Revealing Fannie Mae’s and Freddie Mac’s Budget Costs: A Step Toward GSE Elimination


Improper accounting for Fannie Mae’s and Freddie Mac’s budgetary impact has created the illusory effect that the government-sponsored enterprises (GSEs) represent a free lunch for Washington, which is encouraging higher spending and harming efforts to eliminate the entities. The GSEs’ off-budget status excludes them from federal budget rules and processes, and hides the real cost to taxpayers from federal control of Fannie and Freddie. GSE profits paid to the Treasury in 2013 alone have resulted in federal spending and deficits being underreported by more than $100 billion. The Budget and Accounting Transparency Act of 2014 (H.R. 1872) would take an important first step toward GSE elimination by putting both entities on budget and including market risk in estimates of their cost to taxpayers.


The current budgetary treatment of Fannie Mae and Freddie Mac as off-budget federal entities, meaning that they are excluded from budgeting rules and processes, creates deficit reduction in appearance only with several ill effects. The current cash-flow approach used to report the impact of government-sponsored enterprises (GSEs) on federal finances fails to account properly for taxpayers’ exposure to risk from federal control of Fannie and Freddie. The result is that the entities appear to be a boon for taxpayers because they reduce the reported federal deficit. This fiscal illusion encourages higher federal spending today while putting taxpayers on the hook for future bailouts. Moreover, improper accounting of Fannie and Freddie’s impact on taxpayers hurts efforts to eliminate the GSEs.

The Budget and Accounting Transparency Act of 2014 (H.R. 1872) would address problems with the current accounting for Fannie Mae and Freddie Mac by putting both entities on-budget and calculating their cost to taxpayers by incorporating market risk through a fair-value accounting.[1] This is an important first step toward GSE elimination.

Brief History

The Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) are government-sponsored enterprises under conservatorship by the Federal Housing Finance Agency (FHFA). Both entities participate in the secondary mortgage market by buying mortgages and subsequently repackaging and reselling these mortgages as mortgage-backed securities (MBSs) or holding them as part of their portfolio.

Prior to September 2008, the GSEs were shareholder-owned, supposedly private entities which benefited from a direct line of credit with the Treasury and exemptions from Securities and Exchange Commission filings and from state and local income taxes.[2] However, the entities were long seen as benefiting from an implicit government guarantee—a guarantee which has since been made explicit.

The Housing and Economic Recovery Act allowed the FHFA to place Fannie and Freddie in conservatorship, and it allowed the Treasury to provide financial assistance to the entities to prevent their net worth from falling to zero.[3] In short, the government took control of Fannie and Freddie and agreed to shield the entities from bankruptcy. Treasury support for the GSEs comes in the form of senior preferred stock purchases, meaning that the Treasury buys GSE stock with a higher claim on earnings than common stock; since August 2012, Treasury has been entitled to all GSE profits.[4]

Since the federal government takeover of Fannie Mae and Freddie Mac in September 2008, taxpayers have funneled $189 billion into the government-sponsored enterprises.[5] In 2012, this revenue stream reversed with Fannie and Freddie paying more than $203 billion to the U.S. Treasury since then.[6] The mortgage giants nevertheless remain under federal control as the Treasury has instead laid claim to all of the GSEs’ profits for an indefinite time.

Fannie and Freddie’s Impact on the Budget

The White House Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) differ significantly in their budgetary treatment of Fannie Mae and Freddie Mac.

The GSEs are treated as off-budget entities by the OMB because they are considered separate private entities under temporary federal conservatorship. Sarah Rosen Wartell of the Center for American Progress Action Fund explained the OMB’s position in a hearing before the Committee on the Budget:

According to the 1967 Commission on Budget Concepts, inclusion of an entity’s assets and liabilities in the federal budget depends on three basic factors: ownership, control, and permanence. Under the terms of the Housing and Economic Recovery Act of 2008, FHFA as conservator may take any action that is necessary to return Fannie Mae and Freddie Mac to sound and solvent condition and to preserve and conserve the assets of these firms.… [I]t seems difficult to conclude that the current arrangement between Treasury and the GSEs is permanent.[7]

The problem is that it is not clear whether and how Fannie and Freddie would return to stockholder control. The conservatorship agreement over Fannie and Freddie is remarkably unspecific when it comes to the future fate of the GSEs. Until the firms reach a "sound and solvent condition,”[8] the FHFA may continue to hold Fannie and Freddie under conservatorship. With no clear exit clause, Fannie and Freddie could remain under government control until Congress acts to change their status.[9] Therefore, the arrangement between Treasury and the GSEs should be considered permanent for budgetary purposes.

The CBO projects the GSEs’ impact on the federal budget as if Fannie and Freddie were government entities. According to Deborah Lucas, the CBO’s Assistant Director for Financial Analysis, the

federal conservatorship of Fannie Mae and Freddie Mac and their resulting ownership and control by the Treasury make the two entities effectively part of the government and imply that their operations should be reflected in the federal budget.[10]

This inconsistency between Administration and congressional accounting of Fannie and Freddie’s impact on the budget creates budgetary confusion and has resulted in seeming deficit reduction with adverse consequences for spending restraint.

Budgetary Confusion

In its current Budget and Economic Outlook, the CBO presents a 10-year baseline for government spending, revenues, and deficits.[11] The report also includes actual figures for the past fiscal year and estimates for the current fiscal year. In its reporting of actual outlays in the preceding fiscal year and its estimates for the current fiscal year, the CBO adopts Treasury’s cash-flow method to record Fannie and Freddie’s budgetary impact. In other words, official government scorekeepers only take account of money flowing into the Treasury from the GSEs, or vice versa, while ignoring the budgetary costs of guaranteeing GSE mortgage-backed securities—a cost they would acknowledge if the GSEs were on-budget as other federal loan guarantees are. In its baseline budget projections, however, the CBO does account for the subsidy cost of Fannie and Freddie’s activities in a forward-looking basis.

By the cash-flow method, Fannie Mae and Freddie Mac reduced 2013 outlays and the deficit by $97 billion.[12] This is misleading, however, as this method accounts only for cash transfers between the Treasury and the GSEs, such as stock purchases made by Treasury and dividends paid to the Treasury. The method ignores the risk to taxpayers from backing GSE mortgage guarantees and fails to recognize the substantive taxpayer subsidy provided to the secondary mortgage market through Fannie Mae and Freddie Mac operations under federal control. As Lucas testified before Congress in 2011:

That [cash-flow] approach can postpone for many years the recognition of the costs of new obligations. Subsidized mortgage guarantees may even show gains for the government in the short-term because fees are collected up front but losses are realized over time as defaults occur.[13]

Today, the GSEs are paying dividends to the Treasury that are reducing recorded outlays and recorded deficits, while taxpayers are on the hook for future losses.

In its baseline projections through 2024, the CBO calculates the GSEs’ impact on the budget by projecting the subsidy costs of credit assistance offered by Fannie Mae and Freddie Mac over the lifetime of the securitized mortgage guarantees. To incorporate the market risk associated with the GSEs, the CBO calculates their subsidy cost using a fair-value basis. Using this approach, the CBO estimated that the GSEs would have had a net outlay effect of $5 billion in 2013.[14] Considering the GSEs as on-budget entities, their profits paid to Treasury would have been considered an intra-governmental payment with no effect on reported net outlays and the deficit.

Instead of recording a $5 billion cost for maintaining Fannie and Freddie under federal conservatorship, Treasury recorded a $97 billion offsetting receipt.[15] This means that Treasury did not record GSE payments to the government as revenues, but subtracted the value from federal spending as an offsetting receipt. This lowered reported spending in 2013 by $97 billion and reduced the deficit by that same amount.


-By Romina Boccia -

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