Last week, the Congressional Budget Office (CBO) released its score of S.1217, the Housing Finance Reform and Taxpayer Protection Act of 2014, which was approved by the Senate Banking Committee this past spring on a bipartisan basis. CBO estimates that the bill would decrease the federal deficit by $58 billion over the period from Fiscal Years 2015 to 2024 – though CBO cautions that those estimates are subject to significant uncertainty.
The bill would do away with the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and would establish the Federal Mortgage Insurance Corporation (FMIC) to assume the role of guaranteeing mortgage-backed securities. S. 1217 advances many of the same objectives of the housing finance reform plan put forward by the Bipartisan Policy Center Housing Commission.
CBO expects that FMIC’s guarantees would be less expensive than those made by the GSEs, which would result in cost savings for the federal government. These savings would come from two sources: FMIC fees charged on mortgages to guarantee principal and interest to investors and the requirement that the private market absorb some losses before FMIC guarantees become active.
Enacting the legislation would reduce direct spending by $60 billion and reduce revenues by $1.5 billion, according to CBO. Additionally, it estimates that the reform would reduce discretionary spending needs by approximately $7 billion.1
CBO also conducted a “fair-value” estimate of the legislation, which some contend is a better way to estimate the budgetary impact of federal mortgage guarantees than current Federal Credit Reform Act (FCRA) rules. The fair-value estimate yields a smaller reduction in the deficit – $7 billion over ten years – than the FCRA score of $58 billion.
CBO projects that adopting the new laws would raise interest rates somewhat (by 10 to 20 basis points) relative to baseline projections for borrowers seeking mortgages, but that the experience of borrowers seeking mortgages would otherwise be very similar to under current law. Higher interest rates would mean that somewhat fewer mortgages would have government guarantees and that FMIC would guarantee fewer of those mortgages than the GSEs currently do.
This CBO score is an encouraging moment for those who believe that GSE reform is needed. Whether or not creating the FMIC is the right way to go, CBO projections of lower federal spending after winding down the GSEs adds to the likelihood that comprehensive reform could still be achieved.
Alex Gold served as a policy analyst for BPC’s Economic Policy Project.
1 This spending reduction would occur because somewhat more borrowers would seek insurance from the Federal Housing Administration (FHA), and the offsetting collections would total $7 billion.