House Lawmakers to Vote on Fannie-Freddie Rescue Plan

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.

Legislators crafted the agreement nine days after Treasury Secretary Henry Paulson asked for powers to inject capital into Fannie Mae and Freddie Mac. White House spokeswoman Dana Perino today said President George W. Bush will sign the measure, removing a veto threat over a provision to include $3.9 billion in aid to communities hit by the housing market collapse.

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.

Fannie Mae gained $1.39, or 10 percent, to $14.80 at 8:02 a.m. in early New York Stock Exchange composite trading. Freddie Mac added $1.06, or 11 percent, to $10.76.

Vote Today

Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, said the House will vote today, with the Senate expected to take it up tomorrow. He introduced the bill to reduce foreclosures in April.

``Nobody is for everything that's in it or got everything in it he wanted, but we negotiated a lot,'' Frank told reporters late yesterday.

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.

Challenged Bush

Democratic lawmakers challenged Bush with yesterday's deal by including a measure he has repeatedly threatened to veto. Perino maintained that although the White House thought it would have the votes to uphold a presidential veto of the measure, time was running out for action before legislators begin their summer recess in August.

``We believe this is not the time for a prolonged veto fight,'' she said in a conference call with reporters.

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.

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 Bush for signing into law.

$12 Trillion

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.

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.

Higher Cap

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.

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