Federal Bailout Could Cost U.S. Taxpayers $25 Billion
Posted on: Wednesday, 23 July 2008, 09:00 CDT
A federal rescue of Fannie Mae and Freddie Mac could cost taxpayers $25 billion, congressional budget experts said, as the House scheduled a vote today on legislation that would tap the mortgage giants' profits to cover any losses from saving 400,000 homeowners from foreclosure.
A costly rescue for Fannie and Freddie is just a worry, not a certainty at this point. Peter R. Orszag, director of the Congressional Budget Office, predicted in a letter to lawmakers Tuesday 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.
The House was expected to vote today on a housing measure that would give the Treasury Department authority to throw the companies a temporary lifeline.
It's part of a plan to let hundreds of thousands of strapped homeowners refinance through the Federal Housing Administration into more affordable, government-backed loans at fixed rates rather than losing their homes. The bill would send $3.9 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 one-half the nation's total.
It also would create a new affordable housing fund, which would be drawn from the firms' profits and cover any losses from the foreclosure rescue plan.
In a key compromise, lawmakers agreed to limits on the loans Fannie Mae and Freddie Mac may buy, a crucial determinant of how much mortgage credit is available in cities around the country. They could buy mortgages up to 15 percent above the median home price in certain areas, with a cap of $625,000 for the highest-cost housing markets. The limits also apply to the loans FHA may insure.
Lawmakers abandoned efforts to place conditions on any Fannie and Freddie rescue, but the bill hands the new regulator approval power over pay packages for executives at the two companies regardless of whether the government moves to prop them up.
The House measure also counts any federal infusion of money for Fannie or Freddie under the debt limit, essentially capping how much the government could spend to prop up the companies without further approval from Congress. As of Tuesday, the national debt that counts toward the limit stood at about $9.5 trillion, roughly $360 billion below the statutory ceiling.
"The administration wants it a lot. There will be a lot of pressure to move it," Rep. Barney Frank, D-Mass., the House Financial Services Committee chairman, said of the bill.
Treasury Secretary Henry M. Paulson called on Congress July 13 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. Fannie Mae and Freddie Mac stock prices have plummeted on fears about their financial stability in a chaotic housing market.
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 Treasury 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.
not a done deal
A federal accounting official says it is likely Fannie Mae and Freddie Mac will remain afloat and the government won't have to put up any money to cover mortgage losses.
Source: Virginian - Pilot
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