Hoping to stretch a safety net under the nation's tumbling housing market, the Senate on Saturday overwhelmingly approved a huge package of legislation that includes a program to save hundreds of thousands of families from losing their homes to foreclosure.
The legislation is the latest in a series of extraordinary interventions this year by the Bush administration, Congress and the Federal Reserve as they seek to limit shockwaves in the housing sector from rippling across the American economy and the world financial system. In the process, the central bank and taxpayers have taken on what critics warn are incalculable liabilities and risk.
The bill grants the Treasury Department broad authority to safeguard the nation's two mortgage finance giants, Fannie Mae and Freddie Mac, potentially by spending tens of billions of dollars in federal money to prevent the collapse of the companies, which own or guarantee nearly half of the nation's $12 trillion in mortgages.
To accommodate the rescue plan for the mortgage companies, the bill raises the national debt ceiling to $10.6 trillion, an increase of $800 billion and the first time that the limit on the government's credit card has grown to 14 digits.
The Senate, convening for a rare Saturday session as it neared summer recess, approved the bill 72-13. The measure now goes to President Bush, who has said he will sign it, perhaps early this week, to send a reassuring message to the credit markets.
The White House quickly issued a statement praising the vote.
Lawmakers in both parties hailed the bill, saying it was crucially needed. “We are in the midst of the most serious economic crisis to face our nation in many years,” said Sen. Chris Dodd, D-Conn., and chairman of the banking committee. “This bill is going to make a difference almost immediately.”
The federal intervention has certainly been bold. The nearly $29 billion loan by the Federal Reserve Bank of New York in March to orchestrate the sale of Bear Stearns to JPMorgan Chase may seem small compared with the Federal Housing Administration's authority, granted in the new legislation, to insure up to $300 billion in refinanced mortgages to help stem a tide of foreclosures.
Analysts, including the Congressional Budget Office, expect less than $100 billion of that authority to be used. The risk to taxpayers is minimal, analysts say, given higher insurance fees that will be charged to recipients of the refinanced loans.
And yet, even that $100 billion could seem small compared with the Treasury Department's authority to spend unspecified amounts of tax dollars to rescue Fannie Mae and Freddie Mac if they are in peril of collapse.
Treasury Secretary Henry Paulson, an architect of the rescue plan, said he expected never to use the new authority. And the Congressional Budget Office predicted that any bailout between now and Dec. 31, 2009, when the authority sunsets, would most likely cost $25 billion or less, and that there was a better-than-even chance of no cost at all.
But the only real limit on the Treasury's authority is the new $10.6 trillion debt ceiling. There is roughly a $1.1 trillion cushion between the new limit and existing federal debt of $9.5 trillion.
And naysayers in Congress who voted against the housing bill warned that the government was taking on too much risk, and that government aid would only reward irresponsibility by corporations and individuals.
“This bill has moral hazard written all over it,” Rep. Jeff Flake, R-Ariz., said during the debate in the House on Wednesday. “We are pretending to chain a monster here and we are, instead, letting that monster loose.”
Indeed, a provision in the bill underscores the continuing pessimism about the state of the economy. The provision gives the Federal Deposit Insurance Corp. the authority to create so-called bridge institutions for failing savings associations, mirroring a capability that has existed since 1991 for failed banks.
The new power will give the FDIC more latitude to continue the operations of savings associations like IndyMac in California, which failed earlier this month, and buy regulators time to work out a resolution at the lowest possible cost.
Politics aside, the measure approved by Congress was the most aggressive government intervention in the housing market since the 1989 response to the savings and loan crisis and perhaps the boldest attempt to aid troubled borrowers since the creation of the Home Owners' Loan Corp. in 1933 as part of the New Deal.
In addition to the program to prevent foreclosures and the rescue plan for Fannie Mae and Freddie Mac, the bill contains a sweeping new regulatory structure for the mortgage giants, including the creation of an independent regulator, a stand-alone federal agency with a director appointed by the president and confirmed by the Senate.
The bill includes $15 billion in housing-related tax incentives, including a $7,500 tax credit for first-time homebuyers and business tax breaks for home builders and other large corporations.
There is also an array of items buried deep in the legislation, and the implications of some of them are not yet clear.
There are provisions, for example, that grant or extend Section 8 federal housing subsidy eligibility to residents of specific properties in Malden, Mass., and San Francisco.
And one business tax incentive seems intended for a specific but unnamed automobile manufacturer “that will produce in excess of 675,000 automobiles” between Jan. 1 and June 30, 2008.