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This study responds to a request from Congressman Richard H. Baker--in his capacity as Chairman of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, House Committee on Financial Services--that the Congressional Budget Office (CBO) update its May 1996 study Assessing the Public Costs and Benefits of Fannie Mae and Freddie Mac. That study provided an estimate of the value of the federal subsidy to Fannie Mae and Freddie Mac. Congressman Baker also asked that CBO extend the estimate to include the Federal Home Loan Banks and to update its estimate of the portion of the subsidy that the government-sponsored enterprises (GSEs) retain.

Congressman John M. Spratt, Ranking Member, House Committee on the Budget, separately requested an explanation of the methods and assumptions that CBO used in preparing its updated estimate. In addition, Senator Robert F. Bennett, Chairman, Subcommittee on Financial Institutions, and Senator Wayne Allard, Chairman, Subcommittee on Housing and Transportation, both of the Senate Committee on Banking, Housing, and Urban Affairs, jointly requested that CBO review two critiques of its previous work that were prepared under contract for Fannie Mae and Freddie Mac. This study also responds to those requests.

Deborah Lucas and Marvin Phaup prepared this study, with the assistance of David Torregrosa and Lauren Marks and under the direction of Steve Lieberman and Roger Hitchner. Barry Anderson, Charles Capone, Arlene Holen, Angelo Mascaro, John McMurray, Eric Warasta, and Rae Roy of CBO also contributed to the report. Many people outside CBO provided assistance, including staff of Fannie Mae and Freddie Mac, Joe MacKenzie of the Federal Housing Finance Board, Patrick Lawler and Robert Seiler Jr. of the Department of Housing and Urban Development's Office of Federal Housing Enterprise Oversight, Edward DeMarco and Mario Ugoletti of the Department of the Treasury, Wayne Passmore of the Federal Reserve Board, Ron Feldman of the Federal Reserve Bank of Minneapolis, Bill Shear of the General Accounting Office, and Barbara Miles of the Congressional Research Service.

Under contract with CBO, Brent Ambrose and Arthur Warga prepared a report in support of this study: An Update on Measuring GSE Funding Advantages, which is available from CBO's Microeconomic and Financial Studies Division. Also, David Torregrosa authored the supporting CBO paper Interest Rate Differentials Between Jumbo and Conforming Mortgages, 1995-2000.

John Skeen edited this study, and Christine Bogusz proofread it. Kathryn Quattrone prepared it for publication, Annette Kalicki prepared the electronic versions for CBO's Web site, and Lenny Skutnik did the initial printing. Kathryn Quattrone, with the assistance of Binh Thai, designed the cover. This study and other CBO publications are available at CBO's Web site.
 

Dan L. Crippen
Director
May 2001
 
 

INTRODUCTION AND SUMMARY

• The Housing GSEs
• Risk, Return, and Financial Structure
• CBO's Estimation Procedure

THE HOUSING GSEs' STRUCTURE AND FUNCTION

• The Housing GSEs' Borrowing, Investing, and Lending
• Fannie Mae's and Freddie Mac's Guarantees of Mortgage-Backed Securities
• The Regulatory Environment

FEDERAL SUBSIDIES

• Direct Benefits from Special Legal Status
• Indirect Benefits That Lower Borrowing Costs
• The Subsidy to Mortgage-Backed Securities

ESTIMATING THE SUBSIDIES

• The Direct Benefits of Regulatory and Tax Exemptions
• The Subsidy to General Obligation Debt Securities
• The Subsidy to Mortgage-Backed Securities
• Putting the Elements Together: The Total Subsidy

ESTIMATED DISTRIBUTION OF BENEFITS

SENSITIVITY ANALYSIS

APPENDIXES

A - Responses to Analyses of the Congressional Budget Office's 1996 Subsidy Estimates
B - Subsidy Estimates When Growth Is Permanent
 

TABLES
1.	Federal Subsidies to the Housing GSEs, 1995-2000
2.	Balance Sheets for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, December 31, 2000
3.	The Housing GSEs' Outstanding Mortgage-Backed Securities and Debt, Year-End 1985-2000
4.	Annual Value of Tax and Regulatory Exemptions for the Housing GSEs, 1995-2000
5.	Subsidies to GSE Debt, 1995-2000
6.	Subsidies to Mortgage-Backed Securities Guaranteed by Fannie Mae and Freddie Mac, 1995-2000
7.	Total Federal Subsidies to the Housing GSEs, 1995-2000
8.	Distribution of Subsidies by Intermediary and Beneficiary, 1995-2000
9.	Sensitivity Analysis of CBO's Base Case of Federal Subsidies to the Housing GSEs
A-1.	Fannie Mae's and Freddie Mac's Estimated Share of One- to Four-Family Mortgages, December 31, 2000
B-1.	Federal Subsidies to the Housing GSEs Using a Perpetual Horizon, 1995-2000
FIGURES
1.	Fannie Mae's and Freddie Mac's Ratio of Outstanding Debt to Mortgage-Backed Securities, 1986-2000
2.	Growth in the Housing GSEs' Outstanding Debt and Mortgage-Backed Securities, 1995-2000
3.	Total Subsidies to the Housing GSEs Under Three Scenarios, 1988-2011
4.	Distribution of Subsidies by Beneficiary, 1996-2000

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