July 22 (Bloomberg) -- Fannie Mae and Freddie Mac would cost taxpayers an estimated $25 billion over two years under the Bush administration's rescue plan, the Congressional Budget Office said.
While the assessment is more pessimistic than Treasury Secretary Henry Paulson's prediction that a bailout is unlikely, the CBO report may quell concerns among some lawmakers that the price tag would be higher.
There is probably a ``better than 50 percent'' chance taxpayer funds won't be needed to save the two largest mortgage- finance providers, though ``that scenario is far from the only possible result,'' said the CBO, a nonpartisan agency in Washington that provides economic and budget analysis for lawmakers, said in a report today.
``Many analysts and traders believe that there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected'' in the companies' finances, the CBO said. ``Such continuing problems would increase the probability that this new authority would have to be used.''
While neither the Treasury nor the White House budget office has estimated publicly the cost of a bailout, lawmakers including Senators Jon Tester of Montana and Richard Shelby of Alabama said last week they were concerned the cost could reach into the trillions of dollars. The CBO said it reached its assessment by taking into account the probability of various outcomes.
Helping the Markets
Paulson said today he anticipated legislation will be passed this week to authorize his July 13 request for authority to extend credit to the mortgage-finance companies or take an equity stake. 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.
Paulson has said the plan alone would restore investor confidence in Fannie Mae and Freddie Mac, which own or guarantee almost half the $12 trillion in U.S. home loans outstanding, and thereby pose little cost to taxpayers. He said the Treasury has no plans to execute the financial backstop plan, and added that if it did so, he would consult with Congress and the companies.
``This is about not only our housing markets, but it's about our capital markets more broadly,'' Paulson, 62, said today in a Bloomberg Television interview. ``This goes well beyond the two institutions -- Fannie and Freddie -- it has to do with investors in the United States and investors all over the world.''
Potential Turmoil
Congress may have little choice but to sign off on Paulson's request because investors are already anticipating approval, the CBO said.
``Financial markets already appear to be assuming that expanded authority to assist the GSEs will be granted to the Secretary and failing to provide such authority at this point could trigger turmoil in the nation's financial and housing markets,'' the CBO said.
Fannie Mae fell $1.14, or 8 percent, to $12.99 at 12:41 p.m. in New York Stock Exchange composite trading. Freddie Mac dropped 51 cents, or 5.8 percent, to $8.24.
Loss Probabilities
The CBO estimate includes the likelihood that losses at Fannie Mae and Freddie Mac won't worsen and the government plan will prove unnecessary, the CBO said in a report today.
``The CBO report is sure to be utilized by politicians on both sides of the aisle, with opponents pointing to the hefty cost, and supporters pointing to the sub-50 percent odds placed on the likelihood of those costs ever being realized,'' Tony Crescenzi, the chief bond strategist at Miller Tabak & Co. in New York, said.
Senate Budget Committee Chairman Kent Conrad, a Democrat from North Dakota, called the estimate ``good news.'' He said the CBO assessment will be ``very helpful to those who want to advance this legislation.''
House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat who has argued the bailout is unlikely to generate significant costs, said last week the CBO estimate would be ``higher than reality would justify.'' His spokeswoman, Heather Wong, today called the CBO's analysis ``very encouraging,'' saying ``we especially like that there is less than a 50 percent chance that it will be used.''
Tester, a Democrat, said during a July 15 Senate Banking Committee hearing he was concerned the government would be ``potentially spending $1 trillion. Shelby, the panel's top Republican, told reporters that day he was ``uneasy about giving this blanket authority.''
Mortgage Losses
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.
CBO numbers assume Fannie Mae and Freddie Mac won't exceed the $85 billion in fair value losses on their balance sheets, agency officials told reporters in Washington today. The CBO said today it's taking into account an almost 5 percent chance credit losses may reach $100 billion.
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.
To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net; Dawn Kopecki in Washington at dkopecki@bloomberg.net.
Last Updated: July 22, 2008 12:43 EDT
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