The Budgetary Cost of Fannie Mae and Freddie Mac and Options for the Future Federal Role in the Secondary Mortgage Market

June 2, 2011

Testimony before the Committee on the Budget, U.S. House of Representatives

Chairman Ryan, Congressman Van Hollen, and Members of the Committee, thank you for inviting me to testify about the budgetary cost of Fannie Mae and Freddie Mac and options for the future federal role in the secondary mortgage market. Historically, support for the mortgage market has been part of a broader federal policy aimed at encouraging home ownership and, to a lesser extent, at making housing more affordable for low- and moderate-income families. The activities of Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) have been an important aspect of that policy. In 2010, Fannie Mae and Freddie Mac owned or guaranteed roughly half of all outstanding mortgages in the United States, and they financed 63 percent of the new mortgages originated that year. Including the 23 percent of home loans insured by federal agencies such as FHA, about 86 percent of new mortgages made in 2010 carried a federal guarantee. However, the largest federal subsidies for home ownership have generally come from favorable tax treatment for housing.

My testimony today focuses on CBO’s estimates of the budgetary cost of the government’s takeover and continuing operation of Fannie Mae and Freddie Mac. I will also discuss how the budgetary treatment of those two enterprises differs from that of FHA and other federal mortgage programs and the potential problems those inconsistencies cause, and I will summarize alternative options for the future role of the federal government in the secondary mortgage market.