Fannie Mae, Freddie Mac Rescue Plan Approved By Senate
Earlier today, the Senate approved a controversial housing bill that would in effect provide a federal backstop for government sponsored enterprises(GSE) Fannie Mae and Freddie Mac. Expected to be signed into law early next week by President Bush, this represents a sharp policy shift for the administration that has for the past few years tried to instill the perception that GSE’s were operating under free market conditions.
The bill gained momentum as worries about the health of Fannie and Freddie spread. Some House and Senate Republicans were skeptical of a plan unveiled by Treasury Secretary Henry Paulson on July 13 that extends a line of credit to the two and allows the government to buy their stock if necessary.
The rescue plan would extend an unlimited line of credit to the two mortgage-finance giants for 18 months and give the Treasury the authority — also for 18 months — to buy Fannie and Freddie shares if the Treasury deems the companies’ capital to be inadequate.
The government acted abnormally quick on this legislation, which goes to show the true severity of the problem. It hasn’t been three weeks since the story broke about the possible insolvency of the two troubled GSEs.
The two companies own or guarantee about half the loans of the $12 trillion mortgage market and their importance to the market has actually grown since the subprime crisis surfaced. With many lending institutions struggling, the two companies have been involved in over two thirds of the new mortgages written over the past year.
The other provisions in the bill could also help alleviate some pressure in the slumping housing sector. Included are tax breaks for first time home buyers and about $3.9 billion in housing aid to local communities.
The Fed has pretty much fired their bolt already during this current economic crisis and it’s actually good to see the government taking a more active role with fiscal policy. Although the economy is still benefiting from the effects of the economic stimulus package, it was pretty obvious something needed to be done to help the housing market.
