Republican presidential candidate Sen. John McCain said Thursday he would not allow Fannie Mae and Freddie Mac to fail, even as fears mounted that the mortgage giants are insolvent and could succumb to market pressures.
The first-ever explicit commitment by a political leader to a rescue that could cost as much as $1 trillion was immediately echoed by Democrats in Congress. It followed a declaration by a former Federal Reserve president that escalating losses in the mortgage market have driven the agencies to the point of technical insolvency.
Fannie Mae and Freddie Mac, whose stock yesterday plunged to the lowest levels since the early 1990s, currently finance about 80 percent of home purchases and refinancings in the United States. Congress expanded the agencies’ authority this year, giving them a particularly critical role after private mortgage financing all but collapsed last year.
“They are vital to Americans’ ability to own their own homes,” said Mr. McCain in response to a reporter’s question during a campaign stop in Livonia, Mich. “They will not fail; we cannot allow them to fail.”
Later, speaking to reporters in Belleville, Mich., Mr. McCain added that “at this time I don’t think there’s a requirement for a government bailout.”
Sen. Charles E. Schumer, New York Democrat, echoed Mr. McCain’s remarks.
“Fannie Mae and Freddie Mac are too important to go under. Markets should be assured that the federal government will stand by Fannie and Freddie,” he said. “The companies´ regulator has said they are well capitalized; if they need additional support, Congress will act quickly.”
Aides to Democratic presidential candidate Sen. Barack Obama did not go as far.
“Obama believes we must maintain the flow of capital for mortgages and protect homeowners from foreclosure,” said Jason Furman, an Obama economic adviser, adding that the challenges facing the mortgage giants are part of the broader weakness in the economy.
Worries about Fannie and Freddie grew this week as it became clear they do not have a big enough capital cushion to absorb enormous potential losses from mortgages in their portfolios. Applying strict accounting rules, the agencies might have to raise another $75 billion in capital through new stock offerings.
Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry M. Paulson Jr. both urged the agencies to keep raising capital in testimony before Congress yesterday, but Mr. Paulson said there is no emergency.
“Their regulator has made clear that they are adequately capitalized,” Mr. Paulson told the House Committee on Financial Services, downplaying the threat of insolvency.
“In today’s world, it is not helpful to speculate about any financial institution and systemic risk.”
But the Wall Street Journal on Thursday reported that the Treasury and other federal regulators are examining options should the mortgage giants falter, including a possible injection of capital from the Treasury, expanding their credit lines with the Treasury and Fed, or providing an explicit guarantee of the agencies’ $1.5 trillion in debt.
Mr. Paulson has opposed bailing out the mortgage agencies in the past, but Thursday he suggested the government could not stand idly by should they start to fail.
The two firms “play an important role in our housing markets today and need to play an important role in the future,” he said. They are “working through this challenging period.”
Mr. Bernanke said the government-sponsored firms “are well-capitalized now in … a regulatory sense, but we’ve called upon all financial institutions to expand their capital bases so that they can be even more proactive in providing credit and support for the economy.”
Former St. Louis Fed President William Poole was not so generous, declaring that the agencies’ financial troubles are too great to be repaired by the markets.
“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Mr. Poole, 71, who left the Fed in March, told Bloomberg News.
“Federal bailouts for Fannie Mae and Freddie Mac are a distinct possibility, said Peter Schiff, president of Euro Pacific Capital, because of the “dubious quality of their mortgage portfolios.”
“Together, both firms have less than $90 billion in capital reserves to ensure losses on more than $5 trillion in mortgage debt,” he said. “Could anyone reasonably believe that a 2 percent reserve fund can cover all the losses that are likely to be seen?”
“Clearly, Fannie and Freddie would have no ability to survive without a government bailout. This means that taxpayers will be on the hook for hundreds of billions of losses, perhaps even more than $1 trillion.”