NCPA - National Center for Policy Analysis

The Real Cost of Fannie and Freddie

March 21, 2014

If American taxpayers could see the true cost of Fannie Mae and Freddie Mac, they would be much more likely to eliminate them, says Romina Boccia, a fellow in budgetary affairs at the Heritage Foundation.

Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) in the mortgage market, are exempt from federal budget rules and processes because they are treated as "off-budget" entities. What this means is that the real cost of the two GSEs are kept hidden from taxpayers.

  • Accounting gimmicks make the GSEs appear less problematic than they actually are.
  • Currently, the cash-flow approach is used to show the impact of Fannie and Freddie on federal finances, which does not account for taxpayer exposure to risk.
  • This is because the cash-flow method only looks at money that comes into the Treasury from GSEs, ignoring any costs of guaranteeing mortgage-backed securities.
  • Were the GSEs on-budget, these costs would be acknowledged.

The GSEs appear to reduce the federal deficit using this method. This is not only misleading, but it encourages higher spending.

  • Had the two been included as on-budget entities, the federal government would have reported $3.6 trillion in spending in 2013, with a $780 billion budget deficit.
  • Instead, spending was underreported by $100 billion.
  • Taxpayers are responsible for $4 trillion in GSE guarantees, yet those risks are not accounted for in budget reporting.

The Budget and Accounting Transparency Act of 2014 (H.R. 1872) would put Fannie and Freddie "on-budget," and would require fair-value accounting (which incorporates market risk) in order to correctly calculate their cost to taxpayers. This is important because not only would it show to taxpayers the real cost of Fannie and Freddie, but it would demonstrate how eliminating the GSEs would do much to improve federal finances. Fannie and Freddie should be eliminated and a valid accounting of the two is the first step toward doing so.

Source: Romina Boccia, "Revealing Fannie Mae's and Freddie Mac's Budget Costs: A Step Toward GSE Elimination," Heritage Foundation, March 16, 2014.


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