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WASHINGTON (Reuters) - U.S. President George W. Bush on Wednesday signed into law a sweeping rescue package aimed at resurrecting the housing market from its worst slump since the Great Depression and stabilizing the two largest mortgage finance companies.
The new law launches a $300 billion government initiative to refinance troubled mortgages, and boosts oversight of Fannie Mae and Freddie Mac, which own or guarantee almost half the country's $12 trillion in home mortgage debt.
It expands a line of U.S. Treasury credit for the companies, and gives the government the option to take equity stakes if they ran into trouble.
Lawmakers ironed out the law over the past month to stem a crisis in investor confidence over the two companies, which were created by Congress to keep mortgage money flowing. The companies are trying to strike a balance between expanding earning power and providing finance for the mortgage market against containing losses that have eroded their capital.
"We look forward to put in place new authorities to improve confidence and stability in markets, and to provide better oversight for Fannie Mae and Freddie Mac," said White House spokesman Tony Fratto.
Bush signed the legislation into law because it included numerous key housing reforms, including a stronger regulator of the two mortgage giants. The White House had originally opposed a provision that offers $4 billion in grants to states to buy and repair foreclosed homes.
The Bush administration for years advocated a smaller role for the companies, asserting that their management of trillions in assets placed too much risk on the U.S. financial system.
The bill underscores the importance of the companies, long criticized as private companies with an implicit guarantee from the U.S. government. The more explicit taxpayer backing put in place by legislation benefits holders of their $1.6 trillion in combined debt used to fund mortgage purchases.
"The oddity of the situation is if the debt is backed by the government, then it might be impossible to imagine how the companies might ever fail," said Charles Lieberman, chief investment officer at Advisors Capital Management in Paramus, New Jersey.
The companies' mortgage holdings have ballooned this year, and their regulator and the Treasury have pressured them to raise capital needed to fill a huge void left by the crippled Wall Street mortgage funding machine.
They have plowed some capital into buying mortgages from lenders, which helps hold down home loan rates and provides banks with fresh money to continue lending. The capital also helps offset expected losses.
Fannie Mae on Wednesday said its investment portfolio in June increased at the fastest annualized rate in nearly five years, though it slightly slowed planned future purchases. The portfolio, which is the company's top revenue source, increased to $749.6 billion.
Solid demand for $4 billion of bills sold by Fannie Mae and Freddie Mac on Wednesday also suggested growing confidence among investors in the two.
The housing legislation comes amid signs that real estate is continuing a nearly two-year descent that many economists say will hamper U.S. economic growth through 2009.
Prices for U.S. single-family homes plunged 15.8 percent in May from a year earlier, a record pace, according to the Standard & Poor's/Case Shiller Home Price Index released on Tuesday. Applications for new mortgages dropped last week to the slowest rate since 2000, the Mortgage Bankers Association said on Wednesday.
The new law also sets up a $300 billion fund under the Federal Housing Administration to help distressed homeowners get more affordable, government-backed mortgages and get out from under risky mortgages they cannot afford.
The bill also offers tax breaks to spur home-buying; sets up the first national licensing system for mortgage brokers and loan officers; and raises the limit on the size of mortgages that the Fannie Mae and Freddie Mac can guarantee.
Shares of Fannie Mae and Freddie Mac initially rose after Bush signed the legislation early on Wednesday, and as U.S. securities regulators extended an emergency rule aimed at curbing bets against the stocks of 19 major financial firms, including Fannie Mae and Freddie Mac, known as short selling.
Stock and bond investors were also heartened by a ruling by the Financial Accounting Standards Board to delay a change that could have put $4 trillion of mortgage bond guarantees onto the balance sheets of Fannie Mae and Freddie Mac, making them fall severely short of capital.
Fannie Mae shares rose 5.3 percent to $12.21 and Freddie Mac's stock increased 3.3 percent to $8.70, according to preliminary closing figures.
Speculation that losses at the companies would grow and leave them short of capital caused a frenzy of selling in their shares earlier this month, pushing them down 50 percent. The hastily arranged plan by the Treasury on July 13 for backstop funding for Fannie Mae and Freddie Mac -- which was woven into the housing bill -- helped break the fall, but shareholders remain wary about dilution of their stakes as the companies raise more capital.
Writing by Al Yoon in New York; Editing by Jonathan Oatis