WASHINGTON - The Congressional Budget Office, smarting from criticism by Fannie Mae and Freddie Mac of its recent estimate of federal subsidies to the government-sponsored enterprises, is fighting back.
Deborah Lucas, the budget agency's chief economist, in an interview aggressively defended the report that she co-wrote with Marvin Phaup, the agency's deputy assistant director. Released in May, it said the GSEs got subsidies totaling $10.6 billion last year and that they and their shareholders kept $3.9 billion of this instead of passing along the full benefit to consumers. The companies have blasted the estimate as inflated and the CBO's methodology as flawed.
"We don't agree that we made mistakes that biased the results," Ms. Lucas said. "The CBO is a neutral organization. We weighed various considerations and took a balanced approach."
Her remarks last week coincided with the release of a letter by CBO Director Dan L. Crippen to Fannie Mae chairman Franklin Raines, in which he accused Mr. Raines and other company officials of "misleading" characterizations and selective criticism of the parts of the report that hurt Fannie politically.Ms. Lucas and Mr. Phaup continued defending the report at a National Economists Club lunch here Tuesday.
Though Ms. Lucas denied that the public statements are part of an organized counterattack, they are at least timely - coming on the eve of a House Financial Services subcommittee hearing scheduled for today on legislation that would revamp regulation of Fannie and Freddie. The CBO report is expected to be a prominent bone of contention when witnesses testify on each side of the debate.
The report concluded that, because of their special legal status as government-sponsored enterprises holding emergency credit lines with the U.S. Treasury, Fannie and Freddie are perceived as less risky than fully private enterprises and can borrow money at lower cost. Also, the report said, they benefit from tax exemption, securities fees, and regulatory exemptions.
Before the report's release, Fannie and Freddie launched a preemptive strike, arguing that the CBO was basing its findings on incorrect economic assumptions and as a result had dramatically overestimated the benefits of government sponsorship and underestimated the benefits both companies pass on to borrowers. They emphasized the facts that neither company gets a dollar of federal funding and that both promote affordable housing.
Ms. Lucas said the subsidy estimate was much larger in the agency's May report than its $6.5 billion estimate five years previously because the companies have expanded significantly since then - and are expected to continue doing so indefinitely.
"One characteristic of the GSEs has been their exceedingly rapid growth," she said in the interview Thursday.
Ms. Lucas said another reason for the estimate's rise was a change in the accounting for long-term benefits on loans closed in any given year. "The key words for describing the method change [are] that it is 'forward-looking,' " she said.
Instead of accounting for the average interest rate benefit the GSEs give to borrowers solely in the year mortgages are closed, Ms. Lucas said, the report measured the present value of the projected benefits over the life of the loans. "When you make a mortgage, it is a 30-year obligation," she said. "The subsidy is being promised today even though the full amount won't be realized for 30 years."
Ms. Lucas noted that critics of the report frequently argue that the subsidies do not directly cost the government anything and, further, that if they did not exist overall mortgage costs would rise.
From the CBO's point of view, she said, the main point is how much the government forgoes by giving away the privileges it grants to Fannie and Freddie. If the companies "didn't exist, some other institutions would step in and do much the same thing," Ms. Lucas said, "and furthermore, if the government were to provide the same benefits to those institutions, those institutions would pay for them."
A Fannie spokeswoman said that the company has not harshly criticized the report but since 1996 - when the budget agency first estimated subsidies to the government-sponsored enterprises - has conducted "back and forth dialogue with the CBO on the issue."
A Freddie spokeswoman declined to comment on the CBO's defense of its report.
Among those scheduled to testify before the House Financial Services subcommittee with jurisdiction over the GSEs are Timothy Howard, Fannie's executive vice president and chief financial officer, and Mitchell Delk, senior vice president of government relations at Freddie.
