Paulson Criticized as Proposing Only Short-Term Mortgage Fixes

The Treasury secretary is offering few long-term solutions to the mortgage crisis that has sent Fannie Mae and Freddie Mac into a tailspin in recent weeks, economists said.

In a speech yesterday at the New York Public Library, Treasury Secretary Paulson called housing "the largest factor currently impacting our financial markets," and asked Congress to immediately pass the Bush administration's proposal for overhauling the mortgage industry.

"The sooner we work through the housing correction, the sooner home prices will stabilize, and uncertainty about the values of mortgage-related assets will be more easily determined," Mr. Paulson said, adding that, "now, more than ever, we need Fannie and Freddie out there, financing mortgages."

Last week, the Bush administration proposed expanding the mortgage giants' line of credit to $2.25 billion and purchasing stock in the two companies. Mr. Paulson said the relief package would be in place for only 18 months, and that it would quiet market turmoil. Congress is expected to vote on the plan, which would cost taxpayers $25 billion over the next two fiscal years, according to the Congressional Budget Office, this week.

The chairman of the Cato Institute, William Niskanen, a former member of President Reagan's Council of Economic Advisers, said he was "dismayed" by Mr. Paulson's plan. The Treasury secretary "is not using the occasion to correct what is a long-term problem with the basic structure of Fannie Mae and Freddie Mac," he said. "This is an attempt to get through the rest of the year, hoping that the housing market will recover, but it does nothing whatsoever to address the long-term stability of the housing market and the mortgage turmoil in general."

In his speech, Mr. Paulson said Fannie Mae and Freddie Mac have issued $5 trillion in debt and mortgage-backed securities, $3 trillion of which is held by American financial institutions and $1.5 trillion of which is held by foreign institutions. "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," he said. "Working through the current turmoil will take additional time, as markets and financial institutions continue to reassess risk and reprice securities across a number of asset classes and sectors."

The Treasury's bailout plan would be "effective in the near term," but over the long term, the companies should be "tightening regulating requirements and raising more capital," a professor at the University of Maryland School of Business, Peter Morici, said.