CBO Report Defuses Case for GSEs on Left, Right

WASHINGTON, DC-In 2011, Congress and the Obama Administration are expected to tackle the issue of the GSEs. A recently-released report from the Congressional Budget Office provides reasons for both left- and ring-wing politicians to consider alternatives from Fannie Mae’s and Freddie Mac’s current structure by debunking two assumptions. One is the belief that the GSEs have, at net, aided the availability and cost of affordable housing. The other is that they have not displaced private mortgage origination activities. Not so in either scenario, says the CBO, which found the GSEs had only a limited effect on affordable housing and, via its federal guarantees, reduced the incentives for mortgage originators to make risky loans.

In the case of affordable housing, the problem arose because Fannie Mae and Freddie Mac faced intrinsic, and ultimately intractable, tensions in balancing competing goals: maximizing profits for their shareholders; maintaining safety and soundness to minimize potential costs to taxpayers; and supporting affordable housing. “For example: Efforts to help low-income households tend to involve targeting loans toward borrowers who generally pose more risk than borrowers of traditional conforming mortgages do, thereby putting taxpayers at greater risk of loss,” the report said. “The affordable-housing goals and the pursuit of profit may have encouraged Fannie Mae and Freddie Mac to purchase subprime MBSs that were expected to generate high returns, but that involved excessive risk for borrowers and taxpayers alike.”