Rescue of Fannie, Freddie Could Cost $25 Billion

A Bush administration plan to rescue Fannie Mae and Freddie Mac could cost U.S. taxpayers $25 billion, congressional budget analysts said, as Congress worked to complete sweeping housing market legislation.

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In a report that initially sent the share prices of both companies tumbling, the nonpartisan Congressional Budget Office (CBO) questioned Treasury Secretary Henry Paulson's assurances that Fannie and Freddie would not need the support.

Still CBO said there is a "probably better than 50 percent" chance that the proposed new Treasury authority would not be used before it expired at the end of December 2009. In that case, the proposed credit line and possible government equity investment would cost taxpayers nothing.

But CBO added that any further worsening in the nation's already steep housing market slump "would increase the probability that this new authority would have to be used." The "scenario is far from the only possible result."

Special Report: Fannie and Freddie Fallout

The housing market continued to show declines on Tuesday as the Office of Federal Housing Enterprise Oversight reported an average drop of 0.3 percent in May and that over the past year they have fallen 4.8 percent. It was the third straight monthly drop and 10th decline out of 11 months, according to Deutsche Bank.

Paulson lobbied for passage of the plan in a series of public appearances in which he argued that the housing market can rebound with help from Congress.

"I believe we can get to the point within months where we turn the corner on housing," Paulson said in a televised interview with Fox Business Network.

Congress was on track to move ahead this week with a package of legislation, including Paulson's proposal, meant to reduce foreclosures as home prices fall in an economic slowdown that some economists say has already triggered a recession.

Paulson's plan includes support for Fannie and Freddie which the companies known as government-sponsored enterprises, or GSEs, which own or guarantee almost half of the nation's $12 trillion in outstanding residential mortgage debt.

Both GSEs' stock prices have fallen dramatically on market uncertainty about their ability to ride out the slump.

In late Tuesday morning trade on the New York Stock Exchange, Fannie was down 8.1 percent at $12.98 after first falling nearly 18 percent in early trade. Freddie was off 5.1 percent at $8.30 after falling 18.5 percent earlier in the session.

Paulson said on Tuesday in a speech in New York, "Until the housing market stabilizes further, we should expect some continued stresses in our financial markets."

He said restoring confidence in Fannie and Freddie is crucial. "Now more than ever, we need Fannie and Freddie out there, financing mortgages," Paulson said.

The plan to rescue the two companies has hit criticism from those who argue that home owners should be helped first and from critics of the GSE's management record, which has included a series of multi-billion dollar accounting mishaps and earnings restatements in recent years.

Paulson has proposed giving the GSEs expanded access to government loans and has said the government should stand ready to buy equity in the companies if needed.

"I would rather not be in the position of asking for extraordinary authorities to support the GSEs. But I am playing the hand that I have been dealt," he said.

White House spokesman Tony Fratto, asked about the CBO report, said: "We just saw their report and are looking at it. What's important to remember is that the intention of the new authorities is that they would not need to be used."

The House of Representatives was expected to vote on Wednesday on a bill that would include Paulson's plan, as well as measures to set up a new GSE regulator and help troubled homeowners refinance from costly, exotic mortgages into more affordable, government-backed home loans.

House approval would send the bill on to the Senate. Approval there would send it on to the White House.

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