RPT-UPDATE 1 US Senate nears vote on housing market rescue bill

(Repeats to fix spelling of Sen. Mitch McConnell's first name, paragraph 10; removes "hold" on slug) (Recasts, adds detail, background)

By Patrick Rucker and Kevin Drawbaugh

WASHINGTON, June 17 (Reuters) - The U.S. Senate was expected to vote as soon as Tuesday on a housing market rescue bill to refinance distressed mortgages and create a new regulator for Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research), sources close to Senate talks said.

The legislation under discussion closely resembles a bill passed by the Senate Banking Committee last month. It includes some measures favored by the White House and others it opposes, clouding the outlook for its chances of Senate passage and eventual approval by President George W. Bush.

"Democratic leaders still believe they can send the bill to the president by the Independence Day recess, though this task gets harder as each day ticks by," said Jaret Seiberg, financial services policy analyst at Stanford Group Co, an investment firm.

Whatever its eventual fate, the legislation is the boldest step by Congress to stem a wave of foreclosures left in the wake of the huge real estate bubble.

The legislation would create a new mortgage insurance fund that could underwrite up to $300 billion of failing loans, although analysts expect it to cover a much smaller share of homeowner debt.

The bill would also create a new regulator for Fannie Mae and Freddie Mac and set some new business practices for the government-sponsored enterprises.

Language of the bill endorsed by the Senate leadership would increase the size of loans the companies may purchase by more than $200,000 and push that cap to $625,000 in some high-cost housing markets, sources familiar with the bill said.