WASHINGTON A federal rescue of Fannie Mae and Freddie Mac could cost taxpayers $25 billion, 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 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.
But Congress is expected to vote as early as Wednesday 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 losing 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 M. 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' stocks have plummeted on fears about their financial stability in a chaotic housing market, where 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 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.
"This is like two months in Iraq for something that involves, literally, market stability and (calms) global jitters," said Sen. Christopher J. 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 needs to 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 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."