Summary

The government and private lenders or investors often share the financial risk of loans and loan guarantees. In this report, the Congressional Budget Office examines ways in which the federal government and private entities share the risk involved in various federal credit programs, including those related to home mortgages, small businesses, and project financing.

What Is the Government’s Role in Credit Markets?

Federal credit programs help make credit more widely available and more affordable to borrowers than it would be in a purely private market. In CBO’s projections, which reflect the assumption that current laws governing revenues and spending generally remain unchanged, the federal government provides credit assistance amounting to $1.9 trillion in 2025—$228 billion in new direct loans and $1.6 trillion in new loan guarantees; that assistance results in outlays totaling $2 billion.1 More than 85 percent of that assistance is in the form of mortgage guarantees or student loans.

How Is Risk Shared in the Government’s Credit Programs?

Risk sharing between the federal government and the private sector can work in either direction. In some cases, the government shifts risk to the private sector, but in others, it takes on risk from the private sector. Because there are different sources and types of financial risk, the form of risk sharing varies among programs. For example, one party might bear all losses up to a specified percentage of the original loan balance, or both parties could bear a share of all losses (see Figure 1).

Partial Guarantees. A common way for the federal government to share the risk of borrowers’ defaulting on loans is by providing a partial guarantee on those loans. Under such an arrangement, the government guarantees a portion of the loans originated and serviced by private lenders. For example, in the Small Business Administration’s (SBA’s) 7(a) business loan program, the government covers about 75 percent of the loss on the balance of a defaulted loan, and the private lender bears the rest of the loss. For eligible home mortgages, the Department of Veterans Affairs’ (VA’s) guarantee covers a loss of up to 25 percent of the balance of a loan greater than $144,000 before private lenders bear any loss.

Project Financing. The federal government provides additional financial support (in the form of direct loans, loan guarantees, and lines of credit) for some projects that receive funding from private parties or state and local governments. Those projects typically benefit the public and often involve infrastructure. For example, the Transportation Infrastructure Finance and Innovation Act program provides financial assistance for highways, and under title XVII of the Energy Policy Act of 2005, the Department of Energy provides loans and loan guarantees for projects developing alternative and innovative energy technologies (such as nuclear, solar, wind, and biofuel technologies).

Government-Sponsored Enterprises’ Credit-Risk-Transfer Transactions. Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs), use credit-risk-transfer (CRT) transactions to transfer to private investors some of the potential credit losses on the mortgages that they guarantee. Those transactions essentially provide the GSEs with a way to reinsure some of their mortgage default risk with insurers and investors in security markets. They also generate market-based measures of the cost of the government’s exposure to risk.

Other Forms of Mortgage Risk Sharing. The two GSEs’ charters require borrowers with small down payments to purchase private mortgage insurance. The insurers share the credit risk with the GSEs in return for receiving premiums paid by the borrowers. The GSEs and the Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development, also transfer, or “put back,” the cost of defaulted loans to the lenders when those loans fail to meet the agencies’ underwriting standards, which are guidelines for loans set to help protect against excessive losses.

How Does Risk Sharing Affect the Federal Budget?

The budgetary effects of risk sharing differ by the form of risk sharing and by the individual characteristics of each program (see Table 1). Though risk sharing often lowers budgetary costs, it may also reduce budgetary savings.

Partial Guarantees. The Federal Credit Reform Act of 1990 (FCRA) specifies an accrual-based budgetary treatment for federal loans and loan guarantees under which the subsidy cost of a loan or guarantee is recorded. The subsidy cost represents the estimated net present value of the federal government’s credit commitment over the life of the loan at the time it was disbursed. (A present value is a single number that expresses the flows of current and projected future income or payments in terms of an equivalent lump sum received or paid at a specified time.) CBO does not use the FCRA approach to value the guarantees made by the GSEs; rather, it uses what is known as a fair-value approach—another accrual-based treatment that differs from the FCRA approach in that it accounts for the market value of the federal government’s obligations.

Subsidy costs for direct loans and guarantees can be positive, indicating net budgetary costs, or negative, indicating net budgetary savings. In general, risk sharing reduces costs for programs that, under FCRA, are estimated to have net budgetary costs, such as VA’s guarantees, because they limit the losses that the federal program bears. For programs that are estimated to result in net savings, partial guarantees may increase budgetary costs, thus decreasing those savings.

The subsidy costs of loans or guarantees are typically revised each year to reflect changes in the actual and expected future performance of credit programs. Those revisions are recorded as increases or decreases in budget outlays. A revised estimate that is lower than the initial estimate of the subsidy cost means that credit losses were (or are projected to be) less than expected or that fees and other cash inflows were (or are projected to be) more than expected.

Project Financing. Risk sharing is often used to support projects that might not be able to obtain full financing in the private sector. The estimated budgetary effects of such risk sharing vary depending on the specific project. For some programs, the estimated costs have increased and decreased over time, reflecting the uncertainty that exists about specific projects, particularly at their start.

Credit-Risk-Transfer Transactions. CBO estimates that the budgetary cost of CRT transactions is zero on a fair-value basis. The GSEs pay fair market prices to investors in a competitive market with no significant impediments to entry. However, one recent study suggests that the transactions may be a relatively inefficient way to transfer risk because CRT securities, even if priced correctly, are illiquid and complex and thus less attractive to market participants than other types of securities.2

Other Forms of Mortgage Risk Sharing. The GSEs’ requirement that mortgage borrowers with small down payments purchase private mortgage insurance lowers the net cost of defaults to the government. Because borrowers pay premiums for mortgage insurance and insurers share the credit losses, the arrangement results in net savings to the government. Similarly, when loans do not meet the agencies’ underwriting standards, the GSEs and the FHA are empowered to force private lenders to repurchase loans. In such cases, the private lender bears the credit losses, thereby lowering the GSEs’ and the FHA’s budgetary costs.

Overview of Federal Credit Programs

The federal government supports some private activities by offering credit assistance through direct loans and by guaranteeing loans made by private institutions. The government also provides cash grants to help fund projects or activities that it considers to be in the public interest.

In periods of financial distress, the government may temporarily expand its role in credit and financial markets. The emergency credit programs implemented during the 2007–2009 financial crisis and the coronavirus pandemic are examples of such temporary intervention.3

In 2025, the federal government is projected to provide new direct loans totaling $228 billion and new guarantees covering $1.6 trillion in loans (see Table 2). Mortgage guarantees and student loans are projected to account for more than 85 percent of that $1.9 trillion in total federal credit assistance. In August 2024, CBO projected that the budgetary cost of the new loans and loan guarantees issued in 2025 would be about $2 billion.4

The largest credit programs are mandatory; that is, lawmakers determine spending for them by setting eligibility rules and other criteria in authorizing legislation rather than by appropriating specific amounts each year. Those programs include Fannie Mae’s and Freddie Mac’s guarantees of mortgage-backed securities (MBSs).5 Together, the two GSEs are projected to provide $987 billion in new guarantees in 2025. Other large mandatory programs are the Department of Education’s student loan programs and VA’s mortgage guarantee program.

Discretionary credit programs are funded through annual appropriation acts and account for only about one-third of the projected dollar value of new loans and guarantees in 2025. The largest discretionary credit programs are the mortgage programs administered by the FHA and the Department of Agriculture’s Rural Housing Service, the SBA’s 7(a) small-business loan program, and the Department of Energy’s Title XVII program, which provides loans and loan guarantees for innovative energy technologies.6

The Government’s Role in Credit Markets

Most markets provide credit in an efficient manner by using risk-based pricing, which minimizes the cost of providing credit, and they generally operate with little federal intervention in normal times. Examples include markets for credit cards, auto loans, home equity loans and lines of credit, and corporate credit. Those markets are subject to federal regulation, including requirements to disclose certain information related to the cost and terms of credit.

In other credit markets, the government directly intervenes to make credit more widely available under all economic conditions and to lower the borrowing cost for certain borrowers.7 Many of the federal government’s permanent credit programs offer credit to borrowers at lower interest rates and in larger amounts than they would be able to attain in private markets. The federal government may also have looser credit standards than private lenders. Federal programs support a range of policy goals, including increasing the availability of credit for students, small businesses, homebuyers, and farmers. The government explicitly subsidizes some loans and implicitly subsidizes others when it bears risk without full compensation.

During periods of financial stress, the government has provided credit and grants to a wider range of individuals and businesses than it does when financial markets are relatively stable. In October 2008, the Emergency Economic Stabilization Act of 2008 established the Troubled Asset Relief Program (TARP) to enable the Treasury Department to promote stability in financial markets by purchasing and guaranteeing “troubled assets.”8 The TARP was used for many purposes, including for specific types of lending activity, some of which had the effect of providing subsidies to certain borrowers.

Later, during the pandemic, lawmakers authorized a range of programs intended to promote stability in credit markets primarily by providing relief to small businesses that took out loans. For example, the Coronavirus Aid, Relief, and Economic Security (CARES) Act included $17 billion for six months of payment relief for businesses participating in certain SBA programs and temporarily increased some loan limits. Those measures were applied automatically to eligible borrowers to prevent loan defaults and additional credit market disruptions.9 The CARES Act also permanently eliminated the zero-­subsidy goal for the 7(a) program, thus allowing SBA to charge lower fees.10

Federal Mortgage Finance Programs

The federal government has several programs that target different segments of the mortgage market. In 2025, CBO projects, more than 60 percent of new mortgage originations will be federally insured.11 During and just after the 2007–2009 recession, when providing home loans was riskier for private lenders than it was before the recession, the government’s share of the mortgage finance market grew rapidly. The resulting increase in the availability of credit helped stabilize the housing market and the economy.12 But the government’s expanded role also transferred to taxpayers the risk of the financial losses that would result if borrowers defaulted—a type of risk referred to as mortgage credit risk. (Mortgages held by federally insured banks also expose taxpayers to mortgage risk, though the risk is much smaller because the banks take the losses ahead of taxpayers.)

Fannie Mae and Freddie Mac. Five decades ago, Congressional charters set up Fannie Mae and Freddie Mac as government-sponsored enterprises—privately owned financial institutions established by the government to fulfill a public mission. In September 2008, the GSEs were placed into conservatorships by their regulator, the Federal Housing Finance Agency (FHFA), after unprecedented financial losses beginning in 2007 resulted in a loss of market confidence in the GSEs. Fannie Mae and Freddie Mac provide a stable source of funding for residential mortgages across the country, including loans for low- and moderate-income families.13 They do so by providing liquidity and stability to the secondary market for residential mortgages. In carrying out their mission, the GSEs buy mortgages from lenders, pool them into mortgage-backed securities, and sell those MBSs—along with a guarantee against defaults on the underlying loans—to investors.14 Through those activities, the GSEs help maintain an active secondary mortgage market and thus help improve lenders’ access to financing, thereby allowing lenders to make new loans.

The Federal Housing Administration and the Department of Veterans Affairs. The government insures or guarantees mortgages through the FHA and VA.15 By shifting the credit risk to the federal government, the federal guarantee protects the holder of such a loan (whether that be the institution that originated it or an investor who purchased it from the originator) from losses that it would otherwise incur if a borrower defaulted.

The federal guarantee allows lenders to charge borrowers lower interest rates and to require smaller down payments than they would otherwise, thus increasing borrowers’ access to mortgage credit. The FHA’s single-­family mortgage guarantees require a minimum down payment of 3.5 percent for most borrowers, whereas private lenders typically require borrowers to put down a minimum of 10 percent to 20 percent. VA guarantees are designed to help eligible veterans, service members, surviving spouses, and members of the reserves or National Guard obtain a mortgage to purchase a home or refinance an existing mortgage. Borrowers who are eligible for a VA loan can often borrow without making any down payment and are charged fees that are lower, on average, than those for mortgages guaranteed by the FHA, Fannie Mae, and Freddie Mac.

FHA loans are particularly attractive to first-time homebuyers, low-income borrowers, and minority borrowers seeking to purchase or refinance a home—people who, in private markets without such guarantees, might face higher interest rates and be required to make larger down payments.16 In November 2023, 82 percent of the FHA’s purchase loans (that is, loans for the purchase of a home as opposed to the refinancing of a current home) went to first-time homebuyers, whereas 51 percent of the GSEs’ purchase loans were for first-time buyers.17 Likewise, about half of the FHA’s purchase loans in 2023 went to minorities—17 percent to Black borrowers. Of the GSEs’ purchase loans originated that year, 30 percent went to minorities and only 5 percent to Black borrowers.18 The FHA and VA accounted for most of the loans to Black borrowers.19

As part of the Department of Housing and Urban Development, the Government National Mortgage Association (Ginnie Mae) aims to attract capital to the market for federally insured mortgages to reduce costs for borrowers. Ginnie Mae carries out that mission by guaranteeing the timely payment of principal and interest on MBSs that private financial institutions create, mainly from FHA and VA loans.20

Other Credit Programs

The federal government provides credit assistance—most often in the form of loan guarantees—to businesses and individuals. For example, the Small Business Administration operates several loan guarantee programs designed to encourage lenders to provide loans to small businesses that have a reasonable amount of invested equity and a demonstrated need for funding.21 The Department of Energy, the Department of Transportation, and the Environmental Protection Agency support large-scale projects that often require significant investment and carry risks that the private sector is not willing to bear without financial guarantees. In addition, the Department of Education provides direct loans to students, offering income-based repayment plans with loan forgiveness that allow borrowers to share the risk of their uncertain future earnings with the government.

Types of Financial Risk

When the federal government provides credit assistance to individuals and businesses through direct loans or by guaranteeing loans made by private institutions, it is exposed to financial risk. That risk can take several forms.

Credit Risk

The government is most exposed to credit risk (also known as default risk)—the risk that borrowers may default on their loans, resulting in losses for the lender. The government is exposed to such risk through both its direct loan programs and its loan guarantee programs. Direct loan programs expose the government to credit risk because when borrowers default, the programs do not receive expected principal and interest payments. Loan guarantee programs expose the government to credit risk because if borrowers default, the government has an obligation to repay the private loan originator (in part or in full) for the resulting losses.

The government’s different credit programs use a variety of strategies to deal with borrowers who miss or make incomplete payments (referred to as delinquencies), to prevent or mitigate defaults, and to limit losses when defaults occur. If borrowers cannot make their scheduled payments, program administrators can make it easier for them to pay by temporarily lowering their payments, offering flexible refinancing programs, or suspending payments for a period. When the government sustains losses because a borrower defaults, it can recover some of those losses by modifying the terms of the loan, reselling collateral, or withholding benefits (including tax refunds and Social Security benefits) due to the borrower.22

Market Risk

Market risk is the component of financial risk that remains even after investors have diversified their portfolios as much as possible; it arises from shifts in macroeconomic conditions, such as productivity and employment, and from changes in expectations about future macroeconomic conditions.23 For taking on market risk, investors demand greater compensation than they would expect to receive from investing in Treasury securities, which are regarded as risk-free, after accounting for the average cost of default. The additional compensation—the difference between the expected return on the investment with market risk and the expected return on Treasury securities—is called the risk premium. Taxpayers and beneficiaries of government programs are exposed to market risk when the government provides credit assistance or invests in a financial asset, such as an ownership stake in a private business.24

Interest Rate Risk

The risk of losses due to changes in interest rates is known as interest rate risk. A large, unexpected change in interest rates—whether an increase or a decrease—can affect the impact of credit programs on the federal deficit. An unexpected rise in interest rates widens the gap between federal borrowing costs and the interest payments that the government receives from borrowers, increasing the effect of federal lending on the deficit. An unexpected fall in interest rates has the opposite effect. One way to limit interest rate risk is to issue loans with floating rates, as, for example, the SBA’s 7(a) loan program does. To limit Fannie Mae’s and Freddie Mac’s exposure to interest rate risk, the FHFA required the GSEs to reduce the size of their investment portfolios of mortgages, which are funded with debt.

Prepayment Risk

Although most mortgages carry 30-year terms at fixed interest rates, few mortgages are actually held for 30 years. When interest rates fall, borrowers tend to prepay their existing mortgages and other prepayable loans and refinance at lower rates. (Mortgages are also prepaid when homes are sold.) Prepayments thus reduce interest income for the GSEs, the FHA, and investors in MBSs. The GSEs lose the relatively high interest income from mortgages they hold as investments that are prepaid, but they are still obligated to pay the higher interest rates on their debt. Prepayment risk and interest rate risk can be lowered or hedged through the purchase and sale of financial derivatives—a type of financial contract used to transfer risk between investors that is so named because its price depends on, or derives from, one or more underlying assets or benchmarks. Such strategies to mitigate risk entail additional costs. In addition, the GSEs and the FHA lose income from fees when borrowers prepay.

Counterparty Risk

The mortgage finance credit programs are also exposed to counterparty risk—the risk that the other party (that is, the counterparty) to a financial transaction or investment might not meet its obligations. For example, the GSEs face counterparty risk when they purchase derivatives from an entity other than the centralized clearinghouses. (Clearinghouses are intermediaries responsible for finalizing trades, which involves such functions as settling trading accounts and overseeing the delivery of assets. They absorb the counterparty risk of derivatives purchased through them.) During the 2007–2009 financial crisis, the GSEs experienced losses when some private mortgage insurers, who were their counterparties on some loans with small down payments, failed to meet their obligations. Similarly, Ginnie Mae incurs counterparty risk if the issuer of its MBSs fails. In that case, Ginnie Mae steps into the role of the issuer—servicing and administering the MBSs (by promptly forwarding to investors principal and interest on the securities), handling defaults and foreclosures on the underlying loans, and working with the primary government guarantors to settle claims.

Liquidity Risk

Liquidity, as it pertains to assets, is the quality of being readily convertible into cash: An asset is liquid if it can be easily bought or sold in large quantities without affecting its price. An institution’s liquidity is its ability to meet financial obligations by virtue of possessing cash or liquid assets. The federal government may be less concerned about liquidity than a typical investor, but some of its mortgage credit programs lower liquidity risk for lenders.25 The GSEs and Ginnie Mae create secondary markets for mortgages. Those markets make mortgages more liquid and thus allow lenders to offer borrowers lower interest rates. During the financial crisis and the pandemic, the Federal Reserve, with funding from the Treasury, established various facilities to increase the liquidity of certain financial assets and reduce private institutions’ liquidity risk.

Forms of Public-Private Risk Sharing

By sharing with private entities some of the risk involved in its credit programs, the government can reduce taxpayers’ risk exposure and, in some cases, minimize losses and make them more predictable.

Because different types of financial risk exist, federal programs use several forms of risk sharing to distribute losses and achieve desired outcomes. Some forms may look very different from others, but they all serve the same purpose—to reduce the losses from defaults that the government bears.

The relative size of the losses borne by the government, private lenders, and investors depends, in part, on where their capital is exposed to risk. Often, risk-sharing arrangements require one party to cover losses up to a specified amount before other parties begin to incur them (a position known as the first-loss position) or specify the percentage of losses to be shared (known as the loss-share percentage). Losses from defaults are inevitable in all programs, and parties in the first-loss position and those with a high loss-share percentage are the most exposed to the risk of such losses.

Risk sharing between the federal government and the private sector can work in either direction. In some cases, the government shifts risk to the private sector, but in others, it takes on risk from the private sector. In principle, the economic effects of those two arrangements are the same, but in practice, differences arise. In general, by shifting risk to private firms and investors—which have financial incentives to monitor, control, and price risk—the government can lower costs. By taking on some risk from private-sector lenders, the government can increase the availability of credit and reduce costs for certain borrowers, though it often does so at a cost to taxpayers.

In some federal programs, sharing credit risk with lenders or investors might undermine other policy goals. The discontinued Federal Family Education Loan (FFEL) program is an example. In that loan guarantee program, private lenders bore little—or in some cases, none—of the credit risk for student loans. To assume additional credit risk without subsidies from the government, lenders would have either demanded more control over which loans to originate or charged higher interest rates, particularly to borrowers with uncertain future income streams. As a result, borrowers would have faced a combination of tighter credit conditions and a higher cost of borrowing.

Partial Guarantees

Partial guarantees are the most widely used type of risk sharing in credit programs. When the federal government provides a partial guarantee, it bears a large share of the credit risk, and the private lender bears the rest. By contrast, a full guarantee leaves the government bearing all the risk and the private lender bearing none.

Full guarantees are more common in housing programs (accounting for nearly 90 percent of all housing credit obligations in 2025), but partial guarantees account for about half of all credit obligations in commercial loan programs. Even in those cases in which the government bears all the initial credit risk, it may shed other types of risk or reinsure the credit risk. In addition, guarantees are often contingent on lenders’ fully complying with all rules and regulations. (For further discussion about full guarantees, see Box 1).

With a partial guarantee, private lenders are responsible for the origination, underwriting, and routine servicing of loans provided under a federal program. The government assumes some amount of the credit risk, protecting the private lender that originated the loan from some (but not all) of the losses that may result from borrowers’ defaulting on their loans. Under most of the programs that provide a partial guarantee, both the government and the private lender bear the burden of a portion of every dollar of a loss. Under a few programs, however, the government is in the first-loss position and thus absorbs all losses up to a specified limit before the private lender incurs any loss.26

VA’s home loan guarantees are an example of a partial guarantee. They cover only part of the losses on a defaulted loan. The portion of a loan that VA guarantees depends on the mortgage amount. For example, for loans greater than $144,000, VA guarantees up to 25 percent of the loan balance; lenders are responsible for any losses that exceed that amount. VA guarantees a larger portion of smaller home loans. For loans less than $45,000, it guarantees 50 percent of the loan balance.27 By contrast, the government generally provides a full guarantee in its other mortgage finance programs—those of the FHA and the GSEs. The latter share the credit risk with private mortgage insurers on loans with less than a 20 percent down payment (see Figure 2).

The government can alter its risk exposure by changing the percentage of the principal or loan balance that it guarantees. The SBA’s 7(a) program, for example, provides a guarantee of approximately 75 percent of the loan balance, and the Department of Agriculture administers several programs for businesses with partial guarantees that range from 80 percent to 98 percent.

Project Financing

The government provides funding for some projects that receive private financing or state or local funding. Those projects are typically for infrastructure, such as highways, mass transit systems, water systems, and energy facilities. Some of those projects are publicly owned and operated, whereas others are privately owned and operated but publicly sponsored or regulated.

Credit Assistance for Transportation and Water Infrastructure. Infrastructure projects receive credit assistance in a variety of ways. The federal government may lend money for infrastructure projects directly to state and local governments (and to private entities building publicly sponsored projects), provide them with lines of credit, or guarantee the repayment of funds that they borrow from other lenders, thus allowing them to secure loans with lower interest rates than they would otherwise be able to obtain.28

Projects financed through the Transportation Infrastructure Finance and Innovation Act (TIFIA) or the Water Infrastructure Finance and Innovation Act (WIFIA) programs receive loans, loan guarantees, and lines of credit that are limited to a portion of the project’s total cost (generally one-third, but in some cases, up to 49 percent). A TIFIA or WIFIA project’s total package of federal assistance (including federal grants and other credit assistance) cannot exceed 80 percent of the project’s cost. In addition, the project must have a dedicated revenue stream. The state or local government provides additional financing, and in cases in which private entities are involved in publicly sponsored projects, private investors provide equity.

The state or local government secures the financing, and the federal government’s position is not subordinate, meaning that amounts owed to the federal government must be repaid before all other forms of debt. The federal financing is offered at low interest rates that are equal to the rates of return on Treasury securities. The state or local government’s obligation to make payments on the federal financing is triggered by substantial completion of the project. If cash flows are not sufficient to make the loan payments, the federal government may restructure the debt service or defer repayment for up to five years. Because many infrastructure projects have long development periods and may be subject to repeated delays, the timing of repayment is uncertain. The construction of roads and bridges, for example, may take several years. And although the credit risk of the borrower is evaluated to determine eligibility, the credit risk of the project is not.

For projects supported by federal financing, the allocation of risk among private investors, state and local governments, and the federal government depends in part on whether the financing is repaid using tolls or availability payments—that is, installment payments that the state or local government is obligated to make regardless of how much revenue a project generates. When a state or local government agrees to a contract requiring availability payments, it takes on more risk, lowering the probability of private borrowers’ defaulting on the loan. That lower probability of default means that the federal government bears less risk when it provides loans that require availability payments than it would otherwise. As a result, the projected federal costs of such loans are lower as well.

Title XVII Program for Innovative Energy Technologies. The Department of Energy is authorized to make loans and loan guarantees for projects developing alternative and innovative energy technologies under title XVII of the Energy Policy Act of 2005. Such projects may be related to nuclear, solar, or wind power or to biofuels or other alternative sources of energy. Most loans are fully guaranteed, funded by the Federal Financing Bank (FFB), and limited to 80 percent of the project’s costs.29 Financing is secured by collateral that may include project assets as well as assets not related to the project. The interest rate on the loan is based on the credit risk of the project and on the prevailing rate of interest in the private sector for similar loans and risks. The government’s position is not subordinate to that of other lenders, but those lenders may have liens on the project with equal claim to the assets used to secure the government’s loan. Outstanding loans and guarantees in 2023 totaled $17 billion; direct loans and fully guaranteed loans account for $16 billion of that total.30

Public-Private Partnerships. Public-private partnerships are arrangements that are intended to improve the efficiency of federal, state, and local governments’ spending on large-scale projects that typically benefit the public in some way. Such partnerships have, for example, been used to design, build, operate, and maintain transportation and water infrastructure. The partnerships might motivate private entities to achieve those outcomes more efficiently by combining project stages (and sometimes private financing) in a way that transfers risk to the private party. Because the private partner’s profit depends on the project’s success, that partner has an incentive to achieve the best outcome at the lowest cost. The federal government has rarely entered into such partnerships. From 1991 to 2016, CBO estimates, public-private partnerships accounted for 1 percent to 3 percent of spending for highway, transit, and water infrastructure.31

The amount of risk that state and local governments have transferred to private entities through partnerships for highway projects has declined in recent decades. One way for private financiers to limit their risk is to require repayment directly from state and local governments (through availability payments) rather than from riskier sources such as tolls. From 2009 to 2019, 44 percent of all private financing was to be repaid directly by governments, whereas from 1993 to 2008, 17 percent of such financing was repaid directly. The federal government’s share of project financing grew significantly in those years, rising from 25 percent in the 1993–2008 period to 49 percent in the 2009–2019 period (see Figure 3).

The Infrastructure Investment and Jobs Act, enacted in November 2021, expanded the range of activities for which public-private partnerships can be used to include building new and improving existing broadband networks, enhancing the cybersecurity of the power grid, and researching and developing clean hydrogen.32 The law also tightened oversight of and reporting requirements for partnerships established under certain surface transportation programs. For example, one provision requires a “value for money analysis”—that is, an analysis of the costs of undertaking a project using public funding versus private financing—for transportation projects that are estimated to cost more than $750 million.

The GSEs’ Credit-Risk-Transfer Transactions

At the direction of the FHFA, Fannie Mae and Freddie Mac began using CRT transactions in calendar year 2013 to share with private investors a portion of the credit risk on the single-family mortgages that the GSEs guarantee.33 (The years in this section are calendar years.)

Although CRT transactions can have varying structures, all share the same purpose: They shift some of the costs of default to other private parties, such as investors, mortgage insurers, or private reinsurance companies. In some cases, the GSEs might purchase insurance to lessen their credit risk, but in most CRT transactions, Fannie Mae and Freddie Mac issue bonds—called credit-risk notes or CRT securities—with insurance-like properties that protect the GSEs from some losses.34 Investors in CRT securities are repaid their principal plus interest; the amounts of those payments depend on the performance of an underlying pool of mortgages that the GSEs already guarantee as part of a traditional MBS.35 (CRT securities do not change the GSEs’ guarantee on MBSs or interfere with the functioning of the MBS market.) CRT securities insulate Fannie Mae and Freddie Mac from a specified amount of mortgage losses by reducing the amount of principal that they must repay to the holders of the securities when losses occur.

The Role of Credit-Risk-Transfer Transactions. As part of its 2013 strategic initiative, the FHFA sought to reduce the GSEs’ dominant presence in the marketplace and set annual goals for the amount of risk that the GSEs transferred to private investors.36 The FHFA directed Fannie Mae and Freddie Mac to test multiple types of CRT transactions involving single-family loans in both security and insurance markets.37 The CRT transactions are designed to transfer to investors losses of up to about 4 percent of a mortgage pool—a portion that would have been sufficient to cover most of the losses that the GSEs incurred during the 2007–2009 financial crisis.38

CRT transactions helped to create a broader, more liquid market for mortgage credit risk by introducing multiple sources of private capital.39 Before 2013, providers of private capital took on mortgage credit risk mainly by purchasing private-label securities (MBSs issued and insured by private companies without government backing) or by selling private mortgage insurance. The market for private-label securities is much smaller than it was before the 2007–2009 financial crisis, but now investors can assume mortgage credit risk by purchasing CRT securities. Ultimately, Fannie Mae and Freddie Mac may help develop a private market for mortgage credit risk that can operate after the GSEs’ conservatorships end and thus further reduce their direct role in the mortgage market.

CRT securities offer investors a predictable and regular schedule for issuance (although that schedule was disrupted during the pandemic), reliable historical loan-level performance data that the GSEs make publicly available, and quality bond ratings from multiple credit rating agencies. Those traits make CRT securities an attractive option for investors, and demand for them has increased over time.40 The pricing of CRT securities could provide information about the cost of the risk borne by the GSEs.41

The Structure of CRT Securities. Investors in CRT securities take on part of the credit risk for a pool of mortgages in return for interest paid by the GSEs. The interest rate is equal to a short-term interest rate (currently the Secured Overnight Financing Rate) plus an additional percentage (referred to as a spread) based on the riskiness of the individual security. If enough of the loans in the pool defaulted, the investors would lose some of their interest and principal payments.

The structure of CRT securities is complicated, in part because the securities are exposed to both credit risk and prepayment risk. To issue a set of CRT securities, Fannie Mae and Freddie Mac first bundle some of the mortgages that they guarantee to create a reference pool on which the value of the securities is based. They then divide the principal balance of the reference pool into different groups of bonds (or tranches). Each tranche is assigned a different level of exposure to credit losses, essentially affording each class of investors a different risk profile to match their level of risk tolerance.

The level of risk exposure of a particular tranche is referred to as its seniority: Senior tranches are safer than junior ones because losses are allocated to the most junior tranche first. When there is a loss in the reference pool, the principal balance of the most junior tranche is reduced by the amount of the loss. If losses exceed the balance of that tranche, the balance of the next most junior tranche (the most junior of the middle tranches) is reduced by the amount of the remaining loss up to that tranche’s balance, and so on. As a result, senior tranches carry lower interest rates than junior tranches.

Fannie Mae and Freddie Mac structure the CRT securities in such a way that they hold the most senior, or safest, tranche (see Figure 4). Typically, they also retain the most junior, or riskiest, tranche, which exposes them to the first losses in the reference pool and thus increases their incentive to mitigate losses.42 They sell most of the middle tranches to investors but generally retain between 5 percent and 30 percent of those tranches to align their interests with investors’ interests. That “skin in the game” approach ensures that the GSEs still have an incentive to be vigilant about mitigating losses after mortgages default.43 And because the GSEs retain the most senior tranche, they bear all the losses greater than those absorbed by the tranches sold to investors.

The payments on CRT securities are determined by the performance of the loans in the reference pool. As borrowers pay the principal on the mortgages in the reference pool, those payments are allocated among the tranches on the basis of seniority, as follows: The most senior tranche receives a percentage of the payments that is equal to its portion of the reference pool’s outstanding principal balance. The rest of the payments go to the remaining tranches in order of seniority—that is, the second-­most senior tranche (the most senior of the middle tranches) is repaid first, and once that tranche is fully repaid, the next most senior tranche is repaid, and so on. If any tranche is fully repaid by principal payments before losses reach it, the holders of securities in that tranche do not bear any losses.

To understand how losses and principal payments are allocated to investors in CRT securities, consider a hypothetical transaction based on a reference pool with an initial principal balance of $1,000 that is divided into three tranches. The initial principal balances of the three tranches are as follows: $960 (or 96 percent of the balance of the pool) for the senior tranche (held by the GSEs), $35 (or 3.5 percent) for the middle tranche, and $5 (or 0.5 percent) for the junior tranche. Suppose that the reference pool experiences losses amounting to $1 and that the principal payments made on mortgages in the pool total $200. The most junior tranche bears the entire loss of $1, and its balance is reduced to $4. The principal payments are first distributed to the senior tranche in proportion to its share ($960) of the outstanding balance for all tranches (now $999) and then to the remaining tranches in order of seniority. Thus, $192 (or 96.1 percent of the principal payments received) goes to the senior tranche, and $8 (the rest of the principal payments received) to the middle tranche. The most junior tranche will not receive any principal payments until the middle tranche is fully repaid. After losses and principal payments have been allocated, the balances are $768 for the senior tranche, $27 for the middle tranche, and $4 for the junior tranche. Payments and losses continue to be distributed in that manner until the outstanding balances are zero.

CRT securities have a complex legal structure that protects the GSEs from the risk of investors’ insolvency and investors from the risk of the GSEs’ insolvency (see Figure 5). The GSEs set up a trust that sells a set of CRT securities to private investors and invests the cash proceeds in short-term money markets. The trust uses earnings from those investments and additional funds from the GSEs to pay principal (net of any losses) and interest to the holders of the CRT securities. When a mortgage defaults, the trust does not make principal or interest payments on the CRT securities; instead, it transfers the corresponding principal and interest to the GSEs. The GSEs then use those funds to help pay principal and interest to holders of its MBSs, which are guaranteed. Because the GSEs receive the principal balance of the CRT securities when they sell them to investors, the securities do not expose the GSEs to counterparty risk.

The Credit-Risk-Transfer Market. From 2013 to December 31, 2023, the GSEs engaged in transactions that covered $6.7 trillion of single-family loan balances and transferred possible losses of $210 billion, or about 3.2 percent of the balances. (The amount of possible losses transferred is the maximum amount of losses that CRT investors and counterparties could absorb after the CRT transaction.) In 2023, the CRT transactions covered about $422 billion of single-family loan balances and transferred $13 billion of possible losses (about 3.1 percent of the balances).44

As of February 2021, the GSEs had paid around $15 billion (or about 7.5 percent of their combined net income since August 2013) to private investors for CRT transactions, and the transactions had transferred around $50 million of actual credit losses from the GSEs to private investors. Those losses account for just 5 percent of total realized losses on the mortgages underlying CRT transactions because nearly all the losses were absorbed by the most junior tranches, which are held by the GSEs.45 To date, the GSEs have paid out more than the losses covered by the CRT transactions because the mortgage market has not yet experienced the kind of losses that the transactions are designed to cover.

Other Forms of Risk Sharing

The GSEs, the FHA, the Department of Education, and the Export-Import Bank use other forms of risk sharing in addition to those already discussed. For example, the GSEs require private mortgage insurance on certain loans, and the GSEs and the FHA enforce underwriting standards for lenders and share risk with other parties on multifamily loans. The Department of Education’s direct student loan program gives borrowers the option to select an income-driven repayment (IDR) plan that reduces the risk of the borrower’s defaulting, though it does so at a cost to taxpayers. (For a detailed discussion of IDR plans, see Box 2.) The Export-Import Bank has purchased private reinsurance to share default risk on some of its existing portfolio.46

GSEs’ Sharing the Risk of Losses on Multifamily Mortgages. Both Fannie Mae and Freddie Mac share credit losses in their multifamily programs, but they do so in different ways.47 Since 1988, lenders selling multifamily loans to Fannie Mae have agreed to retain a portion of the risk of losses on those loans on either a prorated basis (lenders might, for example, agree to cover one-third of all losses, and Fannie Mae would be responsible for the remaining two-thirds) or a tiered basis (lenders might, for example, agree to bear losses up to the first 5 percent of the current loan balance and some portion of all losses beyond that point). By contrast, Freddie Mac shares risk through securities that are similar in structure to the CRT securities for single-family mortgages. Investors bear the losses on the subordinated bonds before Freddie Mac is exposed to losses.

Private Mortgage Insurance and the GSEs’ and the FHA’s Enforcement of Underwriting Standards on Mortgages. Under a traditional guarantee, Fannie Mae and Freddie Mac share some of the credit risk with private mortgage insurers (PMIs), who are in the first-loss position and thus incur losses before the GSEs. The GSEs’ charters require mortgage insurance on most loans with loan-to-value ratios over 80 percent. For mortgages issued with less than a 20 percent down payment, a PMI typically covers losses of 25 percent to 30 percent of the loan balance before one of the GSEs bears losses (see Figure 2).48 In 2023, PMIs insured $255 billion of new single-family mortgages, committing to cover losses of up to $68 billion on those loans before the GSEs would incur any.49 Loans that are not approved for mortgage insurance are generally ineligible for purchase by the GSEs.

Lenders face some credit risk even after they have sold loans to the GSEs. If lenders originate and sell loans to the GSEs that do not meet specific underwriting and eligibility requirements (often referred to as representations and warranties), they face loan repurchase, or putback, risk.50 The GSEs are entitled to enforce their representations and warranties when the contract is breached and can require the mortgage lender or broker to buy back the ineligible loans. The threat of having to repurchase a defaulted loan that fails to meet underwriting requirements aligns the lenders’ incentives with the GSEs’ incentives to control credit quality.

From 2009 through the second quarter of 2023, lenders repurchased $92 billion of loans from the GSEs; most of those loans were originated before 2009.51 Typically, repurchases amount to less than 0.5 percent of the total origination balance of loans purchased by the GSEs in a given year, though repurchases of the loans that Freddie Mac bought in 2007 reached nearly 2 percent of the origination balance.52 The loan repurchases reduce the GSEs’ credit risk and encourage lenders to underwrite loans more carefully. (The GSEs have recently assured lenders that if they provide accurate data and use the GSE’s automated underwriting systems, their loans will not be subject to buybacks.)

The FHA can similarly refuse to honor the insurance and demand repurchase or indemnification for any claim filed on a defaulted loan that failed to meet its guidelines. The agency has an additional legal remedy that imposes litigation risk on lenders and servicers under the False Claims Act.53 The FHA increased enforcement of that law in recent years, and the agency has posted policy drafts to clarify what actions might result in enforcement.54

The FHA’s Risk Sharing With Housing Finance Agencies. The FHA has several small risk-­sharing agreements with state and local housing finance agencies (HFAs) to increase the resources available for multifamily loans to provide affordable housing. The FHA takes on 69 percent of the credit risk while the HFAs handle the loan processing and asset management and bear the rest of the credit risk. Because the HFAs’ bonds are backed by the FHA’s mortgage insurance, they are investment grade; the HFAs thus can borrow at lower interest rates than those they would be offered without the insurance. The program began as a pilot, and the appropriation act that provided the Department of Housing and Urban Development’s 2001 funding made it permanent. In March 2024, the Office of Management and Budget (OMB) estimated that in 2025, the risk-sharing program would insure $7 million worth of loans and result in budgetary savings.55

Servicing Guidelines for Student Loans. Entities that originate and service student loans must adhere to laws that govern such practices as marketing, disclosure, debt collection, and credit reporting. With the rulemaking authority granted to it under title IV of the Higher Education Act of 1965, the Department of Education has issued several servicing-related regulations and other guidelines for servicers.56 If a servicer fails to follow all applicable statutes and regulations, the Department of Education may reject a claim for a loan guaranteed under the Federal Family Education Loan program. Although recent audits have found instances of noncompliance, rejection rates for FFEL claims are typically less than 0.5 percent.57

Budgetary Effects of Public-Private Risk Sharing

The budgetary effects of risk sharing can be complicated and are not always intuitive. Those effects depend on how costs are measured and recorded in the federal budget. The costs of most federal activities are recorded in the budget on a cash basis—that is, inflows and outflows are recorded as they occur. But the costs of federal credit programs are recorded on an accrual basis—that is, the estimated net present value of the lifetime cost of credit is recorded at the time the credit is issued.58 (The administrative costs of credit programs are reported on a cash basis.)59 That budgetary treatment applies to direct loans (for which most of the cash outflows occur up front, when a loan is disbursed) as well as to loan guarantees (for which cash flows to and from the government occur gradually over the life of the commitment).

One of two approaches to accrual accounting is used to estimate the cost to the federal government of credit programs:

• The accounting procedures currently used in the federal budget, as prescribed by the Federal Credit Reform Act of 1990, or
• The fair-value method—an alternative approach in which costs are estimated on the basis of the market value of the federal government’s obligations.60

The Federal Credit Reform Act of 1990 specifies an accrual-based budgetary treatment for federal loans and loan guarantees. That treatment was largely intended to measure the costs of federal credit programs more accurately than they would be measured on a cash basis so that they could be readily compared with the costs of other activities and the allocation of budgetary resources could be improved.61 FCRA estimates represent the average projected effect of a given credit program on federal debt.

In accordance with FCRA, the budget reflects the anticipated subsidy cost of loans and loan guarantees—that is, the estimated net present value of the cash flows to and from the federal government that stem from the credit commitment over the life of the loan or guarantee. To calculate the subsidy cost, analysts use whatever information is available at the time of the commitment to inform judgments about the risk of default and the likelihood of recoveries in the event of default.

Subsidy costs can be positive or negative. A positive subsidy rate indicates that a credit program has a net cost; funding must be available to cover the costs of such a program.62 But when income from interest, recoveries, and fees is expected to exceed the government’s outlays on a net present-value basis, a program’s subsidy rate is negative. A program with a negative subsidy rate results in budgetary savings.63

Under FCRA, subsidy rates are typically revised annually to bring them into alignment with actual and expected cash flows and to account for changes in financial conditions and the performance of credit programs. A revised estimate that is lower than the initial subsidy cost means that credit losses have been or are projected to be less than expected or that fees and other cash inflows have been or are projected to be more than anticipated; a higher estimate indicates changes in the opposite direction. Subsidy rates are also revised to account for differences between the discount rates that were projected when the initial estimates were made and the actual interest rates that prevail when the the credit is disbursed.

CBO measures the costs of most government credit programs on a FCRA basis, as required by law, but it uses the fair-value approach to calculate costs for Fannie Mae and Freddie Mac (as well as the Troubled Asset Relief Program) by approximating market prices for those programs’ guarantees. In CBO’s view, fair-value estimates are a more comprehensive measure than FCRA estimates of the costs of federal credit programs, and thus they allow lawmakers to better compare the advantages and drawbacks of various policies.64 The fair-value approach reflects the market value of the government’s obligations by accounting for market risk. 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 that liability.

CBO uses two different approaches to estimate the effects of Fannie Mae’s and Freddie Mac’s activities on the federal budget: It projects the costs of their mortgage guarantees in future years on a fair-value basis, treating the GSEs as governmental entities, and estimates their transactions with the Treasury in the current year on a cash basis.65 The agency uses the second approach so that its estimates of the budget deficit for the current year are consistent with the Administration’s accounting for the GSEs’ activities in the budget.66

The budgetary effects of risk sharing depend on how the sharing provisions affect the present value of cash flows and whether market risk is measured. The effects vary among programs and depend in part on whether a program has a positive or negative subsidy cost. Risk sharing generally results in savings when it is done for programs that have a positive subsidy rate because it transfers portions of the risk and its expected costs to the private sector. If the lifetime decreases in outflows for credit losses stemming from the risk-sharing provisions exceed the decreases in inflows from interest payments and fees, then the risk sharing results in savings when its effects are measured on a FCRA basis. If the reverse occurs, and the decrease in inflows exceeds the decrease in outflows, then risk sharing will have a cost on a FCRA basis. That sometimes occurs when risk sharing is used for programs that have a negative subsidy rate. When the fair-value approach is used, whether transactions have a cost or not depends solely on whether they are conducted at market prices.

CBO’s Baseline Projections for Federal Programs That Guarantee Mortgages

CBO projects that some federal mortgage programs result in budgetary costs and that others result in budgetary savings (see Table 3). The agency projects subsidy rates, credit volumes, and budgetary costs for the current year and the next 10 years for new mortgage guarantees issued by Fannie Mae and Freddie Mac, the FHA’s Mutual Mortgage Insurance program, VA, and Ginnie Mae. For the 2024–2034 period, those projections—which reflect the assumption that current laws governing revenues and spending generally remain unchanged—are as follows:

• Fannie Mae and Freddie Mac have positive subsidy rates (less than 1.0 percent) and guarantee a total of $16.1 trillion of mortgages over the projection period, resulting in a subsidy cost of $51.8 billion over 11 years.67
• The FHA’s Mutual Mortgage Insurance program has a negative subsidy rate (roughly −2.0 percent in most years) and guarantees $4.8 trillion of loans, resulting in savings of $93.5 billion over 11 years.
• VA’s home loan program has a positive subsidy rate (fluctuating around 1.0 percent in most years) and guarantees $2.5 trillion of loans, resulting in a subsidy cost of $26.3 billion over 11 years.
• Ginnie Mae has a negative subsidy rate (about −0.3 percent annually), and its guarantees result in savings of $22.4 billion over 11 years.

  Table 3.

  CBO’s June 2024 Baseline Projections for Federal Programs That Guarantee Mortgages

  Billions of dollars

  

  Notes

  Data source: Congressional Budget Office. See www.cbo.gov/publication/59408#data.

  The subsidy rate is the estimated cost of a credit program divided by the amount disbursed. A positive subsidy rate indicates a government subsidy and therefore a cost to the government, and a negative rate indicates budgetary savings.

  FCRA = Federal Credit Reform Act of 1990; FHA = Federal Housing Administration; MMI = Mutual Mortgage Insurance; VA = Department of Veterans Affairs; n.a. = not applicable.

  a. Includes nonfederal mortgages.

  b. The projections for 2025 to 2034 include projected subsidy costs of new mortgage guarantees made by Fannie Mae and Freddie Mac in each year, estimated on a fair-value basis. For fiscal year 2024, the baseline includes an estimate of $6.3 billion in mandatory cash payments from Fannie Mae and Freddie Mac to the Treasury. For more information about how CBO accounts for the two government-sponsored enterprises’ activities in its budget projections, see Congressional Budget Office, CBO’s Budgetary Treatment of Fannie Mae and Freddie Mac (January 2010), www.cbo.gov/publication/41887.

  c. The value shown is the average annual subsidy rate, weighted to account for differences in the annual volume of loan originations.

  d. CBO uses the subsidy rates estimated by the Administration for home loans guaranteed or made by the FHA and VA in fiscal year 2024 because the Administration will use those rates when it records the net present value of subsidy costs for such loans. The subsidy rates for all other years are CBO’s estimates, which may diverge from the Administration’s projections.

  e. Excludes home equity conversion mortgages. MMI subsidy receipts are recorded in the budget as offsetting collections to discretionary appropriations. The subsidy rate for the MMI program is calculated using FCRA methods.

  f. Includes guaranteed loans and direct loans made by VA on homes sold by the department; excludes loans acquired from other lenders and guarantees on securities of direct loans originated by VA. Costs associated with VA’s home loan program are recorded in the budget as mandatory spending. The subsidy rate for the program is calculated using FCRA methods.

  g. Ginnie Mae securitizes more than 90 percent of the FHA’s MMI loan guarantees and 98 percent of VA’s loan guarantees, resulting in additional offsetting collections. The subsidy rate for Ginnie Mae, which is calculated using FCRA methods, is estimated to be −0.32 percent in 2024, −0.29 percent in 2025, and −0.30 each year from 2026 to 2034.

Partial Guarantees

The subsidy rate and how costs are measured affect whether partial guarantees result in costs or savings. For example, VA’s mortgage guarantee program has a positive subsidy rate.68 The partial guarantees limit the losses borne by VA, and though they also probably reduce the guarantee fees collected, the budgetary costs are lower than they would be if the program provided a full federal guarantee.

For programs that have negative FCRA subsidies, partial guarantees may increase budgetary costs above what they would be if there was no risk sharing. In a previous report, CBO analyzed policy options to reduce the FHA’s exposure to the risk of losses on its single-family mortgage guarantees. Those options included creating a larger role for private lenders and restricting the availability of the FHA’s guarantees.69 Adopting a partial guarantee, for example, would reduce the volume of guarantees and decrease the average loss per loan. Changing the FHA’s guarantee to a partial one could make credit less available because lenders might be unwilling to accept their share of the risk on certain borrowers, or they might charge borrowers a higher interest rate or higher fees, which would discourage those borrowers from taking out an FHA mortgage. The FHA’s guarantees currently have a negative subsidy rate, and changing to a partial guarantee would decrease projected cash inflows more than outflows; thus, evaluated on a FCRA basis, that option would have a cost.70

Providing guarantees—whether partial or full—is not necessarily less costly than direct lending. The relative costs mostly depend on the structure of the credit and its terms.

Project Financing

The budgetary effects of risk sharing for project financing vary depending on the specific project. Risk sharing often supports projects that might not be able to obtain full financing from private sources, and the projects typically benefit the public in some way. For example, the Department of Energy’s Title XVII loans and loan guarantees have supported innovative technologies for energy that were too risky—that is, the timing and amount of future revenue streams were too uncertain—for private financing to support. The government’s support of such projects has allowed sponsors to obtain partial private financing at lower costs and move forward with innovative, yet risky, technologies. OMB’s revised subsidy rates for most Title XVII loans and loan guarantees have been lower than the original subsidy rates.71

Over the 2009–2019 period, infrastructure projects financed through the TIFIA and WIFIA programs received close to half of their financing from state and local governments and about 20 percent from private entities; the federal government provided the rest. In 2023, the balances of outstanding loans under the TIFIA program totaled $20 billion, and those under the WIFIA program totaled $3.3 billion.72 On a FCRA basis, the estimated cost of the TIFIA program is much lower than CBO’s estimates of the cost to the federal government of 20-year financing through tax-exempt bonds and state bank loans, even though TIFIA loans tend to have longer repayment periods of 30 to 35 years.73

The estimated cost of the WIFIA and TIFIA programs has changed over time. Revised estimates for the WIFIA program have been much higher than the original estimates for loans originated in 2020 and 2021 but much lower for loans originated in 2022 and 2023. Similarly, revised estimates for the TIFIA program have been both significantly lower and higher than the original estimates, reflecting how uncertain the costs of projects were when the loans were originated.

Credit-Risk-Transfer Transactions

CRT transactions do not change the projected budgetary cost of the GSEs measured on a fair-value basis because those transactions are executed at market prices. Market-priced transactions have a fair-value subsidy rate of zero because the payments made to investors equal the value to the GSEs of their reduction in expected credit losses. Although administrative expenses are incurred to carry out the CRT transactions, those expenses are not included in CBO’s fair-value estimates of the GSEs’ subsidy cost.

The CRT transactions also do not change the GSEs’ cash payments to the Treasury, which are set by law.74 The transactions affect their reported profits because the GSEs must pay a risk premium over a short-term interest rate to induce investors to take on the credit risk.75 In addition, investment banks conduct CRT transactions on behalf of the GSEs, and Fannie Mae and Freddie Mac must pay them for those transactions.

The GSEs use a competitive process in orderly markets to determine the price that they pay private investors to take on some of their credit risk.76 No significant barriers to entry exist in the market other than investors’ having to understand the product—a prerequisite for any complicated security for which transactions are conducted at fair market prices. Most large asset managers are aware of the market, and buyers include sophisticated investors. (For further discussion about the market for CRT securities, see Box 3.)

Other Forms of Risk Sharing Related to Mortgage Guarantees

The GSEs lower their budgetary costs when they force private lenders to repurchase loans that do not meet their underwriting standards. Likewise, the FHA lowers its budgetary costs when it settles cases under the False Claims Act. In those cases, the private lenders bear the credit losses instead of the federal government.

The GSEs’ requirement that borrowers with small down payments on their loans purchase private mortgage insurance reduces the amount of credit risk borne by Fannie Mae and Freddie Mac and thus lowers the estimated budgetary costs of the GSEs. Because the GSEs lower their up-front guarantee fees for loans with private mortgage insurance, the savings are reduced.77 If the private mortgage insurers fail, those credit costs would be borne by the GSEs. As their credit losses mounted during the financial crisis, three of the eight PMIs stopped issuing new insurance and were unable to fully pay out claims. Their losses were due in part to a rapid expansion in coverage—a nearly 50 percent increase in 2007—and a reduction in underwriting standards at the height of the housing boom without an increase in rates to reflect the higher risk.78 Because the PMIs did not pay the full amount of claims on time—or, in some cases, at all—the GSEs ended up bearing the uncovered losses.79

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About This Document

This report, which is part of the Congressional Budget Office’s continuing effort to make its work transparent, describes various forms of public-private risk sharing used by federal credit programs and explains how CBO accounts for them in its budget projections. In keeping with CBO’s mandate to provide objective, impartial analysis, the report makes no recommendations.

Wendy Kiska, Delaney Smith, David Torregrosa, and Byoung Hark Yoo wrote the report with contributions from Vinay Maruri (formerly of CBO), Jeffrey Perry (formerly of CBO), and Mitchell Remy and with guidance from Sebastien Gay. Michael Falkenheim, Kathleen Gramp (formerly of CBO), Paul B. A. Holland, Justin Humphrey, Leah Koestner, Kevin Laden, Nathan Musick, Robert Reese, Jennifer Shand, Chad Shirley, and Aurora Swanson offered comments. Joyce Bai and Michael McGrane fact-checked the report.

Douglas Elliott of Oliver Wyman, Edward Golding of the Massachusetts Institute of Technology, and Philip Joyce of the University of Maryland commented on an earlier draft. The assistance of external reviewers implies no responsibility for the final product; that responsibility rests solely with CBO.

Mark Doms, Jeffrey Kling, and Robert Sunshine reviewed the report. Bo Peery edited it, and Jorge Salazar created the graphics and prepared the text for publication. The report is available at www.cbo.gov/publication/59408.

CBO seeks feedback to make its work as useful as possible. Please send comments to communications@cbo.gov.

Phillip L. Swagel

Director

September 2024