Fannie, Freddie bailout may have $25 billion tag

WASHINGTON Tue Jul 22, 2008 12:13pm EDT

The headquarters of mortgage lender Fannie Mae is shown in northwest Washington October 3, 2006. REUTERS/Jason Reed

The headquarters of mortgage lender Fannie Mae is shown in northwest Washington October 3, 2006.

Credit: Reuters/Jason Reed

WASHINGTON (Reuters) - Congressional budget analysts on Tuesday put a $25 billion cost estimate on a Bush administration plan to bolster mortgage finance giants Fannie Mae FNM.N and Freddie Mac FRE.N, but raised questions about a key assumption underlying the plan.

The U.S. Congressional Budget Office said the estimated cost to taxpayers would be incurred over 2009 and 2010, if Congress approves the plan proposed by Treasury Secretary Henry Paulson amid a deep slump in the U.S. housing market.

Paulson has said he does not expect Fannie Mae or Freddie Mac would ever need to draw on the line of credit that he wants to extend to them as a signal that the government will stand behind the nation's largest mortgage finance companies.

CBO estimated 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."

"Under that scenario, the temporary authority would not be used and thus would involve no budgetary cost," it said.

But, CBO added, "That scenario is far from the only possible result. Indeed, many analysts and traders believe that there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected on the GSEs' balance sheets, and such continuing problems would increase the probability that this new authority would have to be used."

The nonpartisan budget analysis office issued its cost estimate as lawmakers this week were working on completing a sweeping package of housing market rescue legislation.

Critics have said Paulson's plan is too open-ended and could cost taxpayers too much, while supporters have stressed the need for reassuring markets of the government's willingness to stand behind the companies.

The stock prices of both Fannie and Freddie dropped sharply last week on market uncertainty over whether they would be able to ride out the housing market slump. Both stocks recovered in recent days, but dropped again on Tuesday shortly after the CBO estimate came out.

Fannie and Freddie together hold or guarantee just under half of the United States' $12 trillion in outstanding home mortgage debt.

(Reporting by Richard Cowan and Kevin Drawbaugh; Editing by Jonathan Oatis)

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