BPC’s forum on the “Implications of GSE Reform for the Federal Budget and National Debt” provided a primer on how the federal government currently accounts for the conservatorship of Fannie Mae and Freddie Mac and the budgetary impact of proposals to wind down the two institutions.
Thanks to our team of panelists – Tim Rood, Deborah Lucas, Michael Bopp, Ike Brannon, and Jim Hearn – who shared their considerable knowledge and expertise, and translated language into terms that even those unfamiliar with the intricacies of the federal budget could understand.
What did we hear?
Fannie Mae and Freddie Mac currently guarantee $5 trillion in mortgage debt, an amount equaling nearly one-third of our nation’s gross domestic product. Yet, the two institutions charged with monitoring the federal budget – the Office of Management and Budget and the Congressional Budget Office – have widely different perspectives on the appropriate budgetary treatment of the GSEs.
OMB considers the GSEs to be nongovernmental entities for budgetary purposes. As a result, OMB records only the cash transfers between Treasury and the GSEs resulting from the framework established in the Housing and Economic Recovery Act of 2008 – that is, the purchase of GSE “senior preferred” stock by Treasury and the dividend payments to Treasury by the GSEs. By the end of March, the GSEs are expected to have returned nearly $200 billion to the Treasury, an amount that exceeds the $187 billion that Treasury previously invested in Fannie Mae and Freddie Mac.
CBO, on the other hand, argues that the federal budget should reflect the operations of the GSEs because Treasury effectively owns them. As a result, in its baseline budget projections, CBO accounts for the cost of these operations as though they are being conducted by a federal agency. Importantly, these costs include estimates of the federal subsidies associated with the GSEs’ mortgage guarantees, a point emphasized by Deborah Lucas.
How to estimate the subsidy costs is also a subject of contention: CBO contends that a “fair-value” approach provides the most accurate assessment of potential taxpayer liability, while others insist that using the methodology outlined in the Federal Credit Reform Act of 1990 is more suitable and consistent with the budgetary treatment of other federal credit subsidy programs.
These different accounting approaches produce widely different projections of future costs. As Bill Hoagland explained, the President’s Fiscal Year 2015 budget, using the OMB methodology, estimates the GSEs could return an additional $180 billion to the Treasury over the next ten years if they continue in conservatorship. CBO, however, estimates that over the same period the conservatorship would cost the government some $20 billion. In other words, there is a staggering $200 billion difference between the OMB and CBO estimates.
In addition, Congress typically relies on the CBO when estimating the impact of legislation on the federal budget. As Jim Hearn explained, CBO will likely “score” the housing finance reform bill recently unveiled by Senate Banking Committee Chairman Tim Johnson and Ranking Member Mike Crapo, particularly if this bill is the subject of a committee mark-up. CBO has already scored the Protecting American Taxpayers and Homeowners Act, or PATH Act, introduced last year by Housing Financial Services Committee Chairman Jeb Hensarling and reported out of that committee.
Another subject raised during the forum was the budgetary implications of placing the GSEs in receivership. In response, Michael Bopp pointed to a recent analysis by Alvarez & Marsal Valuation Services that estimates the GSEs would collectively have a liquidation value of $170 billion after a ten-year wind down period.
Is this stuff complicated? You bet it is. But what is not so complicated is the need for the American people to have a much clearer understanding of these critical budgetary issues as the Congressional debate on GSE reform moves forward. BPC’s forum was one small step to help shed some light.