Fannie, Freddie Rescue May Cost Taxpayers $25 Billion, CBO Says
By Brian Faler and Dawn Kopecki
‘‘There is a significant chance -- probably better than 50 percent -- that the proposed new Treasury authority would not be used before it expired at the end of December 2009,'' the nonpartisan agency, which provides economic and budget analysis for lawmakers, said in a report today.
Democratic lawmakers were seeking to determine the cost of Paulson's plan to offer emergency funding to Fannie Mae and Freddie Mac, which own or guarantee almost half of the $12 trillion in U.S. home loans outstanding. Paulson today said Congress understands ‘‘the demands'' of the housing downturn and will likely approve this week his request to help the government- sponsored enterprises.
‘‘We need to act in the short-term because the GSEs are vital institutions in our capital markets today and are vital to emerging from the housing correction,'' Paulson, 62, said in a speech in New York. Fannie Mae and Freddie Mac are among the ‘‘most interconnected of all global financial institutions,'' he said.
Paulson on July 13 asked Congress to grant the Treasury the power for 18 months to buy equity in Fannie Mae and Freddie Mac and expand their credit lines with the government after concern that the companies don't have enough capital sent the shares to the lowest in more than 17 years. Paulson also requested expanded powers for the Federal Reserve to oversee capital requirements.
The cost of the plan will depend upon terms of the credit, whether the companies have to put up collateral, pay fees or commit a portion of profit to the Treasury, said Marvin Phaup, a CBO economist for almost 20 years who retired in 2007 and is now a research scholar at George Washington University in Washington.
‘‘This is a very very difficult thing to do and of course the political pressure will be great to make the cost estimate zero,'' Phaup said in a telephone interview last week. ‘‘You can make a reasoned argument that it will be zero with some probability, but of course, it's also with some probability it could be very costly to taxpayers.''
Neither the Treasury nor the White House budget office has estimated publicly the cost of the bailout. Paulson has said the plan would restore investor confidence in the companies and thereby pose little cost to
Lawmakers have negotiated with Paulson over the details, with the goal of putting the package to a vote in the House of Representatives tomorrow. The Senate would also need to vote.
The Federal Reserve is talking with the Office of Federal Housing Enterprise Oversight, the regulator for Fannie Mae and Freddie Mac, to determine whether the companies have enough capital to offset credit losses.
More Market Stress
‘‘The Federal Reserve is working with Ofheo to get a better understanding of the issues facing the GSEs,'' Fed spokesman David Skidmore said. The New York Times earlier reported that the Fed and the Comptroller of the Currency are examining the books of Fannie Mae and Freddie Mac to evaluate their health, citing an interview with Paulson.
Paulson said the Treasury has no plans to execute the financial backstop plan, and added that before doing so he would consult with the Congress and the companies. Paulson said financial market turmoil will take ‘‘additional time'' to be resolved and that progress ‘‘won't come in a straight line.''
‘‘Until the housing market stabilizes further, we should expect some continued stresses in our financial markets,'' he said.
Savior No More
The Bush administration is depending on Fannie Mae and Freddie Mac to help pull the U.S. out of the worst housing slump since the Great Depression. The companies, which buy mortgages from banks, face mounting credit losses stemming from the collapse of the subprime-mortgage market.
Freddie Mac may cut purchases of home loans from banks and bonds backed by housing debt to shore up its capital amid record delinquencies.
Freddie Mac, which last week registered with the U.S. Securities and Exchange Commission for the first time, is also considering selling securities and reducing its dividend while it prepares to issue $5.5 billion of stock. JPMorgan Chase & Co. analyst Matthew Jozoff said last week that growth in the mortgage holdings of Freddie Mac and Fannie Mae will be ‘‘weak.''
‘‘This just means much less credit availability for mortgage borrowers,'' said Paul Colonna, who manages more than $100 billion as chief investment officer for fixed income at GE Asset Management in Stamford, Connecticut. ‘‘They were teed up to be saviors of the mortgage crisis, but now they've got their own capital issues.''
Combined losses at the companies will probably total $48 billion through 2009, Jozoff said in a July 18 report.
‘‘Mortgage losses are significant, and will probably foster capital conservation from the agencies rather than portfolio growth,'' he said.
House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, has said he agrees with Paulson that the cost of a rescue would be insignificant.
Lawmakers will probably cap federal aid by counting any liabilities against the government's debt limit, Frank said. Such a safeguard may reassure lawmakers concerned about taxpayers' exposure to losses, he said.
Fannie Mae, created in Franklin Delano Roosevelt's New Deal plan, and Freddie Mac, started in 1970, have the implicit backing of the U.S. government and get access to funds at lower rates than banks, became more indispensable this year after private providers of mortgages collapsed or were acquired.
At the end of March Freddie Mac had $6 billion more than the minimum capital required by its regulator, and Fannie Mae had surplus capital of $5.1 billion. The companies already raised $20 billion in the past year to cover losses and meet Ofheo rules.
Freddie Mac will probably report a surplus exceeding the minimum 20 percent required for the second quarter, according to a company filing with the SEC last week. The SEC registration and equity raising will allow the company to reduce its capital surplus level to 10 percent.