CBO Reports GSEs in Better Financial Position to Exit Conservatorship
Written By: Joel Palmer, Op-Ed Writer
An analysis by the Congressional Budget Office (CBO) has concluded that Fannie Mae and Freddie Mac are in better financial position to repay the U.S. Treasury for its stake in the enterprises than they were four years ago.
CBO conducted updated analysis on the effects of recapitalizing the GSEs at the request of the House Financial Services Committee. The original analysis was conducted in August 2020, while the CBO released its updated findings last week.
“CBO’s updated analysis concludes that the potential value of the GSEs to investors is greater now than it was at the time of the previous analysis, resulting in more scenarios in which the GSEs could be recapitalized through the sale of common stock and could repay the Treasury for its stake in the enterprises,” the office concluded.
Fannie and Freddie have been under the conservatorship of the Federal Housing Finance Agency, which also regulates the entities, since the financial crisis of 2008. For a decade, the entities paid nearly all of their earnings to Treasury, which owns the dominant stakes in the two GSEs.
In late 2019, after several years of profitability, Treasury allowed the GSEs to retain more of their earnings to rebuild their capital reserves. This was considered a vital step for Fannie and Freddie to raise the necessary capital to once again become fully private enterprises.
In the August 2020 report, CBO examined options for recapitalizing the GSEs by allowing them to retain all of their profits for an initial period, after which the GSEs would sell new common stock to investors to replace the Treasury’s ownership stake.
The new analysis describes how the GSEs’ current financial conditions differ from the conditions underlying the estimates in the 2020 report and how those differences affect scenarios for recapitalization.
In both reports, CBO created 250 scenarios using different combinations of estimates for factors such as:
The recapitalization period (three or five years).
The capital requirements for the GSEs.
The growth rates of the GSEs’ earnings and assets over the recapitalization period.
How potential shareholders would estimate the value of the GSEs.
“CBO found that under current conditions nearly 60 percent of CBO’s 250 recapitalization scenarios would raise enough funds to allow the GSEs to fully repay the Treasury for its roughly $190 billion in outstanding preferred shares issued before the GSEs’ conservatorships,” CBO informed the committee in a letter.
Four years ago, that outcome only occurred in 12 percent of the 250 scenarios.
CBO noted that the GSEs’ combined assets, income, and capital are higher today than what the 2020 analysis projected they would have at this point. This was largely due to Fannie and Freddie growing its assets
Those differences occurred because the GSEs’ assets grew at a faster average annual rate than the projected 4 percent rate used in the previous analysis. Higher asset growth resulted in higher income, which enabled the GSEs to accumulate more capital.
CBO said higher home prices boosted the principal balance of mortgages guaranteed by the GSEs as part of their mortgage-backed securities, which drove asset growth from 2020 to 2023. Higher home prices also increased the GSEs’ income by allowing them to reduce the amount of future credit losses expected on their mortgage guarantees.
In addition, interest rates were higher than CBO had projected four years ago. Higher interest rates reduced the early repayment of mortgages included in the GSEs’ mortgage-backed securities, which in turn increased the GSEs’ assets and the income earned on them.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
