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Statement of Robert D. Reischauer, Director, Congressional Budget Office, before the Subcommittee on Housing and Community Development, Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives 1 (May 1991)

handle is hein.congrec/cbo9055 and id is 1 raw text is: Mr. Chairman, I appreciate the opportunity to appear before this Subcommittee to discuss the Congressional Budget Office's (CBO's) report, Controlling the Risks of Government-SponsoredEnterprises. My testimony will summarize our conclusions about the three housing GSEs and current federal supervision of their safety and soundness, and examine various policy options, including the proposals advanced by the Treasury Department and the General Accounting Office, that could enable the government to limit its exposure to risk more effectively. The Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan Bank (FHLB) System, like the other GSEs, achieve their public purposes by borrowing on the strength of an implicit federal guarantee. The implicit guarantee transfers to the government a large portion of the risk that creditors normally bear. Federal risk bearing conveys a subsidy and creates a permanent potential for federal losses. Although the government is not in any immediate danger from any of the enterprises, the volume of their outstanding obligations is staggering--over $1 trillion. Over 90 percent of these securities have been issued by the three housing GSEs. The government can minimize its risk of loss by imposing statutory limits on the risks that a GSE can take, by empowering a federal agency to

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