By Yali N’Diaye

WASHINGTON (MNI) – While estimates about the cost of subsidizing
Fannie Mae and Freddie Mac’s mortgage guarantees are subject to many
uncertainties, a Congressional Budget Office official Thursday projected
such guarantees would cost $42 billion between 2012 and 2021 should
business continue at the current pace.

“On the basis of the March 2011 baseline projections used for CBO’s
analysis of the President’s budget, the agency estimates that the new
guarantees the GSEs will make over the 2012-2021 period will cost the
government $42 billion,” CBO Assistant Director for Financial Analysis
Deborah Lucas told lawmakers. This is an average of about $4 billion a
year.

At the end of March, Fannie Mae and Freddie Mac had received $154
billion from the government, which in turn received $24 billion in
dividends on its preferred stock holdings in the GSEs, resulting in net
payments they received of $130 billion.

And for FY’11 and FY’12, CBO expects additional net cash payments.
“After that, CBO estimates, the GSEs will pay more to the Treasury in
dividends than they will receive from purchases of preferred stock,”
Lucas said in her testimony to the House Budget Committee during a
hearing on ‘Fannie Mae, Freddie Mac & FHA: Taxpayer Exposure in the
Housing Markets.’

The two GSEs’ disclosures “understate the fair value of the
guarantees,” she continued, “because the disclosures treat the portion
of costs covered by the federal guarantee as having no cost to the
GSEs.”

Later during a question and answer session, she cautioned lawmakers
that many uncertainties surround the CBO’s estimates.

Any estimate of such costs “is difficult to get right,” she said,
when pressed to explain why the CBO’s calculation of the budget impact
of the GSEs’ guarantees using fair value would be correct.

“There is a great deal of uncertainty in these estimates, whether
they’re done under credit reform or on a fair value basis,” she argued,
referring to two methods of calculating the budget impact of the GSE
guarantees.

Under the Federal Credit Reform Act of 1990, the subsidy
calculation measures the lifetime cost of loans or guarantees as of the
year of disbursement. The cost is then considered as a federal outlay in
that year.

CBO is using the fair value approach with the idea being to try “to
reflect what the price would be in a well-functioning financial market.”

** Market News International Washington Bureau: 202-371-2121 **

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