US House Passes Housing Bill; Bush Lifts Veto Threat

Source : The Straits Times, July 24, 2008

WASHINGTON - THE United States House of Representatives passed a massive housing rescue bill after the White House dropped a threatened veto, paving the way for passage of measures aimed at shoring up the worst US home market since the Great Depression.

Withdrawal of the 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 election-year bill.

Approved on a 272-152 vote, the bill now moves to the Senate, where approval was expected within days, with the precise timing of a final vote still uncertain.

The bill had been in the works for months, but took on greater urgency as concerns about Fannie and Freddie's finances began to rattle global financial markets earlier this month.

Ten days ago, the US Treasury pledged an unspecified credit line for the companies and said it would buy their stock, if needed, to bolster investor confidence. Those emergency measures required congressional approval.

The two companies, which own or guarantee almost half of the US$12 trillion (S$16 trillion) in US mortgage debt outstanding, have recorded heavy losses in the past year amid rising defaults.

If they were unable to keep financing mortgages, analysts say the already weak housing market could grind to a halt, tipping the US economy into a deep recession.

No time to wait
A White House spokesman earlier said President George W. Bush would sign the bill because it is needed urgently to address the 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,' spokesman Dana Perino said.

Lawmakers have moved with unusual speed since the Treasury proposed the financial backstop for the two companies.

Senate Majority Leader Harry Reid said he wanted to send the measure to the president on Wednesday, but cautioned Republican lawmakers could still stall it.

South Carolina Senator Jim DeMint and six other Republican senators on Wednesday told Mr Reid in a letter they want to amend the bill with a measure to block Fannie Mae and Freddie Mac from using taxpayer dollars for lobbying.

On the Senate floor late on Wednesday, Mr Reid said to DeMint: 'If your amendment is made part of what we're going to do here and this legislation is changed, it goes back to the House again and we have a process that seems never-ending.

'I don't think we should send this back to the House. I think we should complete it here.'

Treasury Secretary Henry Paulson said he recommended that Mr Bush drop his objections to the bill because reforms for Fannie Mae and Freddie Mac, the country's two biggest mortgage finance companies, were too important.

'What we're doing with the (companies) is orders of magnitude more important than any of the other parts of this housing legislation,' Mr Paulson told reporters.

In a further sign that 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 US$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.

Stronger regulator
Congressional budget analysts have put a US$25 billion potential price tag on provisions to bolster Fannie and Freddie, but said there was potential for the cost to vary widely.

Both Mr Paulson and the companies have said the credit line was just a backstop and they had no intention of using it.

In addition to that backstop, the bill would set up a new regulator for the companies and raise the size of mortgage loans that they and the Federal Housing Administration can guarantee. It would permit the FHA to refinance up to US$300 billion in mortgages facing foreclosure.

A 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 Federal Reserve would have a 'consultative role' in setting those requirements and ensuring the soundness of the mortgage enterprises.

The bill also contains an increase in the Treasury's borrowing authority. This hike was sketched out in a fiscal 2009 budget blueprint that cleared Congress earlier this year.

The current debt limit is set at US$9.815 trillion. Under the bill, it would be increased to US$10.615 trillion to accommodate the federal government's continued deficit spending.

Currently, the public debt is around US$9.5 trillion. -- REUTERS