The Congressional Budget Office (CBO) has released a background paper explaining its budgetary treatment of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
Unlike the Office of Management and Budget, the CBO treats the GSEs as federal agencies. In its report, the CBO says it both anticipates an eventual normalization of the mortgage market and expects the federal government to continue subsidizing the market through Fannie and Freddie.
‘In other words, although the entities' fees and other income on new commitments may be sufficient to cover average losses on those commitments, they are not high enough to fully cover the cost of the risks associated with the commitments," the CBO says. "Before the [GSEs' 2008] conservatorship, CBO and others recognized that such subsidies existed, but those subsidies were never included in federal budget estimates."
The CBO also projects the Treasury's 2009-2019 cash infusions in the GSEs – $163 billion – will fall "well short of the $389 billion in subsidy outlays projected in CBO's baseline for that period."
"As an approximation, one can think of the infusion estimates as capturing only the expected cash shortfalls between the entities' fees and losses," the CBO paper explains. "The subsidy estimates, in comparison, incorporate both the expected cash shortfalls and the risk premium that a private investor would demand for bearing the risk that those shortfalls could be much larger than expected."
SOURCE: Congressional Budget Office