Government sponsorship of Freddie Mac, Fannie Mae and the Federal Home Loan Banks was worth about $23 billion to those entities in 2003, and more than a third of that amount wasn’t passed through to borrowers, according to a new report from the Congressional Budget Office.
The $23 billion figure represents an almost 70 percent increase in the perceived federal subsidy those entities received in 2000, which CBO reported in an earlier study. The jump resulted from the corporations’ rapid expansion in 2001.
Fannie Mae and Freddie Mac retained about $6.3 billion of the perceived subsidy they received last year, and the FHLBs retained about $3.2 billion. Approximately $13.6 billion was passed onto borrowers. The combined figure for Freddie and Fannie could be higher because it doesn’t include the value of Freddie’s state and local income tax exemptions, which couldn’t be ascertained without the corporation’s financial statements.
The two corporations securitize and either resell or own a substantial portion of the outstanding home mortgage debt in the United States. Those secondary market functions enormously increase the liquidity of mortgage funds, and that liquidity makes home loans much more easily available to borrowers.
Fannie Mae and Freddie Mac receive a number of special perks from the federal government that aren’t available to other corporations. Those perks include discount-cost borrowing from the federal government and relief from Securities and Exchange Commission reporting requirements as well as the local and state tax exemptions.
The CBO estimates seek to put a value on those perks. The report refers to them as “subsidies,” but they are not actual appropriations the government gives the so-called “government-sponsored enterprises.”
The updated estimates came in a recent letter to Sen. Richard Shelby, R-Ala., chairman of the U.S. Senate’s banking committee, who has introduced legislation to reform oversight of the GSEs.
It’s unclear whether the legislation, which would create an independent regulator that would have the authority to shut down a housing GSE if it was in danger of insolvency, will be enacted or even come up for a vote in this election year. The bill is the latest in a push for regulatory changes after an accounting scandal last year at Freddie Mac rattled investors.
The GSEs’ subsidy for 2003 would have been worth more than $46 billion, up from about $20 billion in 2000, if CBO had used an alternative view of how the GSEs operate, the agency said.
Freddie Mac spokeswoman Sharon McHale said that the CBO’s approach is flawed and that other studies show Freddie’s and Fannie’s benefits to borrowers far exceed the benefits they receive as a result of their charters. The study also ignores the effect the two corporations have on lowering the costs of all mortgages, not just the ones they buy, she said.
“This is an update using the same methodology that has been widely criticized in the past by a number of studies,” Fannie Mae spokesman Brian Faith added.
Auburn University finance professor James Barth said, “to question the methodology begs the question, which is whether there’s a subsidy and is it passed on? The answer is yes and no.” Barth also is a senior fellow at the Milken Institute.
To say GSEs don’t receive federal subsidies would defy reality, Barth said. The question then becomes whether those financial savings are passed onto borrowers. Both the CBO study and a separate Federal Reserve study show not all the subsidies are passed along. The exact numbers in the studies differ, but neither presents outlandish figures, he said.
Barth said the GSEs were founded to benefit homeowners, not the corporations’ shareholders as much as is happening now.
“It raises the obvious question of is it appropriate for these two enormous financial institutions to receive the size of subsidies they do, especially when they’re not all passed onto home mortgage borrowers,” Barth said.
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