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Letter to the Honorable Barney Frank 1 (September 2010)

handle is hein.congrec/cbo8357 and id is 1 raw text is: O CONGRESSIONAL BUDGET OFFICE Douglas W, Elmendorf, Director U.S. Congress Washington, DC 20515 September 16, 2010 Honorable Barney Frank Chairman Committee on Financial Services U.S. House of Representatives Washington, DC 20515 Dear Mr. Chairman: As you requested, the Congressional Budget Office (CBO) has estimated the budgetary impact of the activities of Fannie Mae and Freddie Mac (two government-sponsored enterprises, or GSEs, that provide credit guarantees for more than half of the outstanding residential mortgages in the United States) using the methodology specified in the Federal Credit Reform Act of 1990 (FCRA). 1 To provide a context for those estimates, this letter also discusses alternative budgetary treatments for the GSEs, describes the usefulness of alternative treatments for Congressional decisionmaking, and explains the rationale for CBO's use of fair-value subsidy estimates for the GSEs in its baseline budget projections. Those fair-value estimates deviate from FCRA-based estimates in an important way: By incorporating a market-based risk premium associated with the GSEs' credit guarantees, they reflect the fact that the governmnent's assumption of financial risk is costly to taxpayers. Projected Budgetary Impact of Fannie Mae and Freddie Mac CBO has used three methodologies-the FCRA, fair-value, and cash treatments- to estimate the impact of Fannie Mae and Freddie Mac on the federal budget over the 2011-2020 period. The alternative methods result in quite different estimates of the GSEs' impact on the federal budget (see Table 1). Procedures Specified by the Federal Credit Reform Act. FCRA specifies the procedures to be used for recording the budgetary impact of most of the federal government's loan and loan guarantee programs. Under FCRA, the budgetary cost of a direct loan or loan guarantee is calculated as the net present value of expected cash flows over the life of the obligation. The net present value is calculated by discounting cash flows to the time of loan disbursement using rates on Treasury www.cbo.gov ' 2 U.S.C. § 661 et seq.

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