In a report delivered to the House Budget Committee on June 2, the CBO said a "fair value" accounting of guaranteeing the two defunct mortgage companies – known as Government Sponsored Enterprises (GSEs) – was more than twice as high as the Office of Management and Budget had accounted for.
"Specifically, CBO treats the mortgages guaranteed each year by the two GSEs as new guarantee obligations of the federal government," the CBO report said. "For those guarantees, CBO's projections of budget outlays equal the estimated federal subsidies inherent in the commitments at the time they are made."
"In contrast, the Administration's Office of Management and Budget continues to treat Fannie Mae and Freddie Mac as nongovernmental entities for budgetary purposes, and thus outside the budget," the report stated. "It records as outlays the amount of the net cash payments provided by the Treasury to the GSEs."
The total of those cash payments is $130 billion, and is normally reported as the cost of the bailout of the GSEs to date. However, the CBO said that merely counting the cash payments, and not the cost of federal subsidies granted to the GSEs, obscures their real costs.
Essentially, the CBO is accounting for the cost of the federal government guaranteeing the loans bought and securitized by the GSEs.
Currently, Fannie and Freddie rely on explicit federal guarantees to continue to secure below-market financing rates. Because Fannie and Freddie are insolvent, the federal government must make up their losses when the loans they have guaranteed lose money in default.
However, the CBO counts not only the amount of federal funds spent to keep the GSEs operating but the cost to the federal government to subsidize the mortgage guarantees issued by Fannie and Freddie. In other words, the CBO counts as a federal spending commitment the subsidy given by the government to the GSEs.
The CBO calls this approach "fair-value" accounting because it treats the federal government's actions just like the actions of any other market participant, taking into account the market risk of guaranteeing a mortgage.
Typically, federal accounting does not do this because it is argued that because the government can print its own money, its risk is zero.
The CBO says that even though the government can print money – technically by issuing Treasury bonds – this merely transfers the risk to the taxpayer, who will eventually have to pay off the bonds issued by the government.
As of March 31, the CBO calculated that the GSEs held a fair-value deficit of $187 billion, meaning that on a fair-value basis Fannie and Freddie held a combined $187 billion more in liabilities than they did in assets.
Added to the $130 billion in bailout payments the government has already made, the total cost of a bailout of Fannie and Freddie rises to $317 billion, which is far above the $130 billion usually cited by the OMB.
"As of March 31, 2011, the GSEs reported a fair-value deficit of approximately $187 billion," the CBO report stated. "Adding to that the $130 billion in net payments already received from the Treasury implies a fair-value cost to the government of about $317 billion in obligations incurred through March 2011."
That figure has grown since August 2009 when the CBO calculated that the cost of bailing out the GSEs was $291 billion, due mainly to further weakening in the housing market.
Further, the CBO expects these costs to rise by an additional $42 billion between 2011 and 2021, an average of $4 billion per year.
"CBO estimated that the subsidy costs of the GSEs' new business would total about $42 billion over the 2012–2021 period, an average of about $4 billion a year," the CBO said.
However, this subsidy cost could grow if the housing market continues to be weak. While the CBO expects it to recover, the difference between the agency's own 2009 and 2011 estimates show that this may not be the case.