Treasury: Support for mortgage giants needed

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WASHINGTON — Treasury Secretary Henry Paulson said Congress needs to quickly approve a support package for Fannie Mae and Freddie Mac to make sure the two mortgage giants maintain their critically important role in housing finance.

Paulson said today that the continued operations of Fannie and Freddie — which guarantee or own almost half of the home mortgages in the country — would be “central to the speed with which we emerge from this housing correction.”

Paulson made his comments in a speech in New York in which he again sought to reassure Americans that despite the recent turmoil, the nation’s banking system is fundamentally sound.

Treasury officials confirmed that bank examiners from both the Federal Reserve and the Office of the Comptroller are currently inspecting the books at both Fannie Mae and Freddie Mac. Paulson said in an interview published Tuesday in the New York Times that he believed the results of those examinations would provide an important signal of confidence for the markets.

Paulson spoke in advance of the release later today of a review by the Congressional Budget Office giving an estimate of the budgetary impact of the administration’s request for new authority to provide support for Fannie Mae and Freddie Mac.

After a period of market turbulence in which fears grew about the fiscal soundness of both institutions, the administration on July 13 unveiled a plan to provide unlimited government loans to the two mortgage giants and also to purchase stock in the two companies if needed. Paulson has stressed that the proposal is a backup effort that would be in effect for 18 months as a way to calm investor fears.

Critics have charged that the open-ended offer of support exposes taxpayers to billions of dollars of losses, however.

The administration and leaders in both the House and Senate have been in negotiations over the plan. Paulson predicted in his speech that Congress would “act to complete work on this legislation this week.” The House is expected to vote on the support plan as part of a larger housing rescue package on either Wednesday or Thursday.

Paulson said that Fannie and Freddie have issued $5 trillion in debt and mortgage backed securities. Of that amount more than $3 trillion is held by U.S. financial institutions and over $1.5 trillion is held by foreign institutions, making the stabilization of the two companies essential to the global economy.

“Because of their size and scope, Fannie and Freddie’s stability is critical to financial market stability,” Paulson told an audience at the New York Public Library. “Investors in our nation and around the world need to know that we understand how important these institutions are to our capital markets broadly and to the U.S. economy.”

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