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Can you guess the financial weight of Fannie and Freddie?

Bipartisan Policy Center: No, and here's why

Housing occupies a significant slice of the national budgets, causing the federal government’s conservatorship of Fannie Mae and Freddie Mac to heavily impact the balance sheet.

As of now, the profits of Fannie and Freddie go to the Treasury, and generally become publicly untraceable after that. Why is that and how may it be changed?

During a panel session Wednesday morning with the Bipartisan Policy Center, experts helped vet through what the main difference and effects of the various budget options would be, with the view that the role of the government-sponsored enterprises will evolve in years to come.

The implications of the federal government’s conservatorship of the GSE boils down to two key differences: the Congressional Budget Office and Office of Management and Budget.

“OMB does not consolidate the GSEs for the federal budget. Overwhelmingly, the huge policy difference in what we are doing here is the fact that CBO scores the GSEs as deficit increasing over the next ten years while the CBO does not,” said Michael Bopp, partner at Gibson, Dunn & Crutcher and former associate director with the Office of Management and Budget.

However, Deborah Lucas, a Sloan distinguished professor of Finance at the MIT Sloan School of Management and former assistant director with the Congressional Budget Office, said one pivotal variable between the two is the impact on the taxpayer.

The CBO uses a fair value accrual approach and captures the lifetime cost of guarantees made each year, Lucas explained.

“There is a difference in the value of the projected losses and fees. More broadly, the purpose of fair value budgetary treatment is to align the economic implications of what is going on with the GSEs with the budgetary issues,” she said.

Lucas defended the positives of the CBO noting that the fair value treatment recognizes that technically taxpayers are also equity holders in the GSE and hold risk, so as a result, they should get some of the returns from the GSE.

“It provides lawmakers and the public the more comprehensive and transparent solution,” Lucas said.  

On thee other hand, the OMB tracks cash flow between Fannie, Freddie and the government. Under the OMB’s systems, it does not recognize the GSEs as being fundamental, so the transactions are treated as cash flows between third party entities and the government, Lucas said.  

“Part of the reason for that is that under the fair value you have to make judgments, and those judgments are not necessarily transparent,” Bopp said.  

However, Lucas responded saying that the fair value approach is the best way for aligning the reality of the situation and the treatment with the GSEs since it does utilize judgment.

Ultimately, this brought the discussion to the economic feasibility and probability of successfully winding down Fannie and Freddie.

"I do not think Congress feels the same need to get rid of the GSEs as it did two or four years ago," Tim Rood, chairman with the Collingwood Group, said. “There is more of a debate now on the role of the GSEs than 'they are just going to be eliminated',” Rood said.  

Putting the GSEs into a dollar amount, Jim Hearn, former deputy staff director with the Senate Budget Committee and former housing and banking analyst with the Congressional Budget Office and fellow with the National Academy of Public Administration, believes that the nation has a lot more housing stock than capital in the U.S.

This comes on the heels of the industry's giving a generally loving welcome to the bipartisan agreement on GSE reform reached by Senate Banking Committee Chairman Tim Johnson, D-S.D., and Ranking Member Mike Crapo, R-Idaho. That legislation, however, is not expected to make meaningful progress this Congress.


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