A government-backed rescue of Fannie Mae (FNM) and Freddie Mac (FRE) could end up costing $25 billion in taxpayer money according to a letter released yesterday (Tuesday) by the Congressional Budget Office (CBO).

The letter from the CBO, addressed to Congress, stated there is “a significant chance — probably better than 50% — that the proposed new Treasury authority” to lend Fannie Mae and Freddie Mac money or buy their stock would not be needed before the authority’s expiration date at the end of 2009. However, if the authority were exercised, the tab for the government’s aid could easily top the CBO’s $25 billion estimate.

“I am well aware that financial market and housing challenges continue to concern America’s families. Progress will not come in a straight line, and we need to remain patient as we work through these challenges,” Treasury Secretary Henry Paulson said in a speech yesterday during his visit to New York City to drum up Wall Street support for his plan to rescue Fannie Mae and Freddie Mac.

Paulson remains committed to government aid for the struggling lending giants, despite the potential $25 billion price tag for taxpayers. Together, Fannie Mae and Freddie Mac secure almost half of the $12 trillion U.S. home mortgage market.

“We need to act in the short-term because the [government-sponsored entities] are vital institutions in our capital markets today and are vital to emerging from the housing correction,” Paulson said in a speech in New York, Bloomberg News reported. Fannie Mae and Freddie Mac are among the “most interconnected of all global financial institutions,” he said, referring to the large number of Fannie Mae and Freddie Mac securities held by financial institutions worldwide.

Lawmakers are expected to vote this week on the Bush Administration’s plan to help Fannie Mae and Freddie Mac through their current liquidity crisis. Paulson has been one of the most vocal advocates for government intervention.

“This is about not only our housing markets, but it’s about our capital markets more broadly,” Paulson said yesterday in a Bloomberg Television interview. “This goes well beyond the two institutions — Fannie and Freddie — it has to do with investors in the United States and investors all over the world.”

Source: Paulson Continues to Advocate Potential $25 Billion Bailout of Fannie Mae and Freddie Mac