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Government Sponsored Enterprises

The Congress has established a number of government-sponsored enterprises (GSEs)—privately owned financial institutions that are federally chartered to fulfill a public mission of facilitating the flow of funds to housing and other sectors of the economy. Fannie Mae and Freddie Mac are the two largest GSEs, backing or holding about half of the $11 trillion of outstanding residential mortgage debt; those institutions have been under federal conservatorship since September 2008. The other GSEs are the Federal Home Loan Bank System, the Farm Credit System, and Farmer Mac. CBO analyzes the effects of the GSEs on the federal budget and on the sectors they are chartered to support.

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  • Modifying Mortgages Involving Fannie Mae and Freddie Mac: Options for Principal Forgiveness

    May 01, 2013

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

    June 02, 2011

  • Policies for Increasing Economic Growth and Employment in 2012 and 2013

    November 15, 2011

  • An Evaluation of Large-Scale Mortgage Refinancing Programs

    September 01, 2011
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Options for Principal Forgiveness in Mortgages Involving Fannie Mae and Freddie Mac: Working Paper 2013-02

working paper

May 1, 2013

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Abstract

Mitchell Remy and Damien Moore

CBO examined three options under which Fannie Mae and Freddie Mac would provide principal forgiveness to certain distressed borrowers—specifically, to borrowers who are eligible or could become eligible for the Home Affordable Modification Program (HAMP). Such borrowers represent about 4 percent of all those with mortgages involving Fannie Mae or Freddie Mac, CBO estimates. The options would reduce the amount owed by borrowers to as low as 115 percent (through the HAMP Principal Reduction Alternative), 100 percent, and 90 percent, respectively, of the value of their homes. Any gain or loss arising from the way the distressed mortgages are handled by Fannie Mae and Freddie Mac under the options would ultimately accrue to taxpayers because, in CBO’s judgment, the federal government is now the effective owner of those enterprises. CBO finds that all three options would probably result in small savings to the government, slightly reduce mortgage foreclosure and delinquency rates, and slightly boost overall economic growth. Designing a program that affected a larger number of borrowers and had a greater impact on the housing market and the economy would require a significant departure from HAMP’s current eligibility rules.


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  • Options for Principal Forgiveness in Mortgages Involving Fannie Mae and Freddie Mac: Working Paper 2013-02

    May 01, 2013

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

    June 02, 2011

  • Policies for Increasing Economic Growth and Employment in 2012 and 2013

    November 15, 2011

  • An Evaluation of Large-Scale Mortgage Refinancing Programs

    September 01, 2011
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Modifying Mortgages Involving Fannie Mae and Freddie Mac: Options for Principal Forgiveness

report

May 1, 2013

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monthly archive

  • May 2013 (2)
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Fannie Mae, Freddie Mac, and the Future of the Secondary Mortgage Market

posted by Damien Moore & David Torregrosa on April 4, 2013

  • Snapshot of Guarantees of New Residential Mortgages

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  • April 16, 2013
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Federal Programs that Guarantee Mortgages—February 2013 Baseline

data or technical information

February 5, 2013

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Modifying Mortgages Involving Fannie Mae and Freddie Mac: Options for Principal Forgiveness

CBO examined three options for Fannie Mae and Freddie Mac to use principal forgiveness for certain underwater borrowers. How would those options affect the number of mortgage defaults, the federal budget, and the overall economy?

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Fair-Value Estimates of the Cost of Federal Credit Programs in 2013

report

June 28, 2012


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Should Fair-Value Accounting Be Used to Measure the Cost of Federal Credit Programs?

blog post

March 5, 2012


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Fair-Value Accounting for Federal Credit Programs

report

March 5, 2012

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Highlights

Federal credit assistance supports such private activities as home ownership, postsecondary education, and certain commercial ventures. Excluding the activities of Fannie Mae and Freddie Mac, at the end of fiscal year 2011, about $2.7 trillion was outstanding in federal direct loans and loan guarantees.

CBO examines fair-value accounting as an alternative to the current approach for measuring the costs to the government of federal credit programs.

FCRA Treatment Does Not Give a Comprehensive Accounting of Federal Costs

The Federal Credit Reform Act of 1990 (FCRA) requires the costs of credit assistance to be measured by discounting—using rates on U.S. Treasury securities—expected future cash flows associated with a loan or loan guarantee to a present value at the time of disbursement.

In CBO’s view, FCRA-based cost estimates do not provide a full accounting of what federal credit programs actually cost the government because they do not incorporate the full cost of the risk associated with the loans.

Fair-Value Accounting Provides a More Comprehensive Measure of Federal Costs

Fair-value accounting recognizes market risk—the component of financial risk that remains even after investors have diversified their portfolios as much as possible, and that arises from shifts in current and expected macroeconomic conditions—as a cost to the government. To incorporate the cost of such risk, fair-value accounting calculates present values using market-based discount rates. Thus, fair-value estimates often imply larger costs to the government for issuing or guaranteeing a loan than do FCRA-based estimates.

Using FCRA-based estimates instead of fair-value estimates has important consequences for the way policymakers might perceive the cost of credit assistance:

  • The costs reported in the budget are generally lower than the costs to even the most efficient private financial institutions for providing credit on the same terms;
  • The budgetary costs are almost always lower than those of other federal spending that imposes equivalent true costs on taxpayers; and
  • Purchases of loans at market prices appear to make money for the government and, conversely, sales of loans at market prices appear to result in losses.

Fair-Value Accounting Has Challenges

  • Government agencies would incur training expenses and the cost of developing new valuation models.
  • Fair-value cost estimates would be somewhat more volatile, although factors that also affect FCRA estimates would continue to be the main cause of volatility.
  • Fair-value estimating would require analysts to make additional judgments that could introduce inconsistencies in how costs of different programs are evaluated.


monthly archive

  • May 2013 (2)
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CBO Testified on Several Topics Related to the Government's Mortgage Programs

blog post

June 2, 2011


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

report

June 2, 2011

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