Freddie Mac and Fannie Mae—the two government-sponsored enterprises (GSEs)—are back in the news again, this time because they appear to be helping taxpayers by reducing the deficit.
The latest reports predict that Freddie Mac, one of the housing GSEs, will send “$10.4 billion to the Treasury Department next month, bringing total payments to about $10 billion above what it got in aid after the 2008 credit crisis.”
The fact that the GSEs are now sending money into the Treasury, rather than the other way around, certainly makes for attention-grabbing headlines. But there are many problems with this story, not least of which is the fact that Freddie Mac’s CEO acknowledges, “These levels of income are not sustainable.”
More importantly, the notion that taxpayers have been paid back is completely wrong. As Heritage research has previously highlighted, under current law, none of the funds being generated by the GSEs can be used to repay the initial bailout. The current agreement doesn’t provide any mechanism for Fannie and Freddie to buy back the preferred shares Treasury bought via the bailout, so repayment can happen only when Treasury finally liquidates its stake in the GSEs.
If this arrangement sounds like Fannie and Freddie are making interest payments on a loan that can never be repaid, that’s because they are. So any discussion of “repayment” needs this disclaimer: Even once Fannie and Freddie have paid $400 billion in dividends to the Treasury, they’ll still owe $188 billion.
All the focus on GSE revenue also ignores the fact that taxpayers remain responsible for nearly $4 trillion in guarantees on GSE debt and securities. Every day that Congress waits to finally shut down the GSEs only makes this problem worse for taxpayers, because they have to guarantee even more GSE obligations.
In other words, GSE revenue is increasing because they’re guaranteeing even more mortgages now that the federal government explicitly backs Fannie and Freddie’s operations. (They’ve also steadily increased the guarantee fees charged to mortgage lenders.)
But just like all funds, this GSE revenue will be spent as soon as it comes into the Treasury, not saved up to protect taxpayers against future losses. Not surprisingly, the Obama Administration has chosen to account for the GSEs’ revenue and ignore future liabilities. According to Heritage budget expert Romina Boccia:
The current cash-flow approach used to report the GSE impact on federal finances fails to properly account for taxpayers’ exposure to risk from federal control over Fannie and Freddie. The result is that the entities appear to be a boon for taxpayers because they reduce the reported federal deficits. This fiscal illusion encourages higher federal spending today while putting taxpayers on the hook for future bailouts. Moreover, improper accounting of Fannie and Freddie’s impact on taxpayers hurts efforts to eliminate the GSEs.
There are several additional reasons that explain the higher GSE revenue, but all of those issues obscure the fact that taxpayers are at more risk now than when they bailed out the GSEs in 2008. Congress should not let the surge in revenue distract it from addressing real reform of the housing finance system by finally eliminating the GSEs.