Fannie, Freddie rescue gets big price tag as House vote looms

By Kevin Drawbaugh and Richard Cowan

WASHINGTON (Reuters) - A Bush administration plan to bolster Fannie Mae and Freddie Mac could cost U.S. taxpayers $25 billion, congressional analysts said on Tuesday in a report that triggered debate as Congress moved toward approving a major housing market rescue package.

Fannie and Freddie shares fell sharply on the report's release but later recovered, with Freddie stock ending higher and Fannie paring its losses.

Investors are concerned whether the two government-sponsored mortgage finance giants, which own or guarantee almost half of the nation's $12 trillion in outstanding residential mortgage debt and play an increasingly key role in the troubled American housing market, can weather a national housing slump.

New data on Tuesday showed home prices fell again in May, while Treasury Secretary Henry Paulson used a speech in New York and television interviews to push for passage of the plan as a way to restore financial stability to the markets.

"Now more than ever, we need Fannie and Freddie out there, financing mortgages," said Paulson, who wants to give Fannie and Freddie access -- if they need it -- to cheap, government capital in the form of loans and possible equity investments by the government.

Congress was pushing ahead on a 600-page housing bill that was expected to include Paulson's proposals, as well as measures to establish a new regulator for the companies and to help distressed homeowners refinance into new mortgages.

In estimating the potential cost exposure of taxpayers to Paulson's proposal, the nonpartisan Congressional Budget Office (CBO) said there was no certainty on whether the capital line he wants to create for the companies would ever be tapped.

The 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 the CBO said that a favorable "scenario is far from the only possible result." Any further worsening in the already steep housing market slump "would increase the probability that this new authority would have to be used," it said.

The housing bill will go to the House of Representatives floor on Wednesday, Massachusetts Democratic Rep. Barney Frank, the Financial Services Committee chairman, told reporters.

Frank said the bill would leave the type of any equity investment in Fannie and Freddie to the discretion of the U.S. Treasury. It also would give a new regulator substantial authority over executive compensation at the companies, regardless of whether they tap the capital supports.

The bill also would include about $4 billion in grants to localities to buy and repair foreclosed properties in distressed neighborhoods.

House approval would send the bill to the Senate, where senior Republicans urged prompt legislative action.

MCCONNELL URGES ACTION

Fresh from a meeting with Paulson, Senate Minority Leader Mitch McConnell, of Kentucky, said the secretary underscored the importance of getting housing legislation finished.