NCPA - National Center for Policy Analysis

Fannie and Freddie as Private Enterprises

April 8, 2011

One of the eight government-sponsored enterprise (GSE) reform bills debated this week is aimed at making Fannie Mae and Freddie Mac charge a more appropriate fee for the guarantee they provide (a "g-fee").  The bill, introduced by Rep. Neugebauer (R-TX), instructs the Federal Housing Finance Agency (FHFA) to determine what the market would charge as a g-fee if it were setting the price.  Put another way, if Fannie and Freddie were private companies with no government support, what fee would they charge to guarantee payment on mortgage-backed securities to investors?  Certainly higher than their current fee, which is subsidized, says Anthony Randazzo, director of economic research at the Reason Foundation.

So how much should the fee go up?  There are a range of potential answers to the question and it all depends on the approach to estimating the fee and what factors are considered.

  • In a paper last year, the Congressional Budget Office (CBO) outlined its budget treatment of Fannie and Freddie.
  • Part of the report estimated the subsidy cost to the government of being the backstop of the GSEs.
  • For example, CBO estimated that the cost of providing a guarantee to Fannie and Freddie cost $291 billion in 2009.
  • This meant the GSEs would have to charge 440 basis points more than usual if they were to operate the same way but be a fully private company without the government backstop.
  • The report estimated that the GSEs should charge 150 basis points (or 1.5 percent) more in their g-fee for 2011 in order to account for the subsidy, 120 basis points for 2012 and 110 basis points for 2013.

Source: Anthony Randazzo, "On Raising the G-Fee," Reason Foundation, April 4, 2011.

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