Fannie, Freddie Could Need $100 Billion or Not a Cent
By Lori Montgomery and David S. Hilzenrath
Washington Post Staff Writers
Wednesday, July 23, 2008
The Bush administration's plan to prop up troubled mortgage-finance giants Fannie Mae and Freddie Mac is likely to cost taxpayers less than $25 billion, Capitol Hill's chief budget analyst said yesterday. But there is an outside chance that a further collapse in the housing market could require an infusion of $100 billion or more.
In a letter to lawmakers, Peter R. Orszag, director of the Congressional Budget Office, also said there is "a significant chance -- probably better than 50 percent" -- that federal officials would never have to use the authority to lend the firms money or buy their stock.
"There is significant uncertainty involved here," Orszag told reporters. The cost "could be zero. It could be $100 billion."
The newly drafted legislation, released last night, contained at least one major surprise that could stir opposition. The protections for taxpayers promised by the Bush administration and senior lawmakers were not specified but were left to the Treasury to define.
Supporters of the rescue proposal, which is included in a massive package of housing legislation that could be put to a vote in the House as soon as today, hailed Orszag's analysis as a heartening endorsement of the administration's position that Fannie Mae and Freddie Mac remain financially sound despite a sharp drop in share prices and are unlikely to require a federal bailout.
"There's a better than 50 percent chance that the cost will be zero," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee and one of the chief sponsors of the housing package. Orszag's comments "will help deflate the crazy claims" that a bailout could put taxpayers on the hook for trillions of dollars.
But critics of the plan dismissed the analysis. "Everyone knows it's just a wild guess," said Sen. Jim DeMint (R-S.C.), who vowed to force hours of debate on the legislation when it reaches the Senate. "We're either going to spend zero, or we're going to spend a whole lot more than we're talking about here."
The cost estimate had been eagerly awaited by lawmakers, who were putting the finishing touches yesterday on the 600-page housing package, Washington's most ambitious response to a housing crisis that has spawned more than 1.5 million foreclosures and a steep drop in home prices.
The legislation includes a variety of provisions aimed at halting that slide, including a tax break for first-time home buyers worth as much as $7,500 and a plan to rescue more than 400,000 families at risk of foreclosure. It also creates a strong new regulator for Fannie Mae and Freddie Mac, government-chartered but shareholder-owned enterprises that back more than half of all outstanding mortgages.
The White House has threatened to veto the measure, saying it opposes a provision that would provide nearly $4 billion to communities hit hard by foreclosures to purchase vacant properties. But the administration is lobbying hard for the rescue plan for the mortgage firms. Treasury Secretary Henry M. Paulson Jr. yesterday urged Congress to quickly approve the package during a lunch meeting with Senate Republicans and in a speech earlier in the day in New York.
The firms' continued operations are "central to the speed with which we emerge from this housing correction," Paulson told a gathering at the New York Public Library. "Because of their size and scope, Fannie and Freddie's stability is critical to financial market stability. 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."
Critics of the proposal say there are too few protections for taxpayers, and that it sets no limit on how much the Treasury may spend to shore up what are essentially private firms.
"I do have a problem with stepping in and bailing out shareholders of Fannie and Freddie that have made billions on the way up. They never shared that with taxpayers," said Rep. Spencer Bachus (Ala.), the senior Republican on the House Financial Services Committee. He suggested capping any assistance to the companies at $100 billion to reflect the worst-case scenario laid out by the Congressional Budget Office.
The office arrived at that scenario by analyzing the financial statements of the firms and consulting with federal regulators, financial analysts and administration officials. It concluded that the most likely outcome is that the firms will not see losses in excess of the $85 billion they have already acknowledged and will not require government assistance. But there is a 5 percent chance that the firms could have additional losses of more than $100 billion, Orszag said, and would require assistance to continue to operate.
How much assistance is open to debate, Orszag said. It could be "much more" than $100 billion. But given the remote possibility that the firms' losses would run so high, Orszag settled on a "probability-weighted average" cost of $25 billion by the time the legislation expires in December 2009.
The budget office estimate does not include the potential effect on the government's credit rating, which could affect the cost of funding the national debt. Months ago, the Standard & Poor's debt rating agency reported that a bailout of Fannie Mae and Freddie Mac could make it more expensive for the government to borrow money to cover budget deficits. When Standard & Poor's offered that assessment, the government's backing of Fannie Mae and Freddie Mac was merely implied. The Treasury's proposal makes it all but explicit.
Those risks are considerable. The companies had liabilities of $1.6 trillion at the end of March, plus mortgage guarantees and investments totaling $5.2 trillion. By one measure, the excess of their assets over liabilities had dwindled to $7 billion, the budget office said.
The $25 billion estimate also could overstate the cost of a bailout. For example, it does not reflect the value of any stock the government might buy from the companies in return for a hypothetical $25 billion investment.
"If we do this right, taxpayers will not spend any money because the markets will be confident in the vitality of Freddie Mac and Fannie Mae, and the markets will correct themselves," said Sen. Judd Gregg (R-N.H.). "But if the markets don't correct and Fannie Mae and Freddie Mac become unstable, then we've got very serious problems well beyond anything in this estimate."
Staff writer Jeffrey H. Birnbaum contributed to this report.
View all comments that have been posted about this article.