“Views and Estimates of the Committee on Financial Services on Matters to be Set Forth in the Concurrent Resolution on the Budget for Fiscal Year 2016
Pursuant to applicable rules and laws, the Committee on Financial Services transmits to the Committee on the Budget the following views and estimates on matters within its jurisdiction or functions to be set forth in the concurrent resolution on the budget for fiscal year 2016 (FY 2016).
The Government Sponsored Enterprises
After they failed in September 2008, the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac were placed into conservatorship under the Federal Housing Finance Agency (FHFA). The GSEs failed because of years of mismanagement, unsustainable market practices, and an inherently flawed hybrid business model, and their failure resulted in the costliest of all the taxpayer bailouts. The GSEs remain in business only because the federal government grants them preferential treatment it affords to no other financial institution. For example, the federal government allows the GSEs to conduct new business, even though they are critically undercapitalized. According to their latest 10-K Annual Reports, Fannie Mae was leveraged at 341-to-1 and Freddie Mac was leveraged at 156-to-1. The GSEs’ chronic and critical undercapitalization poses an unacceptable risk to taxpayers.
To date, Fannie Mae has drawn approximately $117 billion in taxpayer funds, and Freddie Mac has drawn approximately $72 billion. So far, taxpayers have bailed out the GSEs to the tune of $189.485 billion. In exchange for the more than $189 billion that the GSEs drew from the Treasury to prevent them from going bankrupt, the Treasury Department—and thus, the taxpayers—received shares of GSE Senior Preferred Stock.
Under the terms of the taxpayer-funded bailouts, the GSEs pay dividends on those shares when they show a profit, but those dividend payments cannot be used to reduce or redeem the shares of preferred stock that the taxpayers still own.
Given the continued risk that the GSEs pose to taxpayers, the time for fundamental GSE reform is now. And rather than mitigate these risks, the GSEs’ regulator—the FHFA—has increased the risk that they pose to taxpayers by expanding their activities and further entrenching their market share. Six years have passed since the housing bubble fueled by the GSEs’ recklessness burst, and the Administration has failed to put forth a plan for reforming the GSEs. By contrast, in the 113th Congress this Committee marked up and favorably reported housing finance reform legislation, H.R. 2767, to resolve the GSEs’ conservatorship and their unworkable hybrid status. The Committee continues to support legislative initiatives in the 114th Congress to require the FHFA to repeal the charters of Fannie Mae and Freddie Mac and to wind them down. In their place, the Committee supports legislative initiatives that create a private housing finance market with a new statutory structure for regulating mortgage lending and securitization.
After Fannie Mae and Freddie Mac were placed in conservatorship, the CBO concluded that they should be included in the federal budget to reflect their cost to the taxpayer. But in the President’s FY 2016 budget, the GSEs are treated as “non-budgetary entities” rather than government agencies whose activities are backed and paid for by taxpayers. As a result, the billions upon billions of losses experienced by the GSEs and the ongoing risk of further losses that the GSEs pose to taxpayers are not properly accounted for on the government’s financial statements. The Committee strongly recommends that the Office of Management and Budget be directed by statute to move Fannie Mae and Freddie Mac “on budget,” and to account for losses sustained since they were placed in conservatorship in the same way that the CBO calculates their losses. The Committee also recommends subjecting the GSEs to the statutory debt limit. To allow time to implement these changes, the Committee recommends an effective date of 90 days after the enactment of any such changes.”