WASHINGTON (Reuters) - A Bush administration plan to bolster Fannie Mae and Freddie Mac could cost U.S. taxpayers $25 billion, congressional analysts said on Tuesday in a report that triggered debate as Congress moved toward approving a major housing market rescue package.

Freddie Mac CEO Richard Syron (L) and Fannie Mae CEO Daniel Mudd are seen in a combination file photo. REUTERS/Kevin Lamarque (left) and Jonathan Ernst

Fannie and Freddie shares fell sharply on the report’s release but later recovered, with Freddie stock ending higher and Fannie paring its losses.

Investors are concerned whether the two government-sponsored mortgage finance giants, which own or guarantee almost half of the nation’s $12 trillion in outstanding residential mortgage debt and play an increasingly key role in the troubled American housing market, can weather a national housing slump.

New data on Tuesday showed home prices fell again in May, while Treasury Secretary Henry Paulson used a speech in New York and television interviews to push for passage of the plan as a way to restore financial stability to the markets.

“Now more than ever, we need Fannie and Freddie out there, financing mortgages,” said Paulson, who wants to give Fannie and Freddie access -- if they need it -- to cheap, government capital in the form of loans and possible equity investments by the government.

Congress was pushing ahead on a 600-page housing bill that was expected to include Paulson’s proposals, as well as measures to establish a new regulator for the companies and to help distressed homeowners refinance into new mortgages.

In estimating the potential cost exposure of taxpayers to Paulson’s proposal, the nonpartisan Congressional Budget Office (CBO) said there was no certainty on whether the capital line he wants to create for the companies would ever be tapped.

The CBO said there is a “probably better than 50 percent” chance that the proposed new Treasury authority would not be used before it expired at the end of December 2009. In that case, the proposed credit line and possible government equity investment would cost taxpayers nothing.

But the CBO said that a favorable “scenario is far from the only possible result.” Any further worsening in the already steep housing market slump “would increase the probability that this new authority would have to be used,” it said.

The housing bill will go to the House of Representatives floor on Wednesday, Massachusetts Democratic Rep. Barney Frank, the Financial Services Committee chairman, told reporters.

Frank said the bill would leave the type of any equity investment in Fannie and Freddie to the discretion of the U.S. Treasury. It also would give a new regulator substantial authority over executive compensation at the companies, regardless of whether they tap the capital supports.

The bill also would include about $4 billion in grants to localities to buy and repair foreclosed properties in distressed neighborhoods.

House approval would send the bill to the Senate, where senior Republicans urged prompt legislative action.

MCCONNELL URGES ACTION

Fresh from a meeting with Paulson, Senate Minority Leader Mitch McConnell, of Kentucky, said the secretary underscored the importance of getting housing legislation finished.

McConnell told reporters after a luncheon meeting, “Most of my members share his view that we need to wrap this up.”

Alabama Sen. Richard Shelby, the top Republican on the Senate Banking Committee, said the CBO cost estimate was “pretty good news. A lot of people thought it’d be much higher.”

The Office of Federal Housing Enterprise Oversight (OFHEO), which regulates Fannie and Freddie, reported that home prices fell 0.3 percent in May, for a third straight monthly decline.

Shares in Fannie closed down 5.1 percent at $13.41, while Freddie shares finished up 10.9 percent at $9.70, on a day of broadly bullish trading on the New York Stock Exchange.

In related news, short sales in Fannie and Freddie shares, in which investors bet on a fall in the share price, have declined 90 percent since an emergency rule against abusive short sales took effect, a market data firm S3 Matching Technologies said.

Market regulators are cooperating on examining the GSEs, according to spokesmen for the Federal Reserve and the Office of the Comptroller of the Currency.

“The Federal Reserve is working with OFHEO to get a better understanding of the issues facing the GSEs,” a Fed spokesman said, declining to provide further details.

WHITE HOUSE STUDIES REPORT

White House spokeswoman Dana Perino said the administration was studying the CBO report. “Our intention is not to need any sort of federal taxpayer monies in this regard,” she told reporters. “I would consider this more of an insurance policy. So no taxpayer dollars at this point are on the line.”

She said that if Treasury capital were tapped by the GSEs under Paulson’s plan, “the president would make sure that terms and conditions would be in place to protect the taxpayer.”

At least one Republican lawmaker was critical of Paulson’s proposal. Texas Rep. Jeb Hensarling called it a “bailout” that would give “Fannie and Freddie an unlimited line of credit from the U.S. Treasury and force the taxpayer to buy equity in the companies to help further prop up their stock prices.”

The CBO said in its report it was unclear how large the GSEs losses may ultimately be on existing mortgages it holds or guarantees. The analysts said there was a more than 50 percent chance future losses would not top those already recognized.

But, they added, there is “almost a five percent chance that the added losses would total more than $100 billion.”