True cost of Fannie/Freddie bailout more than twice Obama administration claim

The CBO has a problem with the Office of Management and Budget’s calculation on the cost of the Fannie Mae/Freddie Mac bailouts, and it’s no small calculation error.  OMB has calculated the costs of the bailout at $130 billion, a number repeated on occasion by the Obama administration.  By the CBO’s calculation, the cost of the bailouts reaches $317 billion, more than twice the White House estimate:

In a report delivered to the House Budget Committee on June 2, the CBO said a “fair value” accounting of guaranteeing the two defunct mortgage companies – known as Government Sponsored Enterprises (GSEs) – was more than twice as high as the Office of Management and Budget had accounted for.

“Specifically, CBO treats the mortgages guaranteed each year by the two GSEs as new guarantee obligations of the federal government,” the CBO report said. “For those guarantees, CBO’s projections of budget outlays equal the estimated federal subsidies inherent in the commitments at the time they are made.”

“In contrast, the Administration’s Office of Management and Budget continues to treat Fannie Mae and Freddie Mac as nongovernmental entities for budgetary purposes, and thus outside the budget,” the report stated. “It records as outlays the amount of the net cash payments provided by the Treasury to the GSEs.”

The total of those cash payments is $130 billion, and is normally reported as the cost of the bailout of the GSEs to date. However, the CBO said that merely counting the cash payments, and not the cost of federal subsidies granted to the GSEs, obscures their real costs.

Essentially, the CBO is accounting for the cost of the federal government guaranteeing the loans bought and securitized by the GSEs.

In other words, the difference between the two estimates seems to be the status of the GSEs themselves.  Had the federal government divested Fannie and Freddie by now, we would not be in the position of guaranteeing their ongoing loans.  As CNS news notes, though, the federal government continues to issue explicit guarantees on Fannie and Freddie, allowing them to borrow at a lower rate.  The CBO counts those obligations as part of the risk and potential cost assumed by the bailouts, along with the more recent mortgage guarantees issued by the two GSEs.

The calculation is then rather simple.  The GSEs have a fair-value deficit between assets and liabilities that total to $187 billion.  Combined with the $130 billion in cash infusions given by the federal government to Fannie and Freddie, the taxpayer is on the hook now for $317 billion.  The CBO predicts that the liability will increase each year by slightly more than $4 billion over the next ten years as well.

Taxpayers might have to eat it all in the near term in order to shed the liabilities.  If Congress gets around to ending the government guarantees for Fannie and Freddie, it will almost certainly have to resolve the deficit.  That is why the CBO calculation is so important, and likely why Congress and the White House avoided addressing the issue in 2009 and 2010.