CBO Report: Recipients as the Best Path to Finish Fannie-Freddie Relief
The Congressional Budget Office (CBO) has released a report outlining how to assess budget plans aimed at ending government oversight of Fannie Mae and Freddie Mac. While the report adopts a nonpartisan tone, its implications are clear: the best choice for taxpayers is to include government-sponsored entities (GSE) among the relief recipients.
The CBO begins with critical observations. Even when profitable, Fannie and Freddie still impose costs on the federal budget due to the inherent risks associated with GSEs. Their mortgage guarantees benefit from implicit government backing, allowing them to offer lower fees compared to private guarantors.
Between 2026 and 2035, the CBO forecasts that GSEs will provide guarantees totaling $15.2 trillion, costing taxpayers approximately $81.8 billion. These figures are based on fair value assessments that factor in market risks. Notably, private firms face costs when taking on these obligations.
This accounting approach has its drawbacks. In strong years, the guarantees may appear inexpensive, yet the GSEs’ commitment to cover investors during borrower defaults essentially functions as a federally supported mortgage insurance. This subsidy is indeed real.
Two Paths: Conversion or Receivership
The CBO outlines two potential exit strategies for GSEs.
In one scenario, the Treasury could convert its senior preferred stock, currently valued at $190 billion, into common stock. This would lead to the company recapitalizing by utilizing a warrant to grab up to 79.9% of the common stock and selling more shares to raise around $162 billion, meeting the capital requirements for release. Subsequently, the Treasury would gradually divest its stake. The CBO refers to this as “Conversion among parents.”
In this case, the U.S. Treasury’s stake would amount to $170 billion.
However, the value could have reached $260 billion. By converting stock types, the Treasury would forfeit its liquidation priorities, shifting value to junior preferred and common shareholders. The CBO notes that the value of this transfer could be as high as $36 billion—essentially direct subsidies for speculators who bought shares after the companies’ failure and the subsequent rescue.
On the other hand, under alternate receivership options, the Federal Housing Finance Agency (FHFA) would engage current legal entities, shifting assets and liabilities to new companies and selling ownership to private investors. Older shareholders, like junior preferred stock and common stock holders, would be eliminated, with proceeds directed to the Treasury as the preferred holder senior to the new entity.
In this scenario, the Treasury would reclaim a total of $200 billion, without transferring any value to legacy equity holders.
The CBO makes it clear: “The Treasury will receive all proceeds from the sales of common stock that are not kept as capital reserves,” and “the available amount will likely be lower than what the Treasury’s senior preferred stock liquidation would demand.”
Simply put: U.S. taxpayers get priority, while others gain nothing.
What’s at Stake: $36 Billion Dilemma
The differences between these two paths are somewhat murky. One route aims to conclude the relief process smoothly and return the full value to taxpayers, while the other diverts $36 billion to investors knowingly purchasing shares in two failed institutions during the 2008 crisis. Many of these investors, including large hedge funds, have pursued legal action for compensation and have lobbied for a favorable resolution for years. Some even speculated that, despite the collapse, the government would eventually pass on value to them.
To put it bluntly, conversion doesn’t reform; it quietly provides relief for speculators who already lost in court.
The CBO framework illustrates that this approach simply transfers public value to private interests. The Treasury would see its preferred stock diluted, with the net effect being taxpayers footing the bill while benefitting speculators receive a windfall.
Receivership as a Solution, Not Confusion
Some critics view receiverships as disruptive. However, the CBO report asserts that it’s quite the opposite. In their proposed scenario, “Fannie and Freddie’s business operations continue uninterrupted,” albeit under a new entity bearing the same name. The “confusion” is largely legal—it’s a separation from the capital structure that led to the 2008 failure.
In practical terms, the recipients mean:
- Reducing risks associated with litigation from shareholder lawsuits
- Preventing politically sensitive bailouts for Wall Street investors
- Ensuring the mortgage market remains stable
- Cleaning up financial statements for a genuine reboot
- And, most importantly, Maximizing returns for taxpayers
It’s crucial to note that the CBO’s proposed scenario does not align with any specific administration’s plan—like Trump’s, which remains largely undeveloped. Still, as previously indicated, the receivership option aligns with stated governmental goals. Many alternatives for Fannie and Freddie’s future could be explored, yet there have been persistent dead ends after a decade of efforts aimed at resolving the reserve issue.
The receivership framework clearly grants legal authority to the FHFA, based on the 2008 Housing and Economic Recovery Act, while avoiding moral hazard and ensuring that the American people receive their full value back.
Moreover, it’s important to manage Fannie and Freddie’s interests without conceding to speculators who have aggressively pursued their claims in court, often losing on many fronts. Receiverships would prevent significant payouts to hedge funds at taxpayers’ expense.
Ultimately, it’s quite possible that nothing will fundamentally change—the mortgage market continues to function. Fannie and Freddie are currently under better management than when they operated as private entities. It raises the question of why past reform attempts have faltered after 16 years of stagnation. Perhaps, receiverships represent the least flawed option, remaining the best route forward unless policymakers are ready to embrace this approach.
