U.S. Senate to Take Up Fannie-Freddie Bill After House Approval

By Brian Faler

July 24 (Bloomberg) -- The U.S. Senate plans to consider the housing legislation designed to shore up confidence in Fannie Mae and Freddie Mac and stem record mortgage foreclosures after the House of Representatives approved it yesterday.

House members voted 272-152 in favor of the measure, which lawmakers and administration officials expect will be passed in the Senate and signed into law by President George W. Bush. The bill gives Treasury Secretary Henry Paulson power to inject capital into Fannie Mae and Freddie Mac and provides for a federal agency to insure refinanced home loans.

Paulson overcame opposition within his own party after some Republicans said the bill risked taxpayer funds and fell short on overhauling the mortgage-finance firms. The Treasury chief said the measure was critical to U.S. financial-market stability and persuaded Bush to drop a veto threat.

``This is the most important piece of housing legislation in a generation,'' Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, told reporters in Washington yesterday. Paulson said he was ``pleased'' with the vote and would ``look forward to working with the Senate'' to get the bill to Bush's desk for signing this week.

Senate Majority Leader Harry Reid, a Nevada Democrat, intended to take up the bill yesterday before running into a delay caused by Senator Jim DeMint, a South Carolina Republican.

Delaying Tactic

DeMint threatened to postpone a final vote unless he's given a chance to amend the bill. He has proposed an amendment that would bar government-sponsored enterprises Fannie and Freddie from lobbying Congress during the course of the bailout plan. Reid rejected the request, saying it would delay the measure by forcing the House to vote on it again.

The legislation divided Republicans, with House Minority Leader John Boehner criticizing the Bush administration for supporting a bill he said didn't go far enough to reform Fannie Mae and Freddie Mac and would leave taxpayers on the hook for ``billions and billions of dollars.''

``I am disappointed that we couldn't do better -- I'm even more disappointed that the White House will sign this,'' Boehner, a Ohio Republican, said in a speech on the House floor. Three- quarters of the chamber's Republicans voted against the bill.

Equity Purchases

The Treasury secretary would get power to make unlimited equity purchases in and lend to Fannie Mae and Freddie Mac to prevent a collapse in the firms that account for 70 percent of new U.S. mortgages. The bill also provides for a federal agency to insure as much as $300 billion of refinanced mortgages for struggling homeowners.

The Treasury chief said yesterday that the bill will send a ``very strong message'' and is ``key to helping us turn the corner'' after a slide in confidence in the firms.

The White House dropped a veto threat over a measure to buy up foreclosed properties, spurring Reid to predict the Senate would also approve the bill.

Fannie Mae gained $1.59, or 12 percent, to $15 at the close in New York Stock Exchange composite trading. Freddie Mac added $1.10, or 11 percent, to $10.80. The Standard & Poor's 500 Stock Index gained 0.4 percent to 1,282.19.

White House spokeswoman Dana Perino said yesterday Bush will sign the bill, removing the previous veto threat over a provision to include $3.9 billion in aid to communities hit by the housing recession. The administration had maintained the measure would aid lenders who now owned the vacated properties rather than struggling homeowners.

Paulson Recommendation

Bush met early yesterday with Chief of Staff Josh Bolten, senior counselor Ed Gillespie and others, and they sided with Paulson's recommendation that he sign the bill, Perino said.

Paulson's ability to sway the president and his willingness to abandon the government's opposition to giving financial succor to the two mortgage companies demonstrates the Treasury chief's clout within the administration, analysts said.

Paulson and predecessor John W. Snow had repeatedly urged limiting the role of Fannie Mae and Freddie Mac and reducing their implicit government guarantee.

``There's no other person in the administration with the experience and influence Paulson has in these matters,'' said Bruce Bartlett, who served as a Treasury Department economist under President George H.W. Bush. ``There was a political necessity to be seen as doing something, regardless of ideology.''

Stronger Regulator

The bill would create a stronger regulator for Fannie Mae and Freddie Mac and give the Federal Reserve a consultative role in overseeing their capital.

``The legislation will give the new regulator the tools necessary to ensure the safety and soundness of the GSEs so they fulfill their mission of providing stability, liquidity and affordability to the mortgage market,'' James Lockhart, director of the current regulator, the Office of Federal Housing Enterprise Oversight, said in a statement.

Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, helped steer the talks after backing Paulson's call for the emergency measures for Fannie Mae and Freddie Mac, which would last through 2009.

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

$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.

``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 two days ago.

The housing bill would create a program aimed at helping 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. The cap wouldn't drop below $417,000.

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

The Congressional Budget Office two days ago estimated the cost of Paulson's plan at $25 billion.

``It's pretty good news -- a lot of people thought it would be much higher,'' Senator Richard Shelby of Alabama, the Senate Banking Committee's top Republican, said July 22.

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