Accounting for Fannie Mae and Freddie Mac in the Federal Budget

Fannie Mae and Freddie Mac were originally chartered as government-sponsored enterprises (GSEs) to ensure a stable supply of credit for mortgages nationwide. They dominate the secondary (resale) market for residential mortgages, in which they buy home loans, pool the loans into mortgage-backed securities, and sell the securities to investors with a guarantee against most losses from defaults on the underlying loans. The two GSEs have been in federal conservatorship since the financial crisis of 2008.

The budgetary treatment of Fannie Mae and Freddie Mac is complex, as is the treatment of policy options for the housing finance system that CBO analyzes. The budgetary treatment of the GSEs involves two different accounting approaches: fair-value estimating of the costs of the GSEs’ mortgage guarantees and cash-based estimating of the GSEs’ transactions with the Treasury.

• In CBO’s judgment, Fannie Mae and Freddie Mac are effectively part of the government. Hence, in its baseline budget projections for the coming 10 years, CBO accounts for the GSEs’ operations as though they are being conducted by a federal agency. CBO measures the cost of the GSEs’ mortgage guarantees on a fair-value basis by effectively using market prices for those guarantees. (The fair value of a liability, such as a loan guarantee, is the price that would have to be paid to induce a private financial institution to assume the liability.)
• Although Fannie Mae and Freddie Mac are currently controlled by the government, the Administration’s Office of Management and Budget (OMB) treats them as nongovernmental entities for budgetary purposes. OMB records in the budget only cash transactions between the Treasury and the GSEs. In its budget estimates for the current year, CBO too presents the projected cost of Fannie Mae and Freddie Mac on a cash basis so that its estimates for the current year are consistent with how the Administration reports budget totals.

In contrast, CBO accounts for other federal programs that guarantee mortgages—such as programs of the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA)—using the approach required by the Federal Credit Reform Act of 1990 (FCRA).

This report addresses several questions:

• How does federal control of the GSEs affect their budgetary treatment?
• What types of estimates does CBO prepare for federal credit programs?
• Why does CBO use fair-value accounting for the GSEs?
• How do CBO’s 10-year projections differ under fair-value and FCRA accounting?
• What are the implications of that budgetary treatment for potential policy changes?