How Much is Fannie/Freddie Costing Taxpayers? (TraahJillions!)

Fannie Mae and Freddie Mac are charted by Congress as government-sponsored enterprises
(GSEs) to provide liquidity in the mortgage market and promote homeownership for underserved
groups and locations. They purchase mortgages, guarantee them, and package them in mortgagebacked
securities (MBSs), which they either keep as investments or sell to institutional investors.
In addition to the GSEs’ guarantees, investors widely believe that MBSs are implicitly guaranteed
by the federal government. In 2008, the GSEs financial condition had weakened and there were
concerns over their ability to meet their obligations on $1.2 trillion in bonds and $3.7 trillion in
MBSs that they had guaranteed. In response to the financial risks, the federal government took
control of these GSEs in a process known as conservatorship as a means to stabilize the mortgage
credit market.
Congressional interest in Fannie Mae and Freddie Mac has increased in recent years, primarily
because the federal government’s continuing conservatorship of these GSEs, at a time of
uncertainty in the housing, mortgage, and financial markets, has raised doubts about the future of
the enterprises and the potential cost to the Treasury of guaranteeing the enterprises’ debt. Since
more than 60% of households are homeowners, a large number of citizens could be affected by
the future of the GSEs. Congress exercises oversight over the Federal Housing Finance Agency
(FHFA), which is both regulator and conservator of the GSEs, and is considering legislation to
shape the future of the GSEs. Legislation introduced in the 112th Congress, the future of the
GSEs, and ways to reduce the cost to the federal government are analyzed in CRS Report
R41822, Proposals to Reform Fannie Mae and Freddie Mac in the 112th Congress, by N. Eric
Weiss.
Estimates of the eventual total cost to the federal government of supporting the GSEs use
different baselines and vary widely. FHFA estimates that Treasury is likely to purchase $220
billion-$311 billion of senior preferred stock by the end of 2014. The Congressional Budget
Office estimates the budget cost to be more than $300 billion. Standard & Poor’s has estimated
the cost at $280 billion plus $405 billion to create a replacement system.
Under terms of the federal government’s support agreement as amended and effective on August
17, 2012, the enterprises will pay the Treasury all of their quarterly profits (if any). Under the
previous agreements, the enterprises paid Treasury dividends of nearly $20 billion annually (10%
of the support). Paying the federal government all profits earned in a quarter could prevent the
GSEs from accumulating funds to redeem the senior preferred stock. However, it would appear
that the GSEs could make quarterly redemptions.
The financial condition of the GSEs appears to be improving. In the first and second quarters of
2012, both Fannie Mae and Freddie Mac reported profits for the first time since the fourth quarter
of 2006. Also, the second quarter of 2012 was first time that neither GSE had to request financial
support from the Treasury.
Legislation introduced in the 112th Congress, the future of the GSEs, and ways to reduce the cost
to the federal government are analyzed in CRS Report R41822, Proposals to Reform Fannie Mae
and Freddie Mac in the 112th Congress, by N. Eric Weiss.
FULL REPORT HERE