Skip Navigation
| Skip Navigation |
|
|
|
|
|
|
April 8, 2004 Honorable Richard C. Shelby
Dear Mr. Chairman: I am pleased to send you the attachment, Updated Estimates of the Subsidies to the Housing GSEs. The primary authors are Deborah Lucas and David Torregrosa. The estimates of the subsidies received by the government-sponsored enterprises and passed through to borrowers in the mortgage market are based on CBO's May 2001 study Federal Subsidies and the Housing GSEs. In keeping with CBO's mandate to provide objective and impartial analysis, the attached analysis includes no recommendations. If you have any questions concerning the analysis, please let me know. Your staff may also contact David Torregrosa. Sincerely, Douglas Holtz-Eakin
Attachment
April 8, 2004 The Congressional Budget Office (CBO) estimates that the total federal subsidy to the three housing government-sponsored enterprises (GSEs) rose to $23 billion in 2003, an increase of nearly 70 percent over the $13.6 billion in 2000 that CBO reported in its May 2001 study.(1) That jump in the value of the subsidy stems from the enterprises' rapid expansion during 2001. Those estimates are based on the assumption that any increase in the GSEs' outstanding debt and mortgage-backed securities (MBSs) are sustained only until the acquired mortgages mature. Under an alternative assumption that the GSEs' issued debt and MBSs are reissued when they mature, the federal subsidy for 2003 would be over $46 billion, up from about $20 billion in 2000. CBO's current analysis, which relies on the same methodology used for its earlier study, comes to essentially the same conclusions as a recent study by a Federal Reserve economist: the GSEs receive substantial subsidies and a significant portion of them is not passed through to borrowers.(2)
Estimating the SubsidyThe value of the total subsidy represents the capitalized value of interest savings on newly originated securities in the year. Figure 1 shows the subsidy in the base case, and Table 1 shows the component sources of the subsidy.(3) The increase in the estimated subsidy over the past three years can be traced to growth in debt and MBSs, an increase in the value of the state and local tax exemptions, and a decline in discount rates (see Table 2).(4) CBO's base case assumes that mortgages purchased by GSEs and the securities that they issue to finance them have an average life of seven years (more precisely, 275 percent prepayment standard assumption).(5) That span is longer than the average realized life of mortgages originated in the mid-1990s because of the refinancing boom that followed as homeowners took advantage of the sharp drop in mortgage rates. (Fannie Mae expects mortgages on its books to "run off" in three years.)(6) Nevertheless, the assumption of a more normal prepayment rate appears reasonable going forward; further drops in interest rates large enough to precipitate another refinancing wave seem unlikely. If this year's growth in outstanding debt and MBSs is assumed to be sustained, which implies only that this year's new security issues will be reissued when they mature--the level of the subsidy in 2003 doubles (see Figure 2 and Table 3). The GSEs' outstanding securities and assets have consistently shown year-over-year increases in recent decades, which suggests that the assumption of sustained growth in debt and assets is a reasonable one.
Estimating the Subsidies by RecipientCBO's May 2001 study also estimated the share of the subsidy that accrued to borrowers of conforming mortgages, which have an original principal of no more than a ceiling that currently is $333,700 for a single-family property, and the share retained by the GSEs and their stakeholders. A key to those estimates is the finding that Fannie Mae and Freddie Mac passed through 25 basis points of the subsidy to borrowers in conforming mortgage markets.(7) In 2003, those borrowers received $13.6 billion, or nearly 60 percent of the total amount of the subsidy. Fannie Mae and Freddie Mac retained $6.3 billion, or a third of the subsidy that they received (see Tables 4 and 5).(8) The total subsidy and the retained portion was larger on the debt that Fannie Mae and Freddie Mac issued to finance their holdings of mortgage assets than on the MBSs that they guaranteed. Although Fannie Mae and Freddie Mac have grown rapidly since 2000, their mortgage portfolios remain about 40 percent of the their total outstanding debt and MBSs (see Table 6). The Federal Home Loan Banks (FHLBs) received $3.4 billion in subsidies in 2003. CBO assumes that the subsidy is passed through to conforming mortgage borrowers in proportion to member banks' conforming mortgage lending as a share of their assets. The remainder, CBO assumes, is passed through to other stakeholders, including borrowers in the jumbo mortgage market and other customers of member institutions.
The Composition of GrowthTwo significant changes in the growth of the housing GSEs have occurred recently. Freddie Mac's outstanding MBSs have been level, and the enterprise has lost some market share to Fannie Mae in 2003 (see Figure 3). That change helps explain why Freddie Mac's subsidy fell in 2003. Also, although the FHLBs' outstanding debt rose from $591 billion at the end of 2000 to $717 billion as of September 31, 2002, its growth slowed (see Figure 4).
Comparison with a Recent StudyAn economist at the Federal Reserve recently estimated that the present value of Fannie Mae's and Freddie Mac's gross subsidy is between $119 billion and $164 billion and that the enterprises retain between $50 billion and $97 billion.(9) While the gross estimates differ, CBO's and Wayne Passmore's results are generally consistent. Passmore's study capitalizes the benefit to the GSEs on all outstanding debt and MBSs, whereas CBO's capitalizes the benefit on the incremental change in outstanding issues for the current year. That difference--the value of the stock rather than the change in the value, or the flow--is the principal reason that Passmore's estimate of the gross subsidy is higher. He also estimates the subsidy pass-through to be much lower--7 basis points versus the 25 basis points used by CBO.(10) He employs a two-step process to reach the lower value. The first step estimates the spread between jumbo and conforming mortgages and finds that difference to be 15 basis points to 18 basis points. (That step uses a methodology similar to CBO's but extends the observation period to May 2003.) The second step attempts to take account of factors other than the GSEs' sponsored status that affect the spread between conforming and jumbo mortgages, including differences in transaction cost, credit risk, and prepayment risk. In sum, both CBO and Passmore conclude that the housing GSEs receive large subsidies and that only a portion of those subsidies reach borrowers in the conforming market.
|
|||||||||||||||||||||||||||||||||||||||||||||||||
