learn more about working at cbo and check out the agency’s career opportunities
May 1, 2013
![]()
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.

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

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.
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 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:
