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$25B Fannie, Freddie tab possible

Analyst says odds are that Congressional help won’t even be needed. Others warn of dangers.

Treasury Secretary Henry Paulson spoke in New York on Tuesday.

AP photo

WASHINGTON — 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 the Federal Reserve and the Office of the Comptroller are currently inspecting the books at Fannie Mae and Freddie Mac.

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.

At the Capitol Tuesday, he used a weekly closed-door party lunch to try to sell the plan to Senate Republicans.

Paulson told the group that by showing a clear willingness to back up Fannie and Freddie, Congress would help ensure that no federal rescue would be needed.

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 the companies should be privatized as part of any plan to rescue them.

However, many lawmakers in both parties regard a lifeline for the companies as vital to restoring investor confidence and market stability.

“Freddie and Fannie are important mainstays in the American economy, and we need to find solid footing for these enterprises before the economy can recover, right itself, and get back on track,” said Sen. Judd Gregg of New Hampshire, the top Budget Committee Republican.

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.

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