Center for American Progress

Fannie Mae, Freddie Mac, and FHA: Taxpayer Exposure in the Housing Market

Fannie Mae, Freddie Mac, and FHA: Taxpayer Exposure in the Housing Market

Testimony Before the House Committee on the Budget

Sarah Rosen Wartell testifies before the House Committee on the Budget on U.S. taxpayer exposure in the housing market.

SOURCE: Center for American Progress

CAP Executive Vice President Sarah R. Wartell testifies before the House Committee on the Budget. Read the testimony (CAP Action).

Chairman Ryan, Ranking Member Van Hollen, and members of the Committee, thank you for the opportunity to testify today about the budgetary treatment of Fannie Mae, Freddie Mac, and the Federal Housing Administration.

As I understand it, the primary purpose of this hearing is to examine how the federal budget reflects the taxpayer’s cost of federal support for the housing market through the government-sponsored enterprises, or GSEs, in conservatorship, Fannie Mae and Freddie Mac, as well as the Federal Housing Administration, or FHA.

Let me begin by making three central points about the budget impact of the GSEs:

  • First, the cost to the taxpayers of government support for Fannie and Freddie is already reflected in the federal budget. In addition, there is transparency about the financial position of the enterprises and the risks to the taxpayer provided by a number of other reports from the Treasury Department; the Office of Management and Budget, or OMB; and the Federal Housing Finance Agency, or FHFA. There is a technical debate between budget analysts about what is the best methodology to use to report these costs, but please do not let anyone tell you the costs are hidden or not reflected in the budget. I detail below how they are reported.
  • The treatment of the GSEs is uniquely complex because we are talking about budget treatment of obligations incurred when the securities were not expressly backed by the full faith and credit of the federal government at a time when we now have an effective government guarantee and ongoing obligations as well. As the housing markets stabilize and a long-term housing finance reform policy is determined, new policy will be made that will involve unwinding the GSEs as we know them. Far more important than the debate about the current treatment of the historical obligations is to ensure any future system of government support includes express terms, fees charged for support provided, and reserves held to protect taxpayers against loss, and all these terms accounted for in the budget using standard budget treatment for credit liabilities under the Federal Credit Reform Act.
  • Finally, the taxpayers’ exposure to risk from the books of business originated before the collapse of the housing market cannot now be altered. It is fixed. But of course the ultimate cost of those obligations to the taxpayers is still undetermined. The cost depends heavily on the recovery of the housing market, which in turn depends upon the policy steps taken by Congress, the administration, and regulators. The GSEs in conservatorship and FHA are playing a central role in stabilizing the housing markets. This month’s economic reports show that the housing market remains very weak. Had the GSEs and FHA not played their central role, the housing collapse would have been far more severe, the economic recovery slower to take hold and even more tepid, and the losses to the taxpayer far greater. What is more, precipitous actions now to limit their role prematurely and imprudently would weaken the housing recovery and have the effect of significantly increasing the GSEs’ and FHA’s losses on outstanding obligations. Thus, the cost to the taxpayers of these existing obligations depends upon the wise exercise of policy discretion in the months and years ahead.

CAP Executive Vice President Sarah R. Wartell testifies before the House Committee on the Budget. Read the testimony (CAP Action).

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Sarah Rosen Wartell