The Bush administration's plan to rescue Congressional Budget Office said Tuesday. That assessment stands in stark contrast to the Treasury's prediction that a bailout of the mortgage giants would be virtually cost-free.
The nonpartisan agency's relatively modest estimate — about the cost of funding two months of the Iraq war — assumes that the housing market improves next year. The tab could go considerably higher if the market does not reverse course.
The government expects to spend $6 billion to $7 billion to close Federal Deposit Insurance Corp., who added that more bank failures are likely. The government must raise banks' insurance premiums to prevent higher costs to taxpayers, she said.
The bailout plan for Fannie and Freddie is pending in Congress, where many Republicans have balked at the potential cost. Few raised objections on Tuesday, however, to CBO's price tag.
Democratic leaders generally support the Treasury's plan and welcomed the CBO's assessment, saying they were relieved that the bill would not be higher.
"That's good news," said Senate Budget Committee Chairman Kent Conrad, North Dakota Democrat.
New York, where he described the mortgage giants as "vital" to the housing and financial markets and the "most interconnected of all global financial institutions" because their bonds and the mortgage pools that they guarantee are purchased around the world.
Housing activity likely would grind to a halt in the United States without Fannie and Freddie, which this year have provided the financing for 80 percent of all new mortgages. The agencies' role in sustaining the housing market grew substantially after the private market for mortgages collapsed last year.
Mr. Paulson argued that the rescue plan would be virtually cost-free because he won't have to use the authority to buy the agencies' bonds and stocks. Just having the authority will convince investors that Fannie and Freddie are sound and bolster financial markets enough to avoid a financial emergency, he said.
The Treasury's authority would expire at the end of next year.
The CBO said there is about a 50 percent chance that Mr. Paulson is right, 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 foot a giant bill to rescue them.
CBO noted that financial markets could fall if Congress does not approve the bailout plan.
"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," CBO's analysis said.
"Clearly, any failure on their part would be catastrophic in the mortgage market," said Herbert Kaufman, a former economist at Fannie Mae, who said Treasury's idea of providing an explicit guarantee for the agencies was the right approach.
"It was extremely well considered for both the Fed and Congress to offer assurances to the market," even though Fannie and Freddie are not in a precarious situation or in danger of collapsing, he said.
"The default rates they´re experiencing are not out of the ordinary for periods of economic distress," he said, but the long-running credit crisis and recent loss of confidence in financial markets forced the administration to act.
Anthony Sanders said that Fannie and Freddie are experiencing low default rates compared with other lenders and deserve Congress' backing. Republicans should resist the urge to dismantle the agencies as long as they continue to provide stability and low mortgage rates for most home loans.
"The most important thing for Congress to realize is that financial markets need stability. Attacking [their] charters would only contribute to uncertainty and decrease stability," he said.
Some analysts were skeptical that the taxpayers' money would be well spent.
Graham Fisher & Co., questioned whether taxpayers should be forced to help pay dividends to Fannie and Freddie stockholders or to help settle likely shareholder lawsuits against the companies. Some members of Congress also want to ensure bailout funds are not used for those purposes.
"Housing prices had not fallen on a nationwide basis at all since the Depression," Mr. Raines said in a live chat on The Washington Times Web site. "Fannie had the capital to withstand a 5 percent decline but has had to raise additional capital to manage a 15 percent decline."
Some analysts think home prices will fall another 15 percent before bottoming out, which would lead to even deeper losses at the agencies.