For all of the press the Treasury/Federal Housing Finance Agency bailout of Fannie Mae (FNM) and Freddie Mac (FRE) has received, it’s the nuances that are now starting to come into clearer view that will determine the future course of mortgage lending in the United States. The Congressional Budget Office opened up the latest can of worms on Tuesday by suggesting that the Treasury needs to take the full operations of each GSE directly onto its balance sheet. “It is CBO’s view that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget,” said Peter Orszag, CBO director, in a post on his own blog. “The GSEs’ revenue would be treated as federal revenue and their expenditures as federal outlays, with appropriate adjustments for the manner in which credit transactions (like a mortgage guarantee) are reflected in the federal budget.” The Financial Times’ Krishna Guha in Washington reported that the White House was caught off guard by Orzag’s recommendation. They shouldn’t have been; the CBO said on July 22 that “a strong argument can be made that if the Treasury used the proposed authority, the GSEs’ operations should be incorporated directly into the federal budget.” White House press secretary Dana Perino told reporters in a press conference Wednesday that “the Office of Management and Budget here at the White House is looking into that matter and reviewing it, so we haven’t made a decision yet.” The CBO’s take on Fannie and Freddie was largely missed in a press frenzy over an updated baseline estimate for the U.S. budget deficit; the CBO said it expects the number to grow to $407 billion this year and a record $438 billion next year. U.S. credit default swaps moved to record highs on Tuesday, a move due in no small part to investor uncertainty over the future of Fannie Mae and Freddie Mac; the CBO’s position on accounting for each will clearly factor into forward expectations, sources told HW on Wednesday. “The more the market thinks of agency debt as Treasury debt the more it will add total agency debt to Treasury debt in assessing the United States long-term fiscal health,” Alan Ruskin, chief international strategist at RBS Greenwich, told Reuters. Disclosure: The author held no positions of relevance when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.