House Lawmakers to Vote on Fannie-Freddie Rescue Plan Today

By Brian Faler

July 23 (Bloomberg) -- The House of Representatives is set to vote today on a rescue plan for Fannie Mae and Freddie Mac after U.S. lawmakers reached a deal on legislation aimed at alleviating the worst housing recession in a quarter century.

``The package we have got is fully acceptable'' to the Treasury, Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, said late yesterday. Legislators crafted the agreement nine days after Treasury Secretary Henry Paulson asked for powers to inject capital into Fannie Mae and Freddie Mac.

The agreement increases the likelihood Paulson will get the authority this week, after he lobbied lawmakers to overcome concerns about taxpayer liability. The Treasury chief argued that the backstop for the beleaguered mortgage companies was critical to help safeguard U.S. financial market stability.

``It's important to get this legislation in place, and Congress and Paulson have done well to put together a workmanlike bill,'' said Peter Wallison, a former Treasury general counsel who is now a fellow at the American Enterprise Institute in Washington.

Lawmakers added the provisions to legislation that would create a stronger regulator for Fannie Mae and Freddie Mac and expand federal efforts to stem mortgage defaults. Frank introduced the bill to reduce foreclosures in April.

Bush administration officials are reviewing the 694-page bill. Frank told reporters in Washington the House will vote today, with the Senate expected to take it up tomorrow.

Debt Limit

Lawmakers, intent on limiting potential losses to taxpayers, tied the potential aid to Fannie Mae and Freddie Mac to the federal debt limit. Still, they also raised that ceiling to $10.6 trillion from the current $9.815 trillion.

Paulson, in an emergency move after Fannie Mae and Freddie Mac stock dropped to the lowest levels in more than 17 years, asked July 13 for power to make unlimited equity purchases in the firms. He also asked for ``unspecified'' increases in their lines of credit, from $2.25 billion each. Both proposed measures would last until the end of next year.

Democratic lawmakers challenged the White House with yesterday's deal by including a measure it has repeatedly threatened to veto.

The provision would channel $3.9 billion to communities for the purchase of foreclosed properties. Officials have said it would aid lenders who now owned the vacated properties rather than struggling homeowners. House Democrats have predicted President George W. Bush wouldn't veto the bill.

`Play Politics'

``It's clear that the Democrats chose to play politics with the legislation,'' White House spokesman Tony Fratto said in an e-mail, without mentioning any veto plans.

Frank's counterpart in the Senate issued a statement indicating he backs the bill.

``We remain optimistic about the prospects for this legislation,'' Democratic Senator Christopher Dodd said in a joint statement with Republican Senator Richard Shelby.

Dodd, of Connecticut, chairs the Senate Banking Committee and Shelby, of Alabama, is the panel's top Republican. After the Senate, the bill would go to President Bush for signing into law.

Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac own or guarantee about half of the $12 trillion of U.S. home loans outstanding. The companies face mounting losses stemming from the collapse of the subprime market.

Drop in Stocks

Fannie Mae has dropped about 45 percent in the past month, and Freddie Mac has tumbled about 60 percent, on concern they have insufficient capital to cover writedowns and losses.

``This is about not only our housing markets, but it's about our capital markets more broadly,'' Paulson said in an interview with Bloomberg Television yesterday. ``We must, in the short term, take steps to boost confidence'' in the firms.

In addition to a new regulator, the bill provides for the Federal Reserve to consult on Fannie Mae and Freddie Mac finances. Paulson said this week that the Fed has already begun participating in assessments of the companies.

The housing bill would create a program aimed to help an estimated 400,000 Americans with subprime home loans refinance into 30-year, fixed-rate mortgages backed by the government.

Fannie Mae and Freddie Mac would have a new, higher cap on the size of mortgages they may purchase. The new limit would be $625,000, or the median home price plus 15 percent, whichever is lower, Frank said.

Mortgage Bonds

States would be able to offer an additional $11 billion of mortgage-revenue bonds to refinance subprime loans.

Chances for the legislation's passage also got a boost yesterday when the Congressional Budget Office released a cost estimate for Paulson's plan that was lower than some had feared. While a range of outcomes was possible, the non-partisan group put a price tag of $25 billion on the proposals.

``It's pretty good news -- a lot of people thought it would be much higher,'' Shelby said yesterday.

The CBO also warned of the consequences of Congress failing to approve the backstop.

``Failing to provide such authority at this point could trigger turmoil in the nation's financial and housing markets, with potentially serious adverse consequences,'' the CBO said, noting that markets are anticipating the measure's passage.

To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net