Fannie, Freddie to fund part of plan

Obama is only using $50 billion of financial bailout funds for his loan modification program. Remaining $25 billion coming from Fannie, Freddie and HUD.

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By Tami Luhby, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- The White House is using only $50 billion from the $700 billion financial industry bailout package to fund the foreclosure prevention program, a senior administration official clarified Friday.

Fannie Mae and Freddie Mac will contribute more than $20 billion to the $75 billion loan modification program, which was unveiled Wednesday. The funds will be used mainly to subsidize interest rates so troubled borrowers' monthly payments can be lowered to affordable levels.

The government took over the troubled mortgage finance companies in September and is increasingly utilizing them to bail out the housing industry. The companies, however, are on shaky financial ground themselves and are expected to report billions in losses in the next week or two. To stabilize them, the foreclosure prevention program calls for doubling their lines of credit with the federal government to $200 billion each.

The federal Department of Housing and Urban Development will contribute the remaining money, which will be used for credit counseling programs for those deeply in debt.

Details of the plan haven't changed. In addition to subsidizing interest rates, the government will use the funds to provide incentives to loan servicers, mortgage investors and borrowers to spur loan modifications.

By drawing on Fannie (FNM, Fortune 500), Freddie (FRE, Fortune 500) and HUD, the administration is conserving the remaining $350 billion of the coveted financial bailout funding Congress approved in October. Obama needs the money to provide additional capital to banks, stimulate consumer and business lending and create a public-private investment fund to purchase toxic assets from banks.

Using other federal funds to support the loan modification is a good way to keep the bailout money focused on the financial industry, especially since Congress doesn't seem inclined to add to the bailout package, said Lyle Gramley, a former Federal Reserve governor. Ultimately, however, the federal government is the one shelling out the dough.

"It's all coming from taxpayers pockets one way or the other," Gramley said. To top of page

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