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Fannie Mae, Freddie Mac mortgage rescues could cost $25 billion
By Julie Hirschfield Davis
Associated Press
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WASHINGTON, D.C. -- A federal rescue of troubled mortgage giants Fannie Mae and Freddie Mac could cost taxpayers as much as $25 billion, Congress' top budget analyst said Tuesday.

But Peter R. 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.

Congress is expected to vote this week on a housing measure that would give the Treasury Department authority to throw Fannie and Freddie a temporary lifeline.

Treasury Secretary Henry M. Paulson, who has been pressing for the power, says it's intended as a backup plan to help calm investors and stabilize financial markets.

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.

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 needs to quickly approve a support package for Fannie Mae and Freddie Mac - which guarantee or own almost half of the home mortgages in the country - to make sure they maintain their critically important role in housing finance. He said their continued operations were "central to the speed with which we emerge from this housing correction."

Treasury officials confirmed that bank examiners from both the Federal Reserve and the Office of the Comptroller are currently inspecting the books at both Fannie Mae and Freddie Mac. Paulson said in an interview published Tuesday in the New York Times that he believed the results of those examinations would provide an important signal of confidence for the markets.

After a period of market turbulence in which fears grew about the fiscal soundness of both institutions, the administration on July 13 unveiled a plan to provide unlimited government loans to the two mortgage giants and also to purchase stock in the two companies if needed. Paulson has stressed that the proposal is a backup effort that would be in effect for 18 months.

Critics have charged that the open-ended offer of support exposes taxpayers to billions of dollars of losses.

Sen. Jim Bunning, R-Ky., told reporters Tuesday that Paulson is trying to "ram down" his proposal to shore up Fannie Mae and Freddie Mac, which Bunning said "smacks of socialism."

Rep. Jeb Hensarling, R-Texas, head of the conservative Republican Study Committee, said if Congress is "forced to bail out" the two companies, they should be privatized.

"If Congress is forced to bailout Fannie and Freddie, I believe that we must take all the necessary steps to protect taxpayers from" a potential collapse of the companies in the future, he said in a statement.

Paulson said that Fannie and Freddie have issued $5 trillion in debt and mortgage backed securities. Of that amount more than $3 trillion is held by U.S. financial institutions and more than $1.5 trillion is held by foreign institutions, making the stabilization of the two companies essential to the global economy.

"Because of their size and scope, Fannie and Freddie's stability is critical to financial market stability," Paulson told an audience at the New York Public Library. "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."

During a question and answer period, Paulson said that housing was at the "heart of our nation's economy." He added that a key to turning the housing market around was bringing home buyers back into the market, an area where he said Fannie and Freddie needed to play a critical role to provide mortgage financing.

The effort to provide support to the two mortgage giants follows the government's involvement in dealing with the near-collapse of Bear Stearns in March when the Federal Reserve provided a $30 billion loan to facilitate the sale of Bear Stearns to JPMorgan.

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Treasury Secretary Henry Paulson addresses a morning gathering at the the main branch of the New York Public Library Tuesday. Paulson said Congress needs to quickly approve a support package for Fannie Mae and Freddie Mac to make sure the two mortgage giants maintain their critically important role in housing finance. (AP Photo/Richard Drew)
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Reader comments on this story - 5 total

Note: All views and opinions expressed in reader comments are solely those of the individual submitting the comment, and not those of the Pantagraph or its staff.

dwarf wrote on Jul 22, 2008 11:27 PM:

" Oh, how I love it when profit is privatized but risk is socialized. "

Not so Political wrote on Jul 22, 2008 11:06 PM:

" business is business, if it goes down the tubes it goes. we should not have to bail them out. they are most likely own by some company from outside the US anyway. "

Constitution Wanker wrote on Jul 22, 2008 6:25 PM:

" I wish the government would bail me out like this!!! "

CubFAN24 wrote on Jul 22, 2008 4:52 PM:

" His pinky finger bugs me. "

Pastafarian wrote on Jul 22, 2008 3:00 PM:

" I understand the need to do this so that we don't spiral into a depression. but I ask this, what is to become of the executives and speculators that nearly drove the mortgage industry into the ground with irresponsible lending practices? There is a reason the mortgages were called sub-prime just like the S&L crisis had junk bonds. It's in the name dummies.

I'm sure they will be given golden parachutes and can jaunt off to the next money grubbing business venture that will spectacularly fail. "
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