Republicans back away from blocking Fannie rescue plan

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Hank Paulson, the US Treasury secretary, appeared to have won his battle of wills with Congress yesterday over plans to bail out Fannie Mae and Freddie Mac, the mortgage finance giants whose feared collapse threatened to cripple the US economy.

The plan, vigorously opposed by Republicans who said it was tantamount to signing a blank cheque, is likely to become law as part of an expansive housing Bill.

The Bill was approved last night by the House of Representatives, and could be voted on by the Senate and signed by the President, George Bush, within days. It contains a raft of measures that include expanding the role of Fannie Mae and Freddie Mac, allowing them to buy much bigger mortgages in particularly distressed parts of the country.

The two companies have long operated under an implicit federal government guarantee that Mr Paulson was forced to make explicit earlier this month, when the stock market began to fear they could fail.

Mr Paulson said the Treasury would extend credit to the two companies and could buy shares if they seek new capital to rebuild their balance sheets. The Congressional Budget Office calculated they could need $25bn (£12.5bn) of government money between them, but Mr Paulson argued that taxpayer money might never be required if market confidence in the companies was restored.

The Bush administration has dropped its threat of vetoing the housing Bill, despite concerns that it presaged too much government intervention in the housing market. "What we're doing with Fannie and Freddie is orders of magnitude more important than any of the other parts of this housing legislation," said Mr Paulson.

Fannie and Freddie will have to submit to beefed-up regulation as part of the deal, and their regulator – the Office of Federal Housing Enterprise Oversight – will get unprecedented powers to limit the compensation of the companies' executives.

The apparent agreement on the Bill was cheered on Wall Street, which believes the fate of the housing market is critical to the resolution of the credit crisis.