US Treasury Secretary Henry Paulson has come up with a 25 billion-dollar plan to save the mortgage finance giants Fannie Mae and Freddie Mac, which he hopes will win congressional approval despite reservations from conservatives.
President George W. Bush dropped a threat to veto a housing rescue bill under debate by Congress on Wednesday, clearing the way for measures meant to shore up the worst U.S. home slump since the Great Depression.
Removal of the presidential veto threat spurred investors to snap up shares and bonds of mortgage finance companies Fannie Mae and Freddie Mac +, which would receive an emergency government lifeline under the bill.
The U.S. House of Representatives was expected to vote on the measure later on Wednesday. It would then move to the Senate, where a vote may take place later this week or early next week, before landing on Bush's desk.
A White House spokeswoman said Bush would sign the bill because it is needed promptly to address a housing and credit crisis, despite concerns about a provision that would provide grants to communities to buy and repair foreclosed homes.
"We do not believe we have time for a prolonged veto fight," spokeswoman Dana Perino said.
Concerns over the health of the two government-sponsored but privately held companies, which own or have guaranteed almost half of the $12 trillion in U.S. mortgage debt outstanding, had dashed hopes for recovery in battered U.S. housing and credit markets. Analysts had warned of a financial catastrophe if they were to collapse.
Lawmakers have moved with unusual speed since the Bush administration proposed establishing a temporary financial
backstop for the two companies just 10 days ago.
Senate Majority Leader Harry Reid said he wanted to send the measure to the president on Wednesday, but cautioned Republican lawmakers could delay it, and it was unclear whether Senate approval would come this week.
Sen. Jim DeMint, a South Carolina Republican, sent a letter to Reid saying that he planned to introduce an amendment that would block Fannie Mae and Freddie Mac from using taxpayer dollars for lobbying.
Treasury Secretary Henry Paulson said on Wednesday he recommended that Bush drop his objections because reforms for Fannie Mae and Freddie Mac, the nation's two biggest mortgage finance companies, were too important.
"What we're doing with the GSEs is orders of magnitude more important than any of the other parts of this housing legislation," Paulson told reporters at an impromptu news conference.
Shares of Fannie Mae and Freddie Mac surged after stock markets opened. Fannie Mae shares were up 10 percent at $14.77, while Freddie Mac was up about 12 percent at $10.85 in afternoon trading on the New York Stock Exchange.
In a further sign market concerns about the companies are relaxing, risk premiums on debt issued by the two companies narrowed. Priya Misra, an interest rate strategist at investment bank Lehman Brothers, said the legislation "makes it easier for them to raise capital."
Fannie Mae on Wednesday sold $3 billion in short term debt at higher interest rates than a week earlier. The rates, however, rose less than a benchmark investors use to judge value, showing decent demand for the deal.
Lawmakers late on Tuesday put finishing touches on the legislation and congressional budget analysts put a $25 billion potential price tag on the provision to bolster Fannie Mae and Freddie Mac, which was drafted by the Bush administration and added to a bill that has been in the works for months.
Brian Bethune, chief U.S. financial economist with Global Insight in Lexington, Massachusetts, said the tab could be considerably higher if the housing market worsens.
"The right constellation of monetary and fiscal policies should promote a stabilization of the housing market and get the economy rolling again. In this case the Treasury could be on the hook for much less than $25 billion," he said. "Any major missteps, however, would mushroom the cost to the Treasury, and the American taxpayer, to $100 billion."
The added measures would give beleaguered Fannie Mae and Freddie Mac access to an expanded credit line from the U.S. Treasury. In addition, it authorizes the Treasury to purchase equity in the two companies if necessary.
More broadly, the measure would set up a new regulator for the companies and raise the size of mortgage loans they and the Federal Housing Administration can guarantee. It would permit the FHA to refinance up to $300 billion in mortgages facing foreclosure.
The new regulator for Fannie Mae and Freddie Mac, the result of years of debate over reining in the powerful government-sponsored enterprises, would have broadened authority to set capital requirements.
The legislation would also give the Federal Reserve a "consultative role" in setting those requirements and ensuring the financial soundness of the mortgage enterprises.
Date created : 2008-07-23