The Senate was on course for a Saturday vote to approve a major housing market rescue bill with a lifeline for Fannie Mae and Freddie Mac and bond market action on Thursday indicated investors in the two mortgage finance giants were encouraged.
But a broad sell-off in the stock market hit Fannie and Freddie shares hard on a day when weak real estate data and steep losses at another large bank underlined the severity of the worst U.S. housing slump since the Great Depression.
Bill Gross, chief investment officer of Pacific Investment Management Co, the world's biggest bond fund, said the housing bill -- expected to be signed into law soon -- was "the best way to begin the long journey back to normalcy."
A handful of Republicans in the Senate and the House of Representatives were still trying to block passage of the election-year measure, despite signals of bipartisan support.
Fourteen Republican House members sent a letter on Thursday to President George W. Bush asking him to reconsider his decision to withdraw a threat to veto the housing bill.
On Wednesday, hours after Bush abruptly dropped his long-standing veto threat, the House approved the bill by a 272-152 vote, with 45 Republicans voting in favor of passage.
That sent the measure to the Senate, where hopes for swift passage were dashed by Republicans who persisted in trying to amend the bill, causing Democrats to invoke procedural tactics that pointed to a final vote on Saturday.
A last-minute deal could bring an earlier vote on Friday, but lawmakers and aides said that looked unlikely.
Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat and chief advocate of the bill, on the Senate floor said it was "about to pass, I believe."
GREGG BACKS BILL
New Hampshire Republican Sen. Judd Gregg expressed some doubts about the bill, but called it "a necessary step. ... This is something we're simply going to have to do."
Fannie and Freddie, both government-sponsored enterprises, or GSEs, are the nation's largest mortgage finance companies. They own or guarantee nearly half of the $12 trillion in outstanding U.S. home mortgage debt and are playing an increasingly crucial role in the struggling housing market.
But their shares have see-sawed in recent days on uncertainty about their ability to weather the slump.
The bill would offer emergency financing to the GSEs, in case they need it, while setting up a new regulator for them, creating tax breaks to spur home buying, and forming a Federal Housing Administration fund to help thousands of distressed homeowners refinance into more affordable mortgages.
In a broad stock market sell-off on Thursday, Fannie Mae closed down 19.9 percent at $12.02 on the New York Stock Exchange, while Freddie Mac shares fell 18.4 percent to $8.81.
A survey released on Thursday by Freddie Mac reported that U.S. mortgage rates spiked upward this week amid fears of rising inflation, housing market weakness and possible Federal Reserve short-term interest rate increases.
The National Association of Realtors reported that the pace of existing home sales fell to a 10-year low in June.
Regional bank National City Corp, based in Cleveland, posted a $1.76 billion second-quarter loss on Thursday, hurt in part by real estate loan losses.
RISK PREMIUMS NARROW
As shares sold off, risk premiums on Fannie and Freddie agency notes narrowed, with yield spreads as much as 8 basis points tighter on Thursday, indicating debt markets were encouraged by Congress' progress with the housing bill.
New York Federal Reserve Bank President Timothy Geithner told a House committee on Thursday that recent financial crises justify big changes in financial oversight at Fannie and Freddie, a project that lawmakers are targeting for 2009.
Securities and Exchange Commission Chairman Christopher Cox told the same hearing his agency would soon offer a proposal to expand emergency curbs on short selling of 19 financial stocks, including Fannie and Freddie, to the entire market.
On Friday, the House Financial Services Committee will hold a hearing on the role of mortgage servicers in the market.
(Additional reporting by Steven C. Johnson, John Parry, Jonathan Stempel and Lynn Adler in New York, with Richard Cowan and Alister Bull in Washington; Editing by Leslie Adler and Carol Bishopric)
