Lawmakers Want Fannie-Freddie Aid Tied to Debt Limit

By Brian Faler and Alison Vekshin

July 18 (Bloomberg) -- Democratic lawmakers sought to put a constraint on the Treasury's request for unlimited power to buy and lend to Fannie Mae and Freddie Mac, a step that didn't temper Secretary Henry Paulson's optimism about a deal.

``Any expenditure under this bill would be subject to the debt limit,'' House Financial Services Committee Chairman Barney Frank told reporters in Washington yesterday, referring to the ceiling on federal government borrowing. That ``is a cap in effect on the amount'' of taxpayer funds officials can use to help finance the mortgage firms, he said.

Frank's comments reflect lawmakers' concern that the Paulson proposal may expose the taxpayer to unlimited risk and confer unprecedented authority. The Treasury chief reiterated his optimism about a deal by the end of next week, indicating he may be open to compromise on a measure he said will restore investor confidence in the beleaguered companies.

Paulson spent a second straight day lobbying on Capitol Hill after legislators balked at a July 15 hearing at his initial request, which Treasury officials anticipated would be enacted this week. Paulson is trying to provide a backstop to Fannie Mae and Freddie Mac after their shares fell to the lowest level in more than 17 years this month, threatening to limit their ability to alleviate the mortgage-market collapse.

``I feel even better than I did yesterday in my confidence level that we will come to a very acceptable result, and come to it next week,'' Paulson told reporters yesterday.

Shares Gain

Fannie Mae shares rose for second day, the first back-to- back gain in a month, to $10.93 in New York Stock Exchange composite trading. Freddie Mac advanced to $8.33, also the second consecutive increase.

Freddie Mac may raise as much as $10 billion by selling new shares, a move that might help avoid a government rescue for it and Fannie Mae, the Wall Street Journal reported today, citing people it didn't identify.

Paulson, since announcing his plan Sunday, July 13, has repeatedly called for power to make ``unspecified'' equity purchases in the two companies, which account for about half of the $12 trillion U.S. mortgage market. He wants a similar right to extend the credit lines the firms have with the Treasury.

Paulson has said limits to his power would impede the measure's ability to buttress investor confidence. The Treasury had sought for it to be outside the borrowing ceiling.

``People talk about trillions of dollars,'' said Frank, of Massachusetts. This ``makes it clear that nothing remotely like that order of magnitude is contemplated even in the worst case.''

No Cost Seen

Frank added that he doesn't expect the plan to incur significant costs because it will spur confidence in the lenders, limiting the need for public money. Paulson has said he doesn't anticipate exercising the proposed authority, noting regulators' comments that the firms are already adequately capitalized.

The debt limit is $9.815 trillion and the current outstanding public debt subject to that limit is about $9.4 trillion, according to the Treasury.

``Today the Treasury has enough unused borrowing authority to give Fannie and Freddie all the support they might need,'' said Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm.

Paulson will work with House Ways and Means Committee Chairman Charles Rangel, of New York, and Budget Committee chief John Spratt, of South Carolina, on the debt limit issue, Frank said. Paulson declined to respond to a reporter's question on the matter yesterday.

Other Limits

Frank, whose committee oversees housing, said earlier this week that he intended to place other restrictions in the legislation, including limits on dividend payments by the firms and a requirement for regulators to approve top officers' compensation.

House lawmakers are working on adding the measure in an existing housing bill that aims to stem the record surge in mortgage foreclosures and set up a new, stronger regulator for Fannie Mae and Freddie Mac. The legislation would then go to the Senate.

Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said lawmakers are considering other ways of trying to assure taxpayers that ``this thing isn't a runaway horse,'' while declining to discuss specifics.

``We're getting close to some ideas that can work that will have negligible, if any, market implications, which is critical,'' Dodd said.

$4 Billion

House Democrats plan to include in their bill a measure that President George W. Bush has threatened to veto, signaling they're prepared to push the administration on the issue.

The proposal would send almost $4 billion to communities to buy up foreclosed properties. The White House has said it would benefit lenders who own the vacated properties, not homeowners.

House Speaker Nancy Pelosi, a California Democrat, said she doubted Bush would make good on the veto threat.

``I don't think the president is going to veto this bill,'' Pelosi said. Foreclosed properties ``are now abandoned properties, taking down communities,'' she said.

Frank said the House will probably vote on the combined measure July 23 before sending it on to the Senate.

House Minority Leader John Boehner, an Ohio Republican who proposed delaying consideration of the plan so that lawmakers could have more time to study it, said two days ago there's no question ``that this will become law and become law very soon.''

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