Fast Forward on the U.S. Housing and Mortgage Relief Bill, As the President Drops His Veto Threat

• A long-overdue regulatory overhaul of Fannie Mae and Freddie Mac; the lack of effective oversight has substantially eroded their credibility.
• Permanently raises the conforming loan limits for the GSEs—the previous cap of $425,000 essentially shut the GSEs out of many markets in the country, leading to regional discrimination in the terms and conditions of mortgage credit.
• Funds a major expansion of the FHA's loan insurance program—this is a voluntary program that will promote more liquidity in the mortgage markets and unlock some financial entities from holding depreciated mortgage assets.
• Provides $3.9 billion in aid to state and local governments to rehabilitate foreclosed homes.
• Tax incentives to support the housing market and first-time homebuyers
• Higher borrowing authorization levels for the Treasury to either lend or purchase equity in the GSEs, to stabilize their financial condition and support their capitalization.

The U.S. Housing and Mortgage Relief Bill has swung into the high-speed passing lane, pushed by the confidence crisis swirling around the giant government-sponsored enterprises (GSEs) over the past two weeks. A just-released independent review by the Congressional Budget Office looked at the capital position of the GSEs, and came up with an estimate that the Treasury should be prepared to inject significant financial resources—with a best guess of $25 billion—over the next two years (very close to the estimate published by Global Insight at the end of last week). The Bush administration has requested that the bill grant significant new financial authority to the Treasury in order to do this, laying the groundwork for the "grand compromise."

This bill is long overdue—but it took a crisis to break the logjam. Global Insight had assumed that Congress would muster enough votes to pass this bill, so the positive benefits from the legislation are already incorporated in our outlook.

At this point, stabilizing the GSEs is imperative. The recent support from the Federal Reserve and the Treasury, combined with increased financial authority under this bill for the Treasury to backstop their capital, should catalyze renewed private-investor interest.

The right constellation of monetary and fiscal policies should promote 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. Any major missteps, however, would mushroom the cost to the Treasury, and the American taxpayer, to $100 billion. High stakes are on the table.