Bush Signs Off $300 Billion Emergency Mortgage Aid

July 31 2008 - The giant housing rescue plan President Bush signed Wednesday might help stanch the bleeding in the housing market, but experts on both sides of the political divide worry that it is, at best, only an emergency step.

In addition to $300 billion in government guarantees to aid homeowners threatened by foreclosure, the administration got extraordinary new powers to backstop mortgage giants Fannie Mae and Freddie Mac after their stocks plunged earlier this month. The legislation gives both companies an open line of credit at the U.S. Treasury and allows the government to buy the companies’ stock through 2009. In return, the companies get a tough new regulator.

But both firms remain weird hybrid entities whose profits are private but whose losses are public, a recipe for excessive risk-taking. The new law makes the government guarantee explicit, exposing taxpayers to losses that could dwarf the savings & loan bailouts of the 1980s that cost taxpayers $300 billion in today’s dollars.

The two companies tripled in size over the last decade and now control $5.2 trillion in mortgages, nearly half the nation’s $12 trillion mortgage market. Their securities are embedded in the global financial system, widely owned by banks and foreign creditors. Their collapse would have paralyzed the mortgage market and caused catastrophic bank losses and a credit meltdown.

Few denied the need to prop up the companies temporarily, but former Clinton administration Treasury Secretary Larry Summers, one of several high-level advisers who met with Democratic presidential candidate Barack Obama in Washington on Monday, warned this week that Fannie and Freddie remain “highly problematic,” adding, “It is easy to sympathize with those who fear that bailouts inhibit market discipline.”

Housing plan signed, but concerns linger
by Carolyn Lochhead | San Francisco Chronicle