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CBO: Eliminating Fannie Mae, Freddie Mac Would Save Billions

cutting-money [1]The Congressional Budget Office (CBO [2]) released a cost estimate on Friday for S. 1217 [3], a senate bill proposed June 2013 by Senator Bob Corker (R-Tennessee) that would eliminate GSEs Fannie Mae and Freddie Mac and replace them with a private insurance company system with a government backstop.

According to the newly-released estimate, removing the two GSEs would save the government billions of dollars in the next 10 years.

Under S. 1217, the new system of guaranteeing mortgage-backed securities (MBSs) would mean less risk for the government, therefore costing the government less money. Fannie Mae and Freddie Mac would no longer offer guarantees on MBSs under S. 1217; instead, the newly-established Federal Mortgage Insurance Corporation (FMIC) would offer guarantees on MBSs that originated in the primary market. FMIC would then guarantee payment of principal and interest by charging fees on the underlying mortgages. Private capital would take on some of the losses before the government payments would kick in.

CBO estimates that S.1217 would result in a reduction of direct government spending by about $60 billion over a 10-year period from 2015 to 2024. The reduction in spending would primarily be attributed to the fees that FMIC would charge MBS issuers would be more than the cost of the guarantees calculated under the Federal Credit Reform Act. Also, the Federal Housing Finance Agency (FHFA [4]), the conservator for the two GSEs since 2008, would no longer charge fees (recorded as revenue) to the GSEs to pay for their administrative expenses, which would result in a $1.5 billion decline in revenue during a five-year period from 2020 to 2024.

Federal deficits are expected to decline by $58 billion over the next 10 years under S. 1217, according to CBO. Pay-as-you-go procedures would come into play under S. 1217 because the bill affects direct spending and revenue.