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Congress Completes Mortgage Bailout Plan

Treasury empowered to protect Fannie and Freddie from failure

July 27, 2008

The measure gives the U.S. Treasury Department the power to step in to protect mortgage giants Fannie Mae and Freddie Mac, preventing them from going into default. By doing so, U.S. taxpayers will assume substantially more risk, promising to bail out the two firms if they begin to teeter toward bankruptcy.

In order to pass the bill, lawmakers had to officially raise the U.S. debt ceiling, increasing it to $10.6 trillion. The measure enjoyed bi-partisan support, sailing toward passage by a 72-13 vote.

It is the latest in a serious of extraordinary steps the government has taken this year to try and head off a major financial collapse. It follows a $29 billion loan by the Federal Reserve to JP Morgan Chase & Company to by the investment bank Bear Stearns, which was days away from default.

Under the new legislation, the Federal Housing Administration will be granted authority to insure up to $300 billion in refinanced mortgages, in hopes of reducing the rising number of home foreclosures. Critics of the plan have called it enormously risky for taxpayers. But Senate Banking Committee Chairman Christopher Dodd (D-CT) said Congress had to act quickly.

"With one of every eight homes projected to enter foreclosure over the next five years, and the economy shedding jobs as the costs of energy, health care and food skyrocket, the American dream has become a nightmare for countless families across the country," Dodd said. "This legislation will address our broader economic problems by helping to reform our housing sector and provide reassurances to our financial markets."

The legislation contains a number of provisions that Dodd says will help homeowners and communities. The legislation also includes several tax measures authored by Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Chuck Grassley (R-IA). Key provisions include:

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