Mandatory Spending

Function 370 - Commerce and Housing Credit

Raise Fannie Mae’s and Freddie Mac’s Guarantee Fees and Decrease Their Eligible Loan Limits

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2021–
Change in Outlaysa  
  Increase guarantee fees 0 -3.8 -4.0 -3.9 -3.7 -3.5 -3.1 -2.8 -2.6 -2.5 -15.5 -30.0
  Decrease loan limits 0 -0.3 -0.4 -0.5 -0.7 -1.0 -1.3 -1.6 -1.9 -2.4 -1.9 -10.0
  Implement both alternativesb 0 -4.0 -4.3 -4.2 -4.1 -4.0 -3.7 -3.7 -3.8 -4.1 -16.5 -35.9

This option would take effect in October 2021.
a. Excludes the potential effects on federal spending for the Federal Housing Administration and the Government National Mortgage Association. Spending for those agencies is set through annual appropriation acts and thus is classified as discretionary, whereas spending for Fannie Mae and Freddie Mac is not determined by appropriation acts and thus is classified by the Congressional Budget Office as mandatory.
b. If both alternatives were enacted together, the total effects would be less than the sum of the effects for each alternative because of interactions between the approaches.

Fannie Mae and Freddie Mac are government-­sponsored enterprises (GSEs) that were federally chartered to help ensure a stable supply of financing for residential mortgages. The GSEs carry out that mission in the secondary mortgage market (the market for buying and selling mortgages after they have been issued): They buy mortgages from lenders and pool those mortgages to create mortgage-backed securities (MBSs), which they sell to investors and guarantee (for a fee) against losses from defaults. Under current law, in 2020 Fannie Mae and Freddie Mac generally can purchase mortgages of up to $765,600 in areas with high housing costs and up to $510,400 in other areas; regulators can alter those limits if house prices change, and those limits will be higher in 2021.

In September 2008, the federal government took Fannie Mae and Freddie Mac into conservatorship. As a result, the Congressional Budget Office concluded, the institutions had effectively become governmental entities whose operations should be reflected in the federal budget. By contrast, the Administration considers the GSEs to be nongovernmental entities. CBO projects that under current law, the mortgage guarantees issued by the GSEs will have a budgetary cost—that is, the cost of the guarantees is expected to exceed the fees received by the GSEs.

This option includes two alternatives. In the first alternative, the average guarantee fee that Fannie Mae and Freddie Mac assess on loans they include in their MBSs would increase by 15 basis points (100 basis points equal 1 percentage point) starting in October 2021, when an increase of 10 basis points that was put in place in 2011 is scheduled to expire. (Under current law, CBO projects the average guarantee fee to be about 60 basis points in 2021.) In the second alternative, the size of the mortgages that Fannie Mae and Freddie Mac can include in their MBSs would be reduced, beginning by setting the maximum mortgage in all areas at $510,400 (eliminating the higher limit in high-cost areas) and then reducing that maximum by 5 percent a year until it reaches about $340,000 by 2030.