"Shrinking them reduces the risk to taxpayers irrespective of the dividends they are currently paying to Treasury, so I would not expect GSE reform to face a CBO scoring problem," Mason said.
With the GSEs in conservatorship, the CBO projects future mortgage guarantees provided by Fannie and Freddie as costing taxpayers money—and thus shutting them down would be a savings, generating a positive budget score. That's because the agency uses a form of fair value accounting that considers the future probability of costs associated with their business.
Essentially, the agency considers a mortgage guarantee from the GSEs to include a credit subsidy from the federal government based on the long-term estimated cost to the government of the guarantee. The large profits currently being generated, which are already considered to some degree in CBO's baseline, don't undo that because those profits don't fully account for the cost of that subsidy. Moreover, any profits generated and sent to Treasury are considered an intra-governmental transfer.
In October, the agency scored House legislation by Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, to unwind the GSEs and get rid of the government backstop for the mortgage market, estimating that winding down Fannie and Freddie would reduce direct spending by $6.7 billion. (Overall, the bill, which would also make significant changes to the Federal Housing Administration, was estimated to reduce the deficit, which includes changes in spending and revenue, by $5.7 billion.)
Still, some advocates for reform continue to warn that Congress should act to unwind the GSEs quickly, rather than let them linger—both because an economic downturn could potentially put them back at financial risk again and because the longer they are around, the more possible it is that CBO could change some of its modeling assumptions about the subsidy cost of the enterprises.
Sen. Bob Corker, R-Tenn., who has led efforts to write a GSE reform bill in the Senate with Sen. Mark Warner, D-Va., has been vocal on the issue.
"Very soon, in order to rid ourselves of the situation that we have on our hands, we're going to have a major pay-for," Corker said at an industry event hosted by the Financial Services Roundtable in early January. "We haven't hit that point yet, but very soon, we'll hit that crossing hour where Congress has to come up with a pay-for to end this arrangement."
How do g-fees factor in?
Another hurdle for those interested in overhauling the mortgage finance market is the ongoing concern that lawmakers could use the entities' guarantee fees to fund unrelated budget provisions.
Already impacting any budget score for winding down the GSEs is a two-month extension of the payroll tax cut passed in December 2011. The $33 billion provision required Fannie and Freddie to raise their guarantee fees 10 basis points through Oct. 1, 2021, to offset the cost of the extension.
A bipartisan group of senators introduced a bill last March to prevent the use of g-fees to offset other government spending, with a companion bill introduced in the House in June. Sen. Tim Johnson, D-S.D., chairman of the Senate Banking Committee, and Mike Crapo, R-Idaho, the panel's ranking member, included a similar provision as an amendment to the Senate's fiscal year 2014 budget resolution, where it passed with unanimous consent.
Housing and banking groups have also been active in warning that ongoing use of the g-fees for budgetary purposes impacts the mortgage market and will make GSE reform harder. So far, all of these efforts have been successful in helping to shield the g-fees from being used to pay down other government activity.
"The strong leadership of Chairman Johnson and Ranking Member Crapo, as well as the united opposition of the housing industry, has made the use of Freddie and Fannie g-fees for deficit reduction increasingly unlikely in the future," said Dwight Fettig, former staff director for Johnson and a partner at Porterfield, Lowenthal, Fettig & Sears.
But despite those efforts, it's still possible the fees could be used as an offset in the future. The issue most recently came up several weeks ago, as the Senate debated a plan for a three-month unemployment insurance extension, when at least one prominent budget group suggested using the g-fees, along with other possible options, to help pay for the $6.4 billion short-term extension. The bill did not include the g-fees as a pay-for, and ultimately failed to get enough support to avoid a filibuster.
"While we have legislation out there that many, many members have signed on saying, 'cross my heart, we'll never touch the [g-fees] again for anything else'…nobody believes that. It's always on the use list," said Warner at the Roundtable event in early January.