WASHINGTON -- A sprawling bill that reaches deep into the U.S. housing industry is close to becoming law, in what will likely stand as the federal government's most expansive effort to stabilize the mortgage and financial markets.

The bill, which began seven months ago as a modest attempt to help struggling homeowners, will now likely touch a vast array of borrowers, lenders, and investors: from owners in Colorado facing foreclosure to community banks in California and investment banks on Wall Street.

The package could also come at a significant cost to the U.S. government, which would be authorized to invest billions of dollars in troubled mortgage giants Fannie Mae and Freddie Mac, as well as insure up to $300 billion in refinanced mortgages. As a result of the bill, Congress will raise the national debt ceiling to $10.6 trillion from $9.8 trillion. It will also give Fannie Mae and Freddie Mac a new, tougher regulator.

To help consumers, Congress is providing a phalanx of tax breaks, incentives and refinancing options -- many of which haven't been tried before and whose effectiveness is unknown. One of the bill's central planks is a government program to insure up to $300 billion in new loans for struggling homeowners. Its effectiveness will hinge on lenders' willingness to take voluntary losses and write down the balance outstanding of troubled loans.

"The overall success of the program will depend on each lender's individual circumstances and the relative strength or weakness of their mortgage portfolio," said Scott Talbott, chief lobbyist for the Financial Services Roundtable, an industry group.

The House of Representatives overwhelmingly passed the package Wednesday by a 272-152 vote. That morning, the White House dropped a longstanding veto threat. The Senate is expected to take up the bill later this week and appears almost certain to pass it. President George W. Bush is expected to sign the bill quickly, with little fanfare and no signing ceremony.

"We think this is the most important piece of housing legislation to come along in a generation," said Francis Creighton, vice president of legislative affairs for the Mortgage Bankers Association, an industry group.

The legislative effort began in earnest after the Christmas recess with a measure to help roughly 500,000 homeowners avoid foreclosure. Since then, several of the country's most influential financial institutions, including Bear Stearns Cos., Countrywide Financial Corp. and IndyMac Bancorp, either collapsed or were sold at fire-sale prices.

Lawmakers and the Bush administration cobbled together a legislative response that became more ambitious at each turn, culminating with the rescue plan for the twin mortgage giants. The bill temporarily increases the Treasury Department's potential line of the credit to Fannie Mae and Freddie Mac from $2.25 billion to an unlimited amount. It would allow the government to bulk up regulation of Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks -- something critics of those institutions have been pushing for more than a decade.

Early Wednesday, the White House announced it was withdrawing a threat to veto the bill because some "provisions are too important to the stability of our nation's housing market, financial system, and the broader economy not to be enacted immediately," specifically the backstops for Fannie Mae and Freddie Mac.

The bill has gone through many iterations over the months and has seemed close to passing or collapse on numerous occasions. All along, it has raised the ire of some conservatives, who charge that it's a bailout for lenders and irresponsible homeowners.

Associated Press Sen. Christopher Dodd, left, and Sen. Richard Shelby discuss President Bush's support of the housing bill at a news conference Wednesday.

But critics remained in the minority, in part because of the monumental nature of the problem Congress is trying to tackle.

Perhaps the most important element of the bill is the rescue plan for Fannie Mae and Freddie Mac. The companies, along with the Federal Housing Administration, are now dominant players in providing money or insurance for home mortgages because Wall Street and other investors have largely withdrawn from that market.

Fannie, Freddie and the FHA accounted for about 90% of U.S. home mortgages originated in the second quarter, the highest level in at least 50 years and up from 49% a year earlier, according to Inside Mortgage Finance, a trade publication. Fannie and Freddie buy home loans from lenders, turn those loans into mortgage-backed securities and sell the bulk of the securities to other investors. The FHA insures lenders and loan investors against losses on defaults.

Federal Backstop

The legislation provides a federal backstop for the two companies, a move prompted by broad worries that both might falter, a scenario that would cripple the housing market and envelop other financial institutions. Buyers of bonds issued by Fannie and Freddie range from small community banks to foreign central banks.

"The government had to stand behind Fannie and Freddie," said Joshua Shapiro, chief U.S. economist for MFR Inc., a research firm in New York. "If the government had said, 'Well, there's no explicit guarantee, tough luck,' the housing market probably would have shut down."

The legislation would also create a new regulator for the two companies with more power than its predecessor, which has long been criticized for failing to rein in the two giants.

"It's not a perfect piece of legislation," said Sen. Richard Shelby (R., Ala.), "but it's high time we have a world-class regulator" for Fannie and Freddie.

The biggest boost for homeowners is a program that would allow the FHA to back the refinancing of as much as $300 billion in home loans for distressed borrowers. Under this plan, the lender or investor holding the mortgage would have to accept at least a 15% write-down in the value of the previous loan. The new mortgage would then receive federal backing.

Key points of the housing bill, and their cost over 10 years (to be fully offset by tax code changes and fees):• Fund to provide more low-income housing: $5.3 billion• Tax credits for first-time home buyers: $4.6 billion• Grants for state and local governments to buy foreclosed homes: $3.9 billion• FHA insurance for up to $300 billion of home loans: $729 million• Counseling for homeowners facing foreclosure: $210 million• Loosens restrictions on how states issue tax-exempt housing bonds• Keeps lenders from foreclosing or increasing mortgage interest on returning troops for a year. Creates financial-counseling program, increases home-loan limit for military veterans: $112 million• Raises loan limit for lenders to 115% of the local area median home price, up to $625,000• Raises limit on seniors' reverse-mortgage program to $625,000• Raises limit on federal debt to $10.6 trillion, from $9.8 trillion• New regulator for Fannie and Freddie, financed by the two lendersThe bill also authorizes the Treasury secretary to expand credit and buy equity shares in Fannie or Freddie if necessary. The Congressional Budget Office estimates this would cost an extra $25 billion if it happened.

But lenders wouldn't be required to participate, and many are likely to conclude that they are better off proceeding with a foreclosure or offering the borrower some other means of trying to catch up on payments. The Congressional Budget Office recently estimated that the program would lead to 500,000 borrowers refinancing loans totaling $85 billion.

Thomas Lawler, a housing economist based in Leesburg, Va., said he expects the effect of that program to be minimal. "This is probably low on [lenders'] list of options" of how to work out overdue loans, he said.

On their own, lenders are finding different ways of averting some foreclosures. Tammy Taylor, who runs a delivery company in Spokane, Wash., said she and her husband, Steven, recently averted a foreclosure auction when their lender, a U.S. unit of London-based HSBC, agreed to sharply reduce their payments for the next 12 months. Ms. Taylor said the couple fell behind because her husband was ill and temporarily out of work. An HSBC spokeswoman said the bank "does not comment on individual customer matters."

Tax Credit

The housing industry is pinning some hope on a tax credit for first-time home buyers to stimulate demand. The credit could total up to $7,500. It works like an interest-free loan that home buyers will have to pay back over 15 years. If the buyer sells the house for more than he paid, but hasn't repaid the credit in full, the buyer owes the government the balance.

Some in the housing industry had been pushing for a tax credit that didn't have to be paid back, mirroring a move made during the housing slump in the 1970s.

"We would have liked for the credit not to have a recapture provision,'' says Jerry Howard, chief executive of the National Association of Home Builders. "But we are still very excited about this and think it will have a stimulative effect."

The bill would end one longstanding home-builder plum: seller-funded, down-payment assistance for loans backed by the FHA. Starting in October, charities would no longer be able to provide down-payment gifts to people using FHA loans, which are then reimbursed by the builder selling the house.

The gifts have allowed many people to buy a house by putting little or no money down, a practice that led to widespread problems in the subprime market. The FHA said these gifts were leading to higher defaults on federally insured loans.

One late addition will allow certain first-time home buyers to receive a tax credit on their 2008 tax return if they purchase their homes between Jan. 1 and June 30, 2009, said Mary Trupo, a spokeswoman for the National Association of Realtors. "We think it's very positive and will help stimulate people sitting on the fence," she said.

Mark Zandi, chief economist at Moody's Economy.com, said the legislation doesn't provide any miracle cure for the housing market, but a defeat "would have been catastrophic." He still expects the average nationwide house price to fall another 10% or so between now and next April or May. Then he expects prices to bottom out and begin a gradual recovery. He expects that about 1.25 million American households will lose their homes to defaults in both 2008 and 2009.

--Ruth Simon and Michael Corkery contributed to this article.

Write to Damian Paletta at damian.paletta@wsj.com and James R. Hagerty at bob.hagerty@wsj.com

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