Talks on Mortgage Giants Continue

Treasury officials and senior lawmakers huddled behind closed doors yesterday, searching for a way the Treasury Department might safely invest in mortgage finance giants Fannie Mae and Freddie Mac without exposing taxpayers to massive losses.

People close to the talks said Treasury Secretary Henry M. Paulson Jr., House Financial Services Committee Chairman Barney Frank (D-Mass.), and leaders of the Senate Banking Committee are considering a plan that would allow the government to buy senior preferred shares in Fannie Mae and Freddie Mac if the firms' financial condition were to deteriorate dramatically. That would mean taxpayers would get any payouts before other shareholders when the firms returned to financial health, the sources said.

After a late-afternoon meeting with Frank, Paulson reported making good progress, saying he expects "a very acceptable result" by next week, when the House is expected to vote on the Bush administration's plan to prop up the ailing mortgage finance giants as part of a broader housing package.

Paulson insists that he does not expect to have to use the authority to help the companies because they remain financially sound. He has said he is asking for the authority to renew confidence in the companies following a steep slide in their stock prices last week.

Another taxpayer-protection option proposed by Frank hit a snag. Frank suggested that if the Treasury were to invest in the firms, the companies should postpone dividend payments to shareholders. But that proposal will have to be dropped -- or at least softened -- because several major institutional investors in Fannie Mae and Freddie Mac are permitted to invest only in stocks that pay dividends and would have to divest if that idea were implemented.

Meanwhile, lawmakers have rejected Paulson's proposal to exempt aid to Fannie Mae and Freddie Mac from the nation's debt limit, which is currently set by law at $9.8 trillion. The House voted this year to raise the debt limit to $10.6 trillion, a move that has yet to be ratified by the Senate. Rather than setting a new, higher cap specifically for Fannie Mae and Freddie Mac, lawmakers are considering including the $10.6 trillion figure in the housing bill, Democratic aides said, giving the Treasury an immediate $800 billion cushion without setting a specific price tag that would be open to attack by opponents.

After meeting with Paulson, Frank said he, too, is "very optimistic" about the negotiations.

"I do not see any differences . . . that will prevent the House from passing the bill on Wednesday, and soon thereafter passing the Senate and soon thereafter being signed by the president," he said.