- The Washington Times - Tuesday, July 22, 2008

The cost to taxpayers of preventing the failure of Fannie Mae and Freddie Mac will be $25 billion before December 2009, the Congressional Budget Office estimated this morning.

The expected cost assumes that the Treasury has to bolster the finances of the mortgage giants by purchasing some of their debt securities under authority Congress is considering giving the Treasury this week.

Treasury Secretary Henry M. Paulson has contended that he won’t have to use the authority to buy the agencies’ bonds and stocks because just having the authority will convince financial markets that Fannie and Freddie are sound and bolster confidence enough to avoid a financial emergency.

Mr. Paulson urged Congress to quickly pass the legislation rescuing Fannie and Freddie in a speech in New York this morning in which he described them as “vital” to both the housing and financial markets and the “most interconnected of all global financial institutions” because their bonds are purchased around the world. Housing activity likely would grind to a halt in the United States without Fannie and Freddie, which currently guarantee or purchase 80 percent of all new mortgages. The agencies’ role in propping up the housing market grew substantially after the private market for mortgages collapsed last year.

The CBO said there is about a 50 percent chance that Mr. Paulson is right about not having to bail out Fannie and Freddie, but there is also a 5 percent chance that the mortgage giants will lose more than $100 billion because of mounting mortgage defaults — forcing the government to have to foot a giant bill to rescue them.

The $25 billion cost estimate assumes moderate losses at the giants, but not the worst scenario, with the government having to step in before the temporary authority granted by Congress expires in December 2009.

CBO noted there could be dire ramifications if the Congress does not approve the bailout authority requested by Treasury because the financial markets expect it.

“Failing to provide such authority at this point could trigger turmoil in the nation’s financial and housing markets, with potentially serious adverse consequences for economic activity,” said CBO ‘s analysis said.