Legislation was vital to home mortgages

THE ISSUE Legislation aimed at rescuing the two federally backed mortgage finance companies should take effect shortly.

CONGRESS has little choice but to rescue Fannie Mae and Freddie Mac, the two federally backed mortgage finance companies. President Bush was rightly concerned about the inclusion of $3.9 billion for states to buy and refurbish foreclosed properties, but a protracted legislative standoff would have drastic effects, and he has abandoned threats to veto the bill.

Action was needed to prevent foreclosure of as many as 400,000 homes, largely financed by subprime loans, those that go to borrowers with limited or damaged credit. Fannie Mae and Freddie Mac, created by Congress to help lower-income people to get mortgages, together hold more than $5 trillion in home loans, nearly half the nation's total.

The two pseudo-government entities are exempt from some taxes, are allowed to hold less capital than that required of other mortgage companies and are allowed to borrow at rates much cheaper because investors perceive that the government will never let them go bankrupt. The legislation sets that perception in stone.

The Congressional Budget Office says the chances are better than even that the legislation won't cost taxpayers anything. It guesses that the bailout will cost $25 billion, but the price could be ten times that amount.

Deterioration of a foreclosed house can spread throughout a neighborhood, lowering property values and leading to more foreclosures. To keep that from happening, the bill includes $3.9 billion in grants to state and local governments to buy those properties and turn them into low- and moderate-income housing.

The problem is that banks that normally try to avoid foreclosures might be eager to free themselves of homes they regard as hard to sell. They should not be encouraged to foreclose.