A federal rescue of Fannie Mae and Freddie Mac could cost taxpayers $25billion, congressional budget experts said Tuesday, as lawmakers put finishing touches on legislation that would tap the troubled mortgage giants' profits to help save homeowners from foreclosure.
A costly rescue is just a worry, not a fact at this point. Peter Orszag, director of the Congressional Budget Office, predicted in a letter to lawmakers that there's a better than even chance the government will not have to step in to prop up the companies by lending them money or buying stock.
But Congress is expected to vote as early as today on a housing measure that would give the Treasury Department authority to throw Fannie and Freddie a temporary lifeline.
It's part of a plan to let hundreds of thousands of strapped homeowners refinance into more affordable, government-backed loans at fixed rates rather than lose their homes. Defying President Bush, the bill would send $4 billion to neighborhoods hit hardest by the housing crisis – something that has prompted the White House to threaten a veto.
Taking advantage of the momentum behind the election-year housing package at a time when economic woes top voters' concerns, Democratic leaders planned to include a separate measure to increase the statutory limit on the national debt by $800 billion, to $10.6 trillion.
The housing bill also would create a new regulator and tighter controls on Fannie Mae and Freddie Mac, the government-sponsored companies that own or guarantee $5 trillion in U.S. mortgages – almost half the nation's total.
And it would create a new affordable housing fund, which would be drawn from the firms' profits and cover any losses from the foreclosure rescue plan.
Treasury Secretary Henry Paulson has been pressing to add to the bill temporary power for the government to offer unlimited sums to prop up Fannie Mae and Freddie Mac, a backup plan he says is intended to help calm investors and stabilize financial markets. The firms' stock prices have plummeted on fears about their financial stability in a chaotic housing market in which falling home values and rising defaults have contributed to large losses at the companies.
Orszag said it's most likely that the companies will remain afloat and the government won't have to put up any money, but there's a very small possibility that the Treasury Department will have to step in to help cover losses at Fannie and Freddie topping $100 billion. The $25 billion estimate reflects his office's best guess of how big a federal infusion would be needed.
“This is like two months in Iraq for something that involves, literally, market stability and (calms) global jitters,” said Sen. Christopher Dodd, D-Conn., the Banking Committee chairman. Dodd said he hoped the legislation would clear Congress by the end of the week.
With financial markets now assuming the measure will be approved, Orszag suggested the cost of inaction could be steep, too.
“It is arguable that if it were not enacted at this point, that the consequences could be quite severe,” he told reporters.
Paulson said in a New York speech Tuesday that Congress should quickly approve the Fannie and Freddie support package to make sure they maintain their critically important role in housing finance. He said their operations were “central to the speed with which we emerge from this housing correction.”
“Because of their size and scope, Fannie and Freddie's stability is critical to financial market stability,” Paulson said. “Investors in our nation and around the world need to know that we understand how important these institutions are to our capital markets broadly and to the U.S. economy.”
Still, the measure faces delaying tactics from foes who oppose tying it to the broader housing package, particularly the $4 billion in neighborhood grants.
Paulson “may want this bailout so bad that he may give in to that,” said Sen. Jim DeMint, R-S.C. But Democrats “will use this as an excuse to pass some bad policy, and whether or not the president holds the line is the question right now.”
Later, at the Capitol, he used a weekly closed-door party lunch to try to sell the plan to Senate Republicans.
Paulson told the group that by showing a clear willingness to back up Fannie and Freddie, Congress actually would help ensure that no federal rescue would be needed.
“If you go in strong, it's less likely that you're going to have to use the strength,” Sen. Sam Brownback, R-Kan., said.
But Senate critics have charged that the open-ended offer of support exposes taxpayers to billions of dollars of losses.