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Revisiting the Net Benefits of Freddie Mac and Fannie Mae

Estimating the Direct Benefits of Freddie Mac and Fannie Mae

Freddie Mac and Fannie Mae provide direct benefits to homeowners by lowering mortgage interest costs. The magnitude of these benefits, relative to the savings in interest expense real- ized by the GSEs, has been an important piece of the policy debate over the role of the GSEs. We presented estimates of these benefits in our 2001 report. Since then, the CBO has issued two updates of their original 1996 report, and a staff economist at the Federal Reserve Board has pre- pared an alternative study. There has also been additional research on the parameters underlying the estimates produced in the CBO studies as well as our own, and there have been increases in the amounts of mortgage loans outstanding and in the balance sheets of the GSEs. In this section we discuss the developments in this area since our previous report and update our estimates.

the jumbo-conforming spread by the volume of loans purchased by the GSEs. All the CBO studies portray the GSEs as providing benefits to homeowners that are substantially less than the subsidy provided by taxpayers.

We critiqued the CBO methodology in detail in our January 2001 report and in a May 2001 press release. Our primary criticisms are that the studies apply an inappropriate framework and use faulty measures of key parameters, particularly the GSE funding advantage on long-term debt securities. In the 2001 and 2004 studies CBO used 47 basis points for the spread between yields on GSE debt and comparable securities of other private firms. They derive this figure from comparisons of GSE securities with securities issued by financial firms having ratings ranging from AA+ to A-. The inclu- sion of the single-A securities is questionable, and it widens the spread considerably.51

The CBO and Federal Reserve Studies

The CBO studies (1996, 2001, 2004) all use a similar framework. They begin with the proposi- tion that Federal sponsorship provides the GSEs with a “subsidy” in the form of lower interest expense on their securities. To estimate the amount of that subsidy, CBO multiplies outstand- ing balances on GSE securities by the spreads between yields on GSE securities and yields on securities issued by selected non-GSE financial firms. To estimate the amount of the subsidy “passed through” to homebuyers CBO multiplies

In 2003 the Federal Reserve Board released a preliminary version of a study that also quantified the benefits of the GSEs. Like the CBO, Pass- more (2005) concluded that the GSEs absorb a large share of the benefits from their funding advantage while passing only a small amount on to homeowners. Like the CBO studies, Passmore considered reduced rates on conforming loans purchased by the GSEs to be the only benefit resulting from Federal sponsorship. Furthermore, his assessment relied on the Passmore, Sher- land, and Burgess (PSB) estimate of the GSEs’

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Toevs (2000, 2001) also critiques the CBO reports.

Estimating the Direct Benefits of Freddie Mac and Fannie Mae

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