Housing starts plunged 9.9 percent to an annual rate of 960,000 after a 1.066 million pace the prior month, according to the median forecast of 77 economists in a Bloomberg News survey. A separate report may show wholesale prices probably rose at a slower pace in July as fuel expenses peaked.

Stricter lending rules, rising borrowing costs, falling property values and record foreclosures will further depress home sales and cause builders to keep retrenching. Inflation pressures are likely to ease as the downturn in housing, loss of jobs and credit crisis weaken the economy this year and into 2009.

“The supply of housing continues to be cut in response to the still relatively high inventories of unsold homes,'' said Brian Bethune, an economist at Global Insight Inc. in Lexington, Massachusetts. “This will continue to generate a large negative drag on overall growth in the second half of 2008.''

The Commerce Department will release starts figures at 8:30 a.m. in Washington. Estimates in the Bloomberg survey ranged from 875,000 to 1.09 million.

Also at 8:30 a.m., the Labor Department may report the producer price index climbed 0.6 percent in July after jumping 1.8 percent in June, according to the survey median. Prices excluding food and fuel probably rose 0.2 percent for a third month.

Permits May Drop

Commerce's housing figures may also show building permits, a sign of future construction, fell 15 percent to a 970,000 annual pace, economists forecast.

A change in New York City's building code that took effect July 1 caused housing starts and permits to unexpectedly surge in June as builders hurried to break ground ahead of the new regulations. The magnitude of the July drop may reflect, in part, a payback.

Underneath the gyrations, demand is weakening. Sales of existing homes fell to a 10-year low in the second quarter, according to the National Association of Realtors. A third of all sales were foreclosures or “short sales,'' in which lenders take a loss on a property.

Financing has also become scarce, a quarterly survey of banks by the Federal Reserve showed. Three-fourths of the loan officers polled reported they tightened standards on prime mortgage loans, up from the April survey. Lending rules on non- traditional loans were also toughened.

Mounting Losses

The five largest U.S. homebuilders reported a combined $1.08 billion in losses in their most recent quarters.

Builders are pessimistic as losses mount. The National Association of Home Builders/Wells Fargo's sentiment index yesterday showed optimism held at a record low in August for a second month.

Still, construction companies are making some headway in reducing the supply glut. The number of new homes for sale dropped in June by the most in four decades.

Some housing-related firms are faring better. Lowe's Cos., the world's second-largest home-improvement retailer, yesterday said full-year profit may fall less than it had anticipated.

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While overall short selling declined in nearly every firm affected by the rule, many of the 19 stocks still suffered declines in their share prices, the studies showed.

The U.S. Securities and Exchange Commission issued an emergency order last month requiring short sellers to pre-borrow stock in mortgage finance giants Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) and Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and 17 other Wall Street firms, such as Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz) and Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz). While the rule expired at 11:59 p.m. on Tuesday, the SEC had billed it as an attempt to crack down on illegal “naked” short selling, that could allow reckless short selling of the stocks.

“While the SEC’s intentions may have been good, their attempt to protect price with rule-making was quite flawed and without intended effect,” said John Standerfer, Vice President of Financial Services for market data firm S3 Matching Technologies. “The market has its own mind.”

An S3 study of market data showed short sells for the 19 stocks dropped by about 63 percent while the rule was in effect, but the firm concluded the rule was “ineffective,” saying short selling “did not seem to be a significant factor” in the market’s determination of price for the stocks.

Shares of Fannie Mae and Freddie Mac are off more than 20 percent since the protective rule was first announced, despite an almost 5 percent rise in the benchmark Standard & Poor’s 500 index .SPX in the same period.

Even with the protection, S3 found the number of short sells in shares of Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz) were often higher while the rule was in effect than they were the day before the rule was announced. But despite the higher levels of short selling, Bank of America’s stock price is up more than 40 percent in the past month.

A separate study from Arturo Bris, a finance professor at IMD business school in Lausanne, Switzerland, found that, even controlling for short selling, market efficiency had deteriorated more for the 19 stocks affected by the rule than for other comparable U.S. financial stocks. 

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Houston-based Waste Management (WMI, Fortune 500) says it is willing to pay about $6.99 billion, for the Ft. Lauderdale, Fla.-based Republic Services Inc (RSG)., which rejected a $34 per share, or $6.19 billion, offer in July.

The new offer, represents a 32.6% premium to Republic’s closing stock price on July 11, the last trading day prior to the public disclosure of Waste Management’s proposal.

Under the new deal, Waste Management would pay Republic $250 million if the companies were unable to close the deal because of antitrust issues. Waste Management said any deal between the companies could close by early 2009. 

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Company executives, in a sobering forecast about the nation’s housing woes, said nationwide home prices are likely to drop another 7% to 9%. Those declines, and other problems in the economy, are likely to cause additional losses on the $1.8 trillion worth of single-family loans that Freddie guarantees or owns.

"Today’s challenging economic environment suggests that the housing market is far from stabilizing," Freddie Mac CEO Richard Syron said during a conference call.

Syron and other Freddie executives sought to assure investors that the company is prepared to ride out the difficulties.

But investors were unconvinced. Shares plunged 19% in afternoon trading. The decline also dragged shares of Fannie Mae (FNM, Fortune 500), which operates in the same business as Freddie and is set to report quarterly results on Friday, down 15%.

Early Wednesday, Freddie (FRE, Fortune 500) reported that it lost $821 million, or $1.63 a share, in the second quarter. Analysts surveyed by Thomson Reuters had forecast it would trim its loss to 41 cents a share from the $151 million or 66 cents-a-share it lost in the first three months of the year.

A year ago, the company earned $729 million, or 96 cents a share.

Freddie also announced that it would cut its quarterly dividend to 5 cents a share or less, subject to a final decision by its board, from 25 cents a share in an effort to save capital. Losses have strained Freddie’s capital, and the dividend cut should save the company more than $500 million a year.

Freddie’s year-to-date losses of nearly $1 billion are far below the $3.7 billion it lost the second half of 2007 as it took charges for the value of its loans portfolio. The current losses are driven by the rapidly rising costs of loan defaults and rising provisions for future losses that are certain to rise.

"While we may be roughly half way through the eventual decline, we are still in the early stages of realized defaults," said Patricia Cook, the company’s chief business officer. "Most of the expected losses are yet to be realized."

Since the start of 2007, Freddie’s portfolio of single-family home loans suffered credit default costs of nearly $2 billion. Three months ago the company estimated that those defaults could end up costing between $15 billion and $20 billion during the life of the loans.

But with steeper home price declines now being forecast, and the increasing rate of mortgage foreclosures and delinquencies, Freddie expects those costs to go higher - to as much as $42 billion in what it says is a worst-case scenario.

Freddie officials said the company should have enough capital to deal with even those worst-case losses, once it goes ahead with plans to raise $5 billion in additional capital.

"We have the wherewithal and the earning power to manage through this period," said Buddy Piszel, its chief financial officer.

Freddie said its estimated core capital slipped to $37.1 billion at the end of the quarter from $38.3 billion at the end of March. That capital level is about $2.7 billion above the level it agreed to meet with its federal regulator.

Provisions for credit losses more than doubled to $2.5 billion from $1.2 billion in the first quarter. The reason: increases in the delinquency and foreclosure rates of the mortgages Freddie owns and guarantees, as well as the continued declines in home prices.

Those provisions for credit losses caused the company to lose $1.4 billion on the guarantees it makes on loans for single-family homes - about triple the $458 million loss on that line in the first quarter. The company made $129 million on those guarantees in the year-ago period.

The company saw losses soar even though its net interest income, the difference between interest paid and interest income soared to $1.5 billion from $793 million a year ago, due to lower interest costs for the firm in the just completed quarter.

That rise in net interest income was more than offset by the $3.3 billion hit in investment activity due to the reduced estimated value of its holdings. That’s up from a loss of $540 million a year earlier.

About $1 billion of the most recent investment loss was caused by the decline in the value of Freddie’s mortgage securities, which are backed by subprime mortgages or so-called Alt-A home loans made to borrowers who did not provide full or any verification of income or assets.

Freddie and Fannie Mae (FNM, Fortune 500), which were set up by the government to provide funding for the mortgage markets, have become the primary source of capital for banks and other lenders making home loans. They are seen as crucial to the recovery of the housing and credit markets.

But investor anxiety about the firms has driven shares of Freddie down by 66% between June 16 and Tuesday’s close, while Fannie shares lost nearly half their value during the same period. It also prompted Congress to pass a rescue measure for the firms, allowing the Treasury Department to loan them an unlimited amount of cash and even buy their shares if necessary.

Syron was asked Wednesday if Fannie and Freddie, known as government sponsored enterprises or GSEs, can continue to operate in a way that both helps the housing market and makes the profits that shareholders demand. He said he believes they can continue to serve both missions going forward, despite these losses.

"I don’t think we’re at a point that the model doesn’t work anymore," he said. "I think we are a point where the model is more stressed."

"I think virtually everyone, including our critics, would say that this would be an extremely ugly mortgage market if you didn’t have the GSEs in it," Syron said. 

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In May, the Federal Reserve and other regulators proposed steps to end what they called "unfair and deceptive" practices in the credit card industry. The rules aim to protect people from having their interest rates raised arbitrarily, among other practices.

In a letter sent Monday to the Fed’s board of governors, the Office of Thrift Supervision and National Credit Union Administration, JPMorgan’s Chase Bank subsidiary said the proposed regulation, if finalized, "is likely to have profound effects on Chase’s operations and financial results."

The bank also said the proposal will negatively affect the credit card asset-backed securities market by reducing the amount of secondary market capital, and make credit less available to customers.

Chase cited data collected from a group of banks, including Chase itself, on a confidential basis by the law firm Morrison & Foerster LLP. Morrison & Foerster could not comment on the data Tuesday, or on how many banks participated.

The cumulative impact for the participating banks would be at least $10.6 billion in lost annualized interest, Chase said in its letter, signed by Associate General Counsel Andrew T. Semmelman.

The bank said those industry losses would likely result in a nearly 12% increase in annual percentage rates to an average of 16.58%; a $1.1 trillion reduction in total credit lines to consumers; and tighter standards that would stop $11 billion in new accounts from being booked each year.

In addition to restricting rate hikes on cards in certain situations, the Fed’s proposed rules aim to limit the imposition of inadequate time restraints on consumers, and the practice of allocating all payments to balances with lower interest rates when a borrower has balances with different rates.

On Monday, the chairman of the Senate’s investigations subcommittee said he supports the Federal Reserve’s proposed restrictions on credit card practices - but that he believes there should be more.

Sen. Carl Levin, D-Mich., wrote in a 13-page letter to the Fed that it should expand its rules to end or restrict such practices as charging interest for debt paid on time; interest on transaction fees; fees levied on consumers paying their bills on time; and billing amounts that force consumers to pay four or five times their original debt.

Back in March, JPMorgan Chase (JPM, Fortune 500), at the behest of the U.S. government, bought the ailing investment bank Bear Stearns Cos. when it appeared to be near collapse. 

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Rural Mexican towns are suffering as money transfers from relatives working north of the border dry up, the result of a weak U.S. economy. Remittances equaled 2.7 percent of gross domestic product last year and are Mexico's second-biggest source of dollar flows after oil exports.

“My children need more than this, but we don't have anything,'' said Rangel, 36, whose husband hasn't sent funds home from Florida in nine months.

Shrinking transfers, inflation at a three-year high and a peso that has appreciated 10 percent this year are eroding the purchasing power of Mexico's poor, the 35 percent of the population that can't afford basics such as clothing, housing and health care. Residents who depend on funds from abroad are cutting back on spending because of weakness in U.S. industries such as construction, the biggest employer of Mexico's migrants.

In the first half of this year, remittances fell 2.2 percent to $11.6 billion, the first decline for the period since Mexico's central bank began tracking the data in 1995. For the entire year, the bank forecasts they will drop as much as 3 percent.

Remittances grew only 1 percent in 2007 to $24 billion after a record 39 percent expansion in 2003.

Danger for Calderon

The dwindling flow of cash this year may shift support from President Felipe Calderon to the opposition Party of the Democratic Revolution, which attracts lower-income voters.

“The worse the economy is, the better'' the PRD will do, said Daniel Lund, president of consulting group Mund Americas in Mexico City. The party's former presidential candidate Andres Manuel Lopez Obrador refused to recognize a razor-thin defeat to Calderon in the 2006 election and set up his own quasi- government that opposes the president's initiatives.

Lopez Obrador, whose campaign pledge was “the poor come first,'' promised to reduce privileges for the business elite. Calderon is backed by the business community, who endorse his efforts to promote free trade and boost private investment.

An increase in popularity for Lopez Obrador “is the great danger'' for Calderon, said Gabriel Casillas, an economist at Banco UBS Pactual in Mexico City. “It's a priority for the presidency to try to prevent him from gaining more support.''

Diversified Exports

So far, the economy is benefiting from diversified exports and Calderon's plan to spend 2.5 trillion pesos ($250.7 billion) in public and private funds on infrastructure projects during his six-year term, creating construction jobs, building ports and expanding roads. The government estimates GDP expanded 3 percent in the second quarter.

In May, Calderon announced a program to boost aid to more than 5 million of Mexico's poorest families by 22 percent to 655 pesos a month. His goal is to shrink extreme poverty, defined as families unable to pay for a basket of basic foodstuffs, by 30 percent in the next five years. In 2006, 10.6 percent of the population was in the lowest income group.

Tarimbaro Mayor Baltazar Gaona Sanchez said Calderon's anti-poverty program benefits only about 6 percent of the townspeople and isn't having a significant effect. Residents work mainly in agriculture, growing corn, tomatoes and onions.

“There's still a lot lacking,'' he said. The economy of the municipality, which is 200 kilometers (124 miles) west of Mexico City, “has sunk,'' he said. “There are a lot of people who come to ask for help to eat.''

`No Work'

Maria Sebastiana, 50, who lives about an hour away in the town of Zinapecuaro, said her husband was fired from his construction job in Oregon and hasn't sent money to her since November. Still, her pregnant daughter's boyfriend has left for the U.S. in search of employment to support the couple and their child. “Here, there's no work,'' Sebastiana said.

In the San Fernando Valley of Los Angeles, Mexicans who once had full-time construction jobs are now looking for day employment on street corners, said Antonio Bernabe, day-laborer organizer at the city's Coalition for Humane Immigrant Rights.

“They are living in very poor conditions, eating noodle soups at 25 cents each,'' Bernabe said.

Only half of Latin American immigrants in the U.S. said they sent money home in February, down from 73 percent two years ago, according to a survey released in April by the Inter- American Development Bank.

Agustin Garduno, wearing a paint-stained sweatshirt, said he sleeps in cars and on floors at friends' houses because he can't afford rent. As noon approaches and no contractors have pulled up to the corner of Van Nuys Boulevard and Oxnard Street looking to hire, it will be the fifteenth day he has gone without work.

“If you gave me a ticket, I'll go back to Mexico because here, there's nothing,'' said Garduno, 48, who used to make $1,300 a month and now makes about $500.

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The Commerce Department also lowered its readings on growth in the two previous quarters, resulting in the first contraction in the economy since the 2001 recession. The report is likely to spur further debate over whether the economy has fallen into a recession.

The gross domestic product, the broadest measure of the nation’s economic activity, grew at an annual rate of 1.9% in the three months ended in June. That’s up from a revised 0.9% growth rate in the first quarter.

Still, the reading was weaker than expected, as economists surveyed by Briefing.com had forecast growth of 2.3%.

The first-quarter reading was revised lower from a 1% growth estimate a month ago.

The Commerce Department revised the fourth-quarter 2007 reading to a decline of 0.2%. The previous fourth-quarter reading was 0.6% growth.

Key to second-quarter growth was the economic stimulus program, which boosted consumer spending in the face of higher prices. Also adding to growth were strong exports, which were helped by a weak dollar that made U.S. goods and services more competitive overseas.

"This shows that the stimulus package is clearly working," Commerce Secretary Carlos Gutierrez told CNNMoney Thursday.
"Trade was great. If I could find a stronger word than great, I would use that."

An advisor to Republican presidential candidate John McCain said the GDP report shows the importance of free trade agreements.

"While growth continues to be disappointing, trade provides one of the few bright spots in an otherwise gloomy economic picture, raising questions about Barack Obama’s policy of economic isolationism," said Doug Holtz-Eakin, McCain’s senior policy advisor on the economy.

Gutierrez conceded that growth is still weaker than the administration would prefer. But he said he’s hopeful the stimulus checks will continue to support spending in the second half of the year. He dismissed calls by Democrats, including Democratic presidential candidate Obama, for a new stimulus package.

"This stimulus package is just barely starting," he said. "Let’s see how this works before we throw any more short-term money [at the economy.]"

But Jason Furman, Obama’s economic policy director, pointed out that a separate report issued Thursday showed that worker pay, when adjusted for inflation, posted the largest drop on record in the second quarter.

"Nothing in today’s GDP numbers was positive for families trying to find a job or pay to fill up their tank," he said. "That is why we need a second $50 billion stimulus package that both relieves the burden on middle-class families and helps to jump-start job creation."

Despite Gutierrez’s optimism about the second half of this year, some economists, most notably Federal Reserve Chairman Ben Bernanke, have expressed worries that with those checks already cashed, spending and economic activity could slow even further.

Gross domestic purchases, a measure of how much American consumers, businesses and governments are buying, fell 0.5%, after a 0.1% rise in the first quarter and a 1% drop in the fourth quarter, a sign of underlying weakness in the economy.

Robert Brusca of FAO Economics described the report as weaker than the 1.9% growth rate would suggest, saying that if it weren’t for changes in imports and exports GDP would have declined in the quarter.

"The consumer adds only 1.1 percentage point to overall growth, and this is with a rebate check in hand," he said. "GDP was net negative on the domestic front. As we look to the second half of the year foreign growth is fading so U.S. exports are sure to slow. Also the rebate checks no longer are a factor. Meanwhile the housing sector is still a negative."

Mark Vitner, senior economist for Wachovia, said the report indicates growth is just narrowly above what would be seen in a recession and that domestic demand is at the weakest level seen since the 1991-92 recession.

He said that while stimulus checks helped support spending, most was apparently spent on items such as food and gasoline, rather than big-ticket items. Spending on services by consumers also was weak due to a pullback in travel, Vitner said.

"We have long held that the best measure of the economy most consumers interact with on a daily basis is final sales to domestic purchasers," said Vitner. "On this basis the economy has actually been weaker than it was in the last recession."

Investment in housing fell for the 10th straight quarter, down 15.6% in the second quarter. Housing subtracted 0.6 percentage points from GDP. A weak auto sector subtracted nearly 1.1 percentage points, as spending on autos and parts plunged 9.4% in the face of record high gas prices.

But the report did include some good news on a closely watched inflation measure, the so called core PCE deflator, which reflects prices paid by consumers on items other than food and energy. The core PCE deflator rose 2.1% annually, down from a 2.3% increase in the first quarter.

Experts say the Fed likes to see that measure rise between 1% and 2%.

The rate of overall price increases also slowed. Overall prices rose 1.1% in the quarter, well below forecasts. Prices increased 2.6% in the first quarter. But other price measures in the report that include food and energy prices showed a jump in overall inflation.

Nonetheless, the Fed is widely expected to leave a key short-term interest rate unchanged at its next meeting on Tuesday. It also held rates steady in May after cutting them seven times between September 2007 and April this year in an effort to spur the economy and help jittery financial markets.

The Fed has a dual mandate to support sustainable economic growth and fight inflation. The central bank typically raises rates when it is more worried about inflation and lowers them when an economic slowdown is the predominant concern. 

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The downturn in U.S. housing construction and stepped-up U.S. immigration raids have made it tougher for migrants to find jobs, and less able to send home money.

Jesus Cervantes, director of economic measurement for the bank, said year-end figures are expected to continue this trend — the first sustained drop since 1995, when Mexico’s central bank began keeping a tally.

Money sent home by Mexican migrants — also known as remittances — is the country’s second-largest legal source of foreign income, after oil exports. And for years, it contributed to a growing Mexican economy: Annual remittances nearly tripled from about $9 billion in 2001 to almost $24 billion in 2007, amid improved reporting methods and an exodus of migrants from Mexico.

Now, businesses in many Mexican towns that came to rely on the cash flow are now being forced to scale back — also because of the decline of the U.S. dollar, which has lost almost 8% of its value against the Mexican peso this year.

Agustin Escobar, an analyst with the Center for Investigations and Superior Studies in Social Anthropology, said Mexico’s overall economy should withstand these pressures, but some families will be hit hard.

"It depends on the type of household," Escobar said. "For households that are largely dependent on remittances, their poverty is going to be felt sharply." 

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The House passed the bill on Wednesday just hours after President Bush reversed his long-standing vow to veto the bill. Bush is expected to sign it soon.

The legislation, one of the most far-reaching on housing in decades, marks the centerpiece of Washington’s efforts to address the nation’s housing meltdown.

"This legislation won’t perform miracles. But as others have said, it’s a step - and I hope an important step - to putting our nation on the road to economic recovery," said Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee and a principal author of the bill.

Following the vote, Dodd said he will meet on Tuesday with representatives from the Treasury, the Federal Reserve, the FDIC and the Department of Housing and Urban Development to discuss how the legislation can be implemented as quickly as possible. "I’m not going to tolerate a slow walk," he said.

Though the Senate vote was 72 to 13, the bill was not without its staunch opponents.

Sen. Charles Grassley, R-Iowa, the leading Republican taxwriter, had supported earlier versions of the legislation but objected to the rescue plan for Fannie and Freddie. "This bill has fallen prey to the special interests on Wall Street and K Street at an unjustifiable expense to taxpayers and homeowners on Main Street," Grassley said.

The White House also objected to parts of the bill, including aid to states to buy foreclosed properties. But White House Press Secretary Tony Fratto said the measures concerning Fannie and Freddie are "urgently needed now … President Bush will sign this bill when he receives it, despite our concerns with some provisions."

The bill has two principal objectives: to offer affordable government-backed mortgages to homeowners at risk of foreclosure, and to bolster Fannie and Freddie with a temporary rescue plan and a new, more stringent regulator.

Provisions in the 700-page bill that would most directly affect consumers and communities include:

Increase the Federal Housing Administration’s role. The FHA will be allowed to insure up to $300 billion in new 30-year fixed-rate mortgages for at-risk borrowers in owner-occupied homes if their lenders agree to write down loan balances to 90% of the homes’ current appraised value.

The cost of the new FHA program - which would begin on Oct. 1 and be in place for just a few years - would be funded by fees from Fannie and Freddie, along with fees paid by both lenders and borrowers.

While the bill authorizes the FHA to insure up to $300 billion in loans, the CBO estimates that the agency is only likely to insure up to $68 billion and help keep roughly 325,000 people in their homes. Those estimates were based on the CBO’s assessment of who is likely to qualify under the program and accounts for a certain number likely to default anyway.

(Here are more details on this provision.)

Establish a stronger regulator for the GSEs. The new regulator will have a greater say over how well funded the two government sponsered enterprises (GSEs) are - a major concern in the markets that has sent stocks in both companies plunging.

Permanently increase "conforming loan" limits. The bill would permanently increase the cap on the size of mortgages guaranteed by Fannie and Freddie to a maximum of $625,500 from $417,000.

The FHA maximum loan limits for high-cost areas would also increase to $625,500. Higher loan limits will make it easier for borrowers to get mortgages, because they’re more likely to be traded if they are considered conforming.

Create home-buyer credit. The bill includes a tax refund for first-time home buyers worth up to 10% of a home’s purchase price but no more than $7,500.

The refund, however, serves more as an interest-free loan, since it would have to be paid back over 15 years in equal installments.

Bar down-payment assistance for FHA loans. The bill eliminates a program that has allowed sellers to provide down payment assistance.

The bill would also increase to 3.5% from 3% the down payment requirement for borrowers getting FHA loans.

Create an affordable housing trust fund. The bill establishes a permanent fund to promote affordable housing. The fund would be paid for by fees from Fannie and Freddie.

Give grants to states to buy foreclosed properties. The bill would grant $4 billion to states to buy up and rehabilitate foreclosed properties. The funding had been opposed by the White House, which said it would benefit lenders and not homeowners.

Concerns over whether Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) will have enough money to weather future losses in the housing market sent shares plummeting in recent weeks. Since the beginning of June, Fannie’s stock price has dropped 57% and Freddie’s plummeted 66%. For the past year, they’re both down roughly 85% as of the end of trade on Friday.

Fannie and Freddie guarantee the purchase and trade of mortgages and own or back $5.2 trillion in mortgages.

To help stabilize markets, Treasury Secretary Henry Paulson asked Congress to temporarily empower Treasury to offer the companies a backstop if needed. Consequently the housing bill now includes provisions that let Treasury over the next 18 months offer Fannie and Freddie an unlimited line of credit and the authority to buy stock in the companies.

Both critics and supporters of the Paulson plan have expressed concern that loaning or investing money in the companies could leave taxpayers with a fat bill to pay.

The Congressional Budget Office on Tuesday estimated the potential cost of a rescue could be $25 billion. CBO said there is probably a better than 50% chance that Treasury would not need to step in. It also said there is a 5% chance that Freddie’s and Fannie’s losses could cost the government $100 billion. 

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The economy grew 0.8 percent from the previous quarter, the central bank said in Seoul today. From a year earlier, gross domestic product increased 4.8 percent, after a 5.8 percent gain in the first quarter.

Exports, which make up about half of the economy, may cool as the U.S. slowdown spreads to the emerging markets that have been buying South Korea's electronics and ships. At home, soaring fuel costs and a weaker won are driving the fastest inflation in almost 10 years, squeezing household incomes and company profits.

“The key uncertainty lying in front of the Korean economy is how sustainable will global demand be,'' said Oh Suk Tae, a Seoul-based economist at Citibank Korea Inc. “Third-quarter economic growth, especially private consumption, will be affected by rising oil prices.''

Both measures matched the median estimates of economists surveyed by Bloomberg News. On July 2 the government trimmed its 2008 growth forecast to 4.7 percent from 6 percent. The economy grew 5 percent last year.

South Korea's benchmark Kopsi Index of stocks fell 1.1 percent, in line with other Asian markets, after a report showed U.S. home sales fell, adding to concern the slowdown in the world's biggest economy will persist, slowing demand for Asian exports. The Kospi has dropped 15 percent this year.

Asian Growth

The won traded at 1007.40 won versus the dollar at 9:45 a.m. from 1007.10 yesterday. The currency, which fell as much as 11.5 percent this year, is now down 7.5 percent for 2008.

South Korea is among the first Asian countries to report second-quarter gross domestic product figures.

China's economy grew at the slowest pace since 2005 in the second quarter from a year earlier, and Singapore's expanded at the slowest pace in five years by the same measure. From a year earlier, South Korea's growth was the slowest since the first quarter of 2007.

Net exports — the difference between exports and imports — powered more than half of the nation's growth, contributing 0.5 percentage point to the increase, down from 0.7 percent in the first quarter.

Spending by households, which are burdened with record debt, fell 0.1 percent, the first decline in four years. Construction investment dropped 0.6 percent. Investment in factories increased 1 percent.

Domestic Demand

Domestic demand, which includes private and corporate spending, rose 0.3 percent in the second quarter, the smallest gain in 3 1/2 years, the report showed.

Finance Minister Kang Man Soo said today the economy faces various difficulties, and that it may pick up in late 2009.

Signs of a slowdown have already been emerging. Factory output had the smallest gain in a half year in May and shipments overseas rose by the least in five months in June.

Exports may also slow as central banks across Asia raise interest rates to combat inflation, slowing economic growth and weakening demand for South Korean goods.

“Demand from emerging markets in Asia will cool because of monetary tightening in the region,'' said Shin Dong Suk, an economist at Samsung Securities Co. in Seoul.

LG Electronics Inc., Asia's second-largest mobile-phone maker, said on July 21 its revenue is poised to fall from the second quarter, when it had a record profit, as slowing global economic growth undermines demand for phones and televisions.

Emerging Markets

“There may be a contraction in emerging markets because of the economic slowdown, the spike in oil prices and inflation,'' Brian Sohn, head of investor relations at LG, said July 21.

Exporters may also come under pressure now that the government has dropped its support for a weaker won to help contain inflation. The Bank of Korea has possibly spent more than $12 billion since the end of May to boost the won's value, according to Jung Chan Ho, a currency dealer at Shinhan Bank in Seoul.

Still, exports to China and other emerging markets will help keep South Korea's $970 billion economy from cooling too much as domestic demand slows, the Bank of Korea said on July 1.

Real gross domestic income, a measure of purchasing power, rose 1.6 percent from the previous quarter, when it declined 2.1 percent.

Governor Lee Seong Tae and his policy board left borrowing costs at 5 percent this month and said economic growth may slow and inflation may stay high for a “significant period of time.''

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