House Passes Legislation Putting the GSEs on Budget

The House of Representatives voted yesterday to put Fannie Mae and Freddie Mac on budget. This should be bigger news than anyone is getting it. As the bill (H.R. 3581) would profoundly change the way the government counts its debt, it should at minimum be a topic in the presidential debate.

In the words of one of the legislation’s backers, Rep. Scott Garret, the bill “recognizes the budgetary impact of government-sponsored enterprises Fannie Mae and Freddie Mac by bringing these black holes of debt out from the shadows and on-budget, and requires that the federal government apply the same credit accounting standards as the private sector when making or guaranteeing loans.”

We have written at length about the need for the GSEs to be on budget. In a July 2010 letter to Secretary Geithner responding to requests for comment on the future of housing finance, we wrote:

The GSEs should also be formally put on the federal budget. They are in effect run by the federal government and meet the Congressional Budget Office standard for being included on the budget. Currently, the White House Office of Management and Budget does not include them. Adding them to the budget would not only be more honest, but it would add more transparency to the true drain the GSEs are on the fiscal stability of the federal government. If the GSEs were put on budget, then all cash flows from maturing mortgages or servicing fees on pools of loans would go into the Treasury to mitigate losses the taxpayers have taken on the GSEs.

The CBO projects the budgetary impact of the two entities’ operations as if they were being conducted by a federal agency, because of the degree of management and financial control that the government exercises over them. Specifically, CBO determined that after the GSEs were placed into conservatorship, they were close enough to government agencies that they should be counted towards the budget. Using principles outlined by the 1976 budget concepts commission CBO includes estimates of losses from the GSEs to is budget baseline.

So fare the OMB, White House budget accountant, still considers the GSEs as off-budget organizations since their conservatorship maintains their technical status as federally chartered enterprises. No budget by the Bush or Obama administration has considered GSE expenses in their budget outlooks. It is possible that the Obama budget to be released next week will include the GSEs—though since the White House has no intention of pushing Congress to pass it, the move would be a token nod.

It is helpful, therefore, that some in Congress have recognized the value of putting the GSEs on budget to reflect their true impact on the country and to better measure our national liabilities.

Not to be lost in this issue is new accounting standards directed by the legislation that would have a profound impact our debt measurement. This is unlikely to be considered in the Senate, but it is a start towards more fiscal responsibility in future legislative cycles. We can hope that it will be discussed during a presidential debate or three come the general election.