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Letter to Mr. Franklin D. Raines 1 (June 2001)

handle is hein.congrec/cbo9417 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE Dan L. Crippen U.S. CONGRESS Director WASHINGTON, DC 20515 June 21, 2001 Mr. Franklin D. Raines Chairman and Chief Executive Officer Fannie Mae 3900 Wisconsin Avenue, NW Washington, DC 20016 Dear Mr. Raines: I am writing to respond to your written comments, dated May 9, 2001, on the Congressional Budget Office's draft study on the housing GSEs and to reply more generally to some related arguments, including ones in a recent speech by Tim Howard, Fannie Mae's Benefits to Home Buyers: The Business Perspective. The first set of comments concerns the calculation of tax and regulatory benefits that the GSEs receive. You argued that the subsidy is exaggerated when figured on a pretax basis. CBO routinely does all such calculations before taking federal taxes into account. Moreover, it is entirely possible that if calculated on an after-tax basis, the ratio of benefits to Fannie Mae and benefits to homeowners would increase. The second set of issues you raise involves the calculation of the debt benefit. You asserted that the spread between portfolio returns and debt should be 78 basis points rather than 90 basis points. Ninety basis points, however, is the spread reported in Fannie Mae's annual report, which is based on mortgages rather than the GSE's overall portfolio. You also made the point that the total debt in Table 2 of CBO's report includes debt that is not used exclusively for conforming mortgages but also for multifamily mortgages and nonmortgage investments, whereas the subsidy to multifamily borrowers is not included in the pass-through estimates. In fact, we based the subsidy estimates on the full increase in the amount of debt outstanding and so included a subsidy to multifamily borrowers. The total subsidy calculation implicitly includes all subsidies that are passed through. As to the issue of the appropriate comparison group, I refer you to the study, which explains in greater detail why CBO used that particular set of firms. We understand that this comparison could overstate the subsidy calculation but not by much. Your own consultants produced estimates that are consistent with ours. Further, many other assumptions that we made are favorable to Fannie Mae and Freddie Mac.

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