Fannie Mae (FNMA)

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CBO: Fannie Mae and Freddie Mac should keep $5 billion in profits per year

Illustrative option vs. policy option



October 20, 2016 Jacob Gaffney

The Congressional Budget Office set forth an examination of both a legislative and non-legislative reform proposal for Fannie Mae and Freddie Mac.

The office is charged with producing independent analyses of budgetary and economic issues to support the Congressional budget process.


As written in the budgetary document released today, the language clearly indicates the federal government’s total stranglehold on operations at the government-sponsored enterprises.

The reason stated for this? The protection of taxpayers from providing another bailout. However, this model cannot be sustained in its current manifestation.

Moving forward, the current administration intended to wind down government control of Fannie and Freddie. The fact that it hasn’t happened remains proof of a lack of political will.

Further, under current agreements, the net worth of the two GSEs is expected to reach zero in 2018.

While none of this is new, this situation results in two fundamental points the CBO report addresses.

The first is the future of Fannie Mae and Freddie Mac remains uncertain. The second, the results indicate, is that any proposed solution should be non-legislative. The CBO refers to this best option as the “illustrative solution.”

The other scenario the CBO analyzed is the “policy option.” This option is built around several bills introduced in the Congress with different approaches to building the GSEs’ capital. This option would allow the GSEs to retain some of their profits and thus increase their capital.

The CBO found the policy option to be unfavorable to the illustrative option.

Why?

Under the illustrative option, each GSE would be allowed to retain an average of $5 billion of its profits annually and would thus increase its capital by up to $50 billion over 10 years. The government’s commitment to purchase more senior preferred stock from Fannie Mae and Freddie Mac if necessary to ensure that they maintain a positive net worth would remain in place.

In addition, the GSEs would invest the profits that they retained under the option in Treasury securities, and returns on those securities would raise the GSEs’ income. Through its holdings of senior preferred stock, the government would continue to have a claim to the GSEs’ net worth ahead of other stockholders.

The policy option, on the other hand, would result in a much higher budgetary cost: $85 billion over 10 years.

At any rate, there remains one big "if" to all of these calculations. The CBO warns there are several lawsuits against the federal government, claiming rights to shareholder profits funnelled to the Treasury during conservatorship.

Any of these filings may result in a partial claim being paid out.

"CBO’s projections of outcomes under current law do not reflect the possibility of private investors’ prevailing in their suits," the report warns.