[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
CONGRESSIONAL BUDGET OFFICE REPORT ON
FEDERAL SUBSIDIES FOR HOUSING GSEs
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE, AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MAY 23, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-20
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72-911 WASHINGTON : 2001
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD, Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missiouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises
RICHARD H. BAKER, Louisiana, Chairman
ROBERT W. NEY, Ohio, Vice Chairman PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
CHRISTOPHER COX, California NYDIA M. VELAZQUEZ, New York
PAUL E. GILLMOR, Ohio KEN BENTSEN, Texas
RON PAUL, Texas MAX SANDLIN, Texas
SPENCER BACHUS, Alabama JAMES H. MALONEY, Connecticut
MICHAEL N. CASTLE, Delaware DARLENE HOOLEY, Oregon
EDWARD R. ROYCE, California FRANK MASCARA, Pennsylvania
FRANK D. LUCAS, Oklahoma STEPHANIE TUBBS JONES, Ohio
BOB BARR, Georgia MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, North Carolina BRAD SHERMAN, California
STEVEN C. LaTOURETTE, Ohio GREGORY W. MEEKS, New York
JOHN B. SHADEGG, Arizona JAY INSLEE, Washington
DAVE WELDON, Florida DENNIS MOORE, Kansas
JIM RYUN, Kansas CHARLES A. GONZALEZ, Texas
BOB RILEY, Alabama HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
GARY G. MILLER, California RONNIE SHOWS, Mississippi
DOUG OSE, California JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania STEVE ISRAEL, New York
MIKE FERGUSON, New Jersey MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
MIKE ROGERS, Michigan
C O N T E N T S
----------
Page
Hearing held on:
May 23, 2001................................................. 1
Appendix:
May 23, 2001................................................. 57
WITNESS
May 23, 2001
Crippen, Hon. Dan L., Director, Congressional Budget Office...... 9
APPENDIX
Prepared statements:
Baker, Hon. Richard H........................................ 58
Ford, Hon. Harold E. Jr...................................... 61
Kanjorski, Hon. Paul E....................................... 63
Crippen, Hon. Dan L. (with charts)........................... 64
Additional Material Submitted for the Record
Crippen, Hon. Dan L.:
CBO Paper: Interest Rate Differentials Between Jumbo and
Conforming Mortgages, 1995-2000............................ 115
CBO Study: Federal Subsidies and the Housing GSEs............ 78
Written response to questions from Hon. Harold E. Ford, Jr... 171
CONGRESSIONAL BUDGET OFFICE REPORT ON FEDERAL SUBSIDIES FOR HOUSING
GSEs
----------
WEDNESDAY, MAY 23, 2001
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, DC.
The subcommittee met at 10:00 a.m., in room 2128, Rayburn
House Office Building, Hon. Richard H. Baker, [chairman of the
subcommittee], presiding.
Present: Chairman Baker; Representatives Ney, Shays, Paul,
Bachus, Lucas, W. Jones, Weldon, Ryun, Riley, Biggert, Miller,
Ose, Rogers, Kanjorski, Bentsen, Sandlin, J. Maloney of
Connecticut, Hooley, S. Jones, LaFalce, Capuano, Sherman,
Meeks, Inslee, Moore, Ford, Hinojosa, Lucas, Shows, Crowley,
Israel and Ross.
Chairman Baker. I would like to call this hearing of the
Capital Markets Subcommittee to order and welcome all those who
have modest interest in this subject matter.
I want to begin this morning by drawing the subcommittee's
attention to an article published just 5 days ago by the
Associated Press, which I think has been distributed to the
Members, that I found insightful with respect to the subject at
hand today.
The fourth paragraph of that release, which I have
highlighted, reads: ``Last month's surplus''--referring to the
budget surplus--``was bigger than the $180 billion many
analysts projected, but matched predictions made by the
Congressional Budget Office.''
So I just want to make note that the CBO does get some
things right, and others do not always hit it on the nose.
Ordinarily I would not deem it necessary to make reference
to the reliability of economic analyses that the CBO has
historically provided Congress. However, in light of the effort
by some over the past week to publicly discredit the integrity
and ability of the CBO, I find myself compelled to dwell on the
subject a bit.
Through the years, both Democrat and Republican Majority
Congresses, and even split Congresses, have rightly relied on
the expertise of non-partisanship of the CBO to inform the
Congress and Members on public policy issues.
My point in quoting the AP story is to suggest that if the
CBO can time and time again accurately assimilate the complex
and myriad economic factors making up budget surplus forecasts,
then surely it possesses the capacity to get a GSE subsidy
pretty close.
Certainly as the quote indicates, CBO works with a degree
of accuracy and objectivity surpassing that of other so-called
analysts who on the subject we take up today perhaps find their
own interests clouding their own unbiased, objective
assessment, but I will return to the analysts a bit later
today.
Some months back, I too thought to criticize the CBO out of
frustration and impatience due to the delayed release of this
report. For the record, I actually wrote that letter last July
asking for an update of the 1996 subsidy.
I have since learned the delay was due to the
extraordinarily studied approach the CBO adopted precisely for
the reasons of avoiding the criticisms that were issued in
1996. That is, to get the numbers right and clear away doubt
about the methodology used to reach its conclusions.
This approach, I now understand, included consultation from
accountants and economists representing respected Federal
institutions. Among others, the Treasury, the Federal Reserve
Board, the Federal Reserve Bank of Minneapolis, the GAO, the
Congressional Research Service.
CBO then raised my anticipation by subjecting it to an even
further lengthy outside rigorous academic-style peer review
process.
I point this out for two reasons.
First, I want to personally thank CBO's Director, Mr. Dan
Crippen, for taking care to craft the report in this manner.
Congress indeed owes a debt of gratitude for the work both you
and your staff do in service to this Congress and to the
American people.
And just a personal note, reading what I have read, Mr.
Crippen, over the past days, it is not my duty to do so, but I
apologize to those professionals who have been engaged in this
who have been subjected to these criticisms.
In our world of elective politics, anything is almost--and
usually is in Louisiana for sure--fair game. But to
professionals who are engaged in the business of doing work at
the direction of the Congress, you should not be subjected to
similar criticisms, and I extend that apology to you.
Consequently, you can expect that Members of this
subcommittee should and will give your testimony the fair and
open-minded consideration that you deserve.
More importantly, I wish to expose the folly of a handful
of people who have already publicly attacked this report,
including those who more incredibly still maintain that housing
GSEs receive no subsidy at all.
Make no mistake. The facts are the facts. The subsidy is
real. It is large. And it has far-reaching implications.
Today, I intend to take our time. We will go through a
lengthy process. We certainly are going to allow every Member
every occasion to ask any question he may choose, but I intend
to visit with you, Mr. Crippen, the clear steps by which you
reached the conclusions and the processes that you engaged.
Second, to look at the rebuttal statements included in the
report and the elements that give credibility to those
rebuttals.
And finally, to return to the issue of the relationships
between the analysts and the GSEs and their involvement in this
matter prior to the public consideration of the report by the
Committee.
With that, I would like to recognize the Ranking Member,
Mr. Kanjorski.
[The prepared statement of Hon. Richard H. Baker can be
found on page 58 in the appendix.]
Mr. Kanjorski. Thank you very much, Mr. Chairman, for the
opportunity to comment before the hearing begins today to learn
more about the latest study compiled by the experts at CBO on
the subsidies received by the housing Government Sponsored
Enterprises.
As I understand, although the agency changed the
methodology it used in 1996----
Mr. LaFalce. Could Mr. Kanjorski speak up a bit louder,
please?
Mr. Kanjorski. Oh, sure. OK?
Mr. LaFalce. That is better, yes.
Mr. Kanjorski. As I understand, although the Agency changed
the methodology it used in 1996 to calculate this subsidy, its
ultimate conclusions remain approximately the same in this new
report. In short, Fannie Mae and Freddie Mac pass on about two-
thirds of the Federal subsidies to home buyers in the form of
lower mortgage prices.
The CBO analysts have also determined that the size of the
Federal subsidy received by Fannie Mae and Freddie Mac has
nearly doubled between 1995 and 2000 to $10.6 billion.
Some will doubtlessly contend today that Congress should
work to control this dramatic growth. The questions we should,
however, be asking ourselves focus not on what caused the
magnitude of the growth and how to control it, but rather where
the subsidy flows, what it buys, and how well the GSEs manage
their risks and operate their businesses.
Additionally, I suspect that a number of my colleagues
during this hearing will raise concerns about the methodology
used by the CBO to calculate its latest estimates.
We should examine these methodological concerns today, but
in doing so we should not forget to look at the big picture.
This report confirms that the GSEs are performing a function
that the Congress wants them to perform. Namely, they are
working to help lower the cost of home ownership at no real
monetary cost to the Federal Government.
In return, the stakeholders and shareholders in the GSEs
receive a share of the Federal subsidy to provide a financial
reward for their efforts.
Moreover, just last week, the Wall Street Journal reported
that the U.S. Census Bureau has found that demand for housing
is actually rising at a faster pace than previously expected.
We could, as a result, soon experience housing shortages in
some parts of the country. The GSEs need to use their benefits
to help us to attend to this looming need for affordable
housing.
If we did not have the GSEs to accomplish our Nation's
housing objectives sufficiently, we would have to create new
housing subsidy programs to address this imminent need, likely
at a greater cost to our Federal Government.
Ultimately, the latest CBO report offers us an additional
piece of information for legislators and policymakers to
analyze in a more complete and comprehensive manner the
contributions brought by the GSEs to the housing marketplace.
Although some have called for reforming GSE's statutory
benefits and regulatory structure in recent months, these
estimates in my opinion present us with no compelling reason
for pursuing any legislation on this matter at this time.
In closing, Mr. Chairman, I look forward to hearing from
CBO Director Crippen today about his agency's study, and I
yield back the balance of my time.
[The prepared statement of Hon. Paul Kanjorski can be found
on page 63 in the appendix.]
Chairman Baker. Thank you, Mr. Kanjorski.
I would like to recognize at this time the Ranking Member
of the Full Committee, Mr. LaFalce. Welcome, sir.
Mr. LaFalce. Thank you very much, Mr. Chairman. And again I
want to commend you. You have certainly taken an interest in
GSEs--that is an understatement--but I think we are all going
to be better off for it.
I do want to say what a joyous day this is for me as I look
forward to working in the Senate with Chairman Paul Sarbanes on
these issues. I want to congratulate Bernie Sanders for any
work that he may have done to encourage the sunshine today.
I also want to make a few comments about GSEs.
First of all, I want to correct a misimpression. I think
the misimpression has been created that somebody is attacking
the integrity or the ability of the CBO. That is the furthest
thing from the truth. But that insinuation, or not even
insinuation, that statement almost implies that you cannot
criticize in a constructive manner the work product of an
organization saying that you would have done it differently
without attacking their integrity or ability. No. Then we could
not engage in any criticism. So I do not think that those who
have given a critique of the work product should be accused of
having attacked either the integrity or the ability of the CBO.
Second, I am very surprised at the idea that GSEs might
derive an economic benefit from their implied guarantee. That
is not rather shocking to me at all. That is one of the reasons
we created them, and then in privatizing them we realized that
we were going to be helpful because of this implied guarantee,
and that is what we wanted to do.
And, of course, we do this in a lot of other areas, too. We
have a lot of other explicit Government guarantees. That is
Credit Allocation. That is a subsidy. We have direct Federal
subsidies, dollars, and direct dollars.
And then we have something called the Tax Expenditure, too.
A lot of tax expenditures for housing. It might be interesting,
Mr. Crippen, to do a study as to the efficiency of the tax
expenditures for housing, and what percentage go to the
consumers, and what percentage go to the developers. I
personally think that is probably the least efficient subsidy
we have, but it is the one that seems to be in currency right
now and in favor.
I think, too, that the energy plan that the President
submitted has a few subsidies, explicit guarantees, implied
guarantees, and so forth. So that is not something that is
rather uncommon.
And yet the implication is that something extraordinary is
happening here with GSEs, because housing GSEs derive some of
the benefit from their status as GSEs.
Well, the simple truth is that that is what Congress
intended. Let's look at what the CBO Report says.
First and foremost it says that fully two-thirds of the
benefits of GSE status for Fannie Mae and Freddie Mac accrue to
the benefit of the consumer. Wow! I wonder if any other
subsidy, explicit guarantee, implicit guarantee, tax
expenditure, is that high? I do not know. It would be
interesting, though, to look into that.
And further, this ratio has stayed fairly constant
according to the CBO over the years. Some say there are other
things you have to consider, too. For example, does the
existence of GSEs contribute to the competitiveness of the
marketplace, and therefore lower the cost to consumers who are
not using GSEs, and therefore create a benefit which should be
considered, too, as part of the benefits in weighing the
tradeoffs between cost benefits.
In any event, as we consider the various questions today I
would ask my colleagues to keep in mind that the CBO is today
concluding that American consumers in their role as home buyers
and homeowners securing a mortgage are receiving some $7
billion a year in benefits in the form of lower mortgage rates
as a result of our policies with respect to GSEs.
It is most appropriate to study the issue before us today.
And again I commend the Chairman for requesting this CBO Report
and having these hearings.
I think it is always appropriate to consider, discuss,
debate if need be, what the appropriate role of Federal
regulation of the GSEs should be.
But again, let us not rush to a precipitous judgment on
something that I think has not only worked well, but may have
helped create a national mortgage market that is the envy of
the world.
I thank the Chair.
Chairman Baker. I thank you for your generous support.
Does any other Member have an opening statement?
Mr. Ney.
Mr. Ney. Thank you, Mr. Chairman.
Mr. Chairman and Ranking Member Kanjorski, I think we
should give both of you a commendation for calling this
hearing. I think it is a good thing to do.
There also can be no doubt that Fannie Mae and Freddie Mac
do receive a benefit by way of their Congressional Charters. I
wanted to stress ``Congressional Charters.'' In fact, Congress
created both of these companies with a careful balance of
advantages, but also restrictions.
The advantages have been well stated, I believe. The
companies do not pay State and local income taxes; they only
pay Federal. They do not have to register as securities with
the SEC their debt trades in the Agency Debt Market.
You must, however, keep in mind Congress also placed some
very clear restrictions on these companies, as well. The
companies are restricted to a single line of business providing
liquidity in the secondary mortgage market.
They are confined to mortgages under a loan limit today of
$275,000. They are required to operate in all markets at all
times regardless of economic downturns.
They must meet a percentage of their business goals for
affordable housing. They must meet a rigorous safety and
soundness regime.
So there are two ends to this. And again it was
Congressionally chartered.
The benefit these companies receive is part of the compact
that Congress granted to them as recently as 1992. However,
beginning with the 1996 CBO Report on benefits received by the
GSEs, questions have been raised about whether Fannie Mae and
Freddie Mac have passed all of those benefits on to the
consumers.
I know we meet today to receive an updated report on the
benefits, much anticipated in recent days, some with
controversy obviously, but there have been a number of concerns
raised about the methodology used by CBO in determining the
benefits that Fannie Mae and Freddie Mac receive.
Mr. Chairman, I think we should welcome today as an
opportunity for Members of Congress to raise their concerns
with Mr. Crippen so that we may have a full and fair discussion
about the way in which CBO determines how the GSEs receive a
benefit and how it calculated the amount of the benefit
retained by Fannie Mae and Freddie Mac.
I also believe it is important for this subcommittee and
your oversight efforts for Members to have every opportunity
obviously to voice their concerns, and that also Mr. Crippen
have an opportunity to provide a response to those concerns.
While studies like the one we consider this morning have
obvious value, I also believe we must also consider how well
the U.S. housing market performs, how to encourage more not
less investment in housing, and how we might improve the
delivery of housing financing.
Again, thank you for your hard work on the issue.
Chairman Baker. Thank you, Mr. Ney.
Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
Mr. Crippen, it is always good to see you.
My uncle, a former Member of this body and of the body
across the street, once told me that everybody in this town has
their own sets of numbers to say what it is they want to say,
and today we get to hear Mr. Crippen and Congressional Budget
Office, what their numbers are, which generally I would say
tend to be pretty much on mark given the set of assumptions and
whether you agree with those assumptions, and given the space
in time that you are looking at.
What we are going to learn today is something that we
really comes as no surprise, that there is a subsidy. I think
everybody understands that.
But what we will also have to remember is is that this is
something that did not happen by accident. This is something
that the Congress created going back decades, and recreated a
few decades after that. And the question I think is not
necessarily whether or not there is a subsidy, but the question
I think will be as compared to what.
And so I look forward to the testimony by Mr. Crippen and
to the discussion we are going to have today, and I appreciate
the Chairman having this hearing.
Chairman Baker. Thank you, Mr. Bentsen.
Any Member on the Republican side have an opening
statement?
[No response.]
Chairman Baker. Ms. Hooley.
Ms. Hooley. Thank you, Mr. Chairman.
We are here today to examine the newest Congressional
Budget Office report on Fannie Mae and Freddie Mac. And like
many Members of the subcommittee, I have supported the role
that Fannie and Freddie play in helping millions of American
families who might otherwise have not been able to purchase a
home.
And no matter how often that term is thrown around, I
believe that owning a home is a capstone of the American dream.
A home is more than four walls and a roof. It is a place where
we watch our children grow up. It is a place where they can
always return, hopefully, with their families.
The only thing, Mr. Chair, that I would have liked today is
to have had a chance to really read this report and analyze it
before we met. But I am looking forward to the testimony and
hearing you, Mr. Crippen.
From what I have been able to gather from the report, the
CBO Report claims Fannie and Freddie have received a
substantial Government subsidy, most of which is passed on to
the consumer.
And, Mr. Chairman, I do not know if we can accurately
quantify the implicit guarantee that Fannie and Freddie
receive, but I know we will be discussing that today. But what
I do know is that if their charters were revoked tomorrow, not
one additional dime would come into our Treasury.
With that said, I look forward to this hearing today and
our discussion, and I yield back the balance of my time.
Chairman Baker. Thank you.
Ms. Jones, did you have a statement?
Ms. Jones. I was interrupted by my colleague. Thank you,
Mr. Chairman, Ranking Member Kanjorski.
Mr. Crippen, I think this is my first opportunity to have a
chance to hearing testimony with regard to Government Sponsored
Enterprises.
I am looking forward to hearing your testimony. I have
quickly, as my colleague, Ms. Hooley said, it would have been
wonderful to have had this for awhile to study before we had to
delve through this packet to make inquiry of you, and perhaps
in the future, should you be requested to report again, it
might be great that we would have adequate opportunity to
review it.
But I am looking forward--the people of the 11th
Congressional District have benefited greatly from the housing
boom that has come as a result of this past 10 years and the
work that the Government Sponsored Enterprises in conjunction
with the banking institutions in my Congressional District have
done to improve housing, and I am interested to hear your
testimony.
Chairman Baker. Ms. Jones, if you can pull that mike a
little closer, people are having a hard time hearing you.
Ms. Jones. Having a hard time hearing me?
[Laughter.]
Ms. Jones. That is incredible. But I would just say I am
looking forward to your testimony, and I having an opportunity
to make inquiry of you of the basis of your testimony on behalf
of the people of my District.
Thank you, very much.
Chairman Baker. Thank you, Ms. Jones.
Mr. Israel.
Mr. Israel. Thank you, Mr. Chairman, and Ranking Member
Kanjorski, for holding this hearing today.
Mr. Chairman, I represent a District on Long Island where
the average sales price of homes is an exorbitant $222,850.
The Long Island Regional Planning Board recently found that
16.3 percent of Long Islanders are spending more than 50
percent of their incomes on housing, including taxes.
In my county, closings have dropped by over 1100 homes from
1999 to 2000. Home ownership is not 100 percent in my District.
But I believe that Fannie Mae and Freddie Mac are working very
hard to make sure that all Americans have the opportunity to
own their own home. They believe in 100 percent home ownership
for all Americans, and Fannie and Freddie are doing an
excellent job in moving individuals into their own homes.
I appreciate this CBO Report and I believe that it is
extremely instructive, but I hope that it will not be used to
distract Fannie Mae and Freddie Mac from their core competency,
which is helping to insure home ownership.
In a recent study the former Office of Management and
Budget Director Dr. James Miller and Dr. James Pierce estimated
a total GSE interest rate savings to America's families to be
between $8 billion and $23 billion each year. And I will
conclude with their words. They said:
``Even using the lowest estimate of consumer benefits and
the highest estimates of the funding advantage in our range of
estimates, the value of the consumer interest cost savings
resulting from Freddie Mac and Fannie Mae's activities
significantly exceeds the highest estimate of their funding
advantage.''
I look forward to continuing to work with you, Mr.
Chairman, and all the Members of this subcommittee toward the
goal of home ownership for all Americans.
Thank you.
Chairman Baker. Mr. Crowley, did you have a statement?
Mr. Crowley. In the interests of time, I will just have my
statement read into the record.
Chairman Baker. Without objection, certainly.
Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman, and Ranking Member
Kanjorski.
Again, we are here to discuss the mission and the benefits
of the Congressionally created and federally chartered GSEs,
Freddie Mac and Fannie Mae.
The Congressional Budget Office has just completed a study
which says, among other things, that the aforementioned GSEs
are being subsidized because of their exemption from certain
fees and preferable tax status.
My major concern with the GSEs is their ability to carry
out their mission, which is to increase home ownership in
America without an appropriation from the Federal Government.
Congress asked the GSEs to bring private capital and
private sector efficiencies to work for American home buyers.
To help them achieve this mission, Congress has given them
benefits and has also imposed clear restrictions. In fact,
legal obligations that relate to affordable housing and the way
they must operate.
In addition, based on voluntary agreements negotiated with
the Members of this subcommittee, the two GSEs have become a
model of transparency and efficiency for financial companies
worldwide.
They do this while carrying out their mission to increase
home ownership in America, a home ownership rate which is at an
all-time high.
My biggest concern with GSEs is what we can do to help them
be more successful in achieving their mission, including
closing the gap in home ownership between whites and
minorities.
I hope there is something in the CBO study that considers
this question.
And I thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Meeks.
Does any other Member have an opening statement?
[No response.]
Chairman Baker. If not, I would like to proceed at this
time to recognize Mr. Dan Crippen, Director of the
Congressional Budget Office.
And, Members, given the nature of the construction of the
hearing this morning, it is my intent to facilitate Mr.
Crippen's presentation by giving him such time as he may
consume, and we will proceed on that basis unless there is
objection.
Mr. Crippen, welcome.
STATEMENT OF HON. DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL
BUDGET OFFICE, WASHINGTON, DC.
Mr. Crippen. Mr. Chairman, Mr. Kanjorski, thank you, and I
appreciate all of your opening remarks--all except, perhaps,
the statement you made, Mr. Chairman, that this was going to be
a lengthy hearing.
Before I begin, let me say that I am here as a
representative of the CBO, as I often find myself, and that is
to say I did not do much of the work you see before you.
The principal authors of this study are with me today, and
I will likely have to refer to them with some of your
questions. One of the authors is Dr. Marvin Phaup, who has been
with us for a very long time at CBO. Dr. Phaup is a Fulbright
Scholar, has written many articles that have been in refereed
journals, worked for the Federal Reserve, knows more about
housing--or will forget more about housing--than I will ever
know.
The other co-author, Dr. Deborah Lucas. Fortunately,
Northwestern was gracious enough to let us borrow her for a
year or so, is a chaired professor in the Kellogg School there,
in fact, a professor of finance, and teaches courses in many of
the issues relevant to this study: courses on options, for
example, and how markets work.
So we are very fortunate to have her help, albeit for a
short time. I have been trying to figure out how to talk her
into staying longer.
But they are the principal authors. As you suggested, Mr.
Chairman, this report underwent a lot of review. We do that
frequently, although perhaps not quite as thoroughly as we did
in this case. That is to say, we have a process under which the
authors inside CBO draft a report. It gets circulation inside.
It goes through several drafts.
We have some 70 Ph.D. economists at CBO, and about 80 folks
who hold Master's Degrees. So they are a well-educated and
probably the best core group of public finance economists in
the world.
Chairman Baker. Mr. Crippen, I hate to interrupt you, but
we are all having trouble with the mikes this morning. You will
have to pull it very close. I do not know if the volume is
turned down somewhere.
Mr. Crippen. How is this?
Chairman Baker. This subject appears to create
interference, for some reason. Do your best.
[Laughter.]
Mr. Crippen. I could probably talk without it, as well. I
was saying that our process is applied to many of our major
studies. There is an internal draft, which is reviewed by the
folks at CBO, some 70 Ph.D. economists and folks with, about 80
folks with Master's Degrees.
Then we very often go out to other Government institutions
and have them have a shot at what we have said.
And then finally for major reports such as this, we often
do an outside review. We will select four or five, usually,
outside reviewers and ask them to give us comments about the
paper, as well.
We take those comments into account, obviously, before we
even have something we call a final draft, and certainly before
we get to a final report. So we do take great care. That is not
to say the report is perfect and could not be improved. We are,
of course, fallible.
But to summarize my lengthy introduction here, I am here as
a representative of CBO and happy to be so. I will obviously
try to answer all of your questions. I may need help from my
colleagues. There may be a question or two that we will have to
respond to in writing, but I am looking forward to our
encounter today, Mr. Chairman.
Thank you for your indulgence. I hope to speak for not much
more than about 10 minutes or so to summarize our study so that
we have as much time as you all want to answer questions.
Ms. Jones. Mr. Chairman, I am with you. I am having a hard
time hearing the witness.
Chairman Baker. We have got somebody checking to make sure
the volume is up on all the microphones. All of them seem to be
under-performing this morning a bit, but keep it close to you
if you can.
Mr. Crippen. I will have more coffee.
Mr. Chairman, is that any better? Is this better? Is this
better? I feel like an optometrist. Is this better, or this
better?
[Laughter.]
Mr. Crippen. Mr. Chairman, you asked us to answer two
questions:
What is the value to the GSEs of the implied subsidy
granted them by their association with the Federal Government?
And how do they distribute or use those subsidies?
Many critics of this study want to ask different questions
or have us answer different questions. Some of these questions
may be relevant, in fact, but most of them are not.
The answers to the two questions you asked are:
The Housing GSEs receive a substantial Federal subsidy from
their special status. As many of the Members of your
subcommittee on both sides have said, that is not surprising.
We estimate it to be $13.6 billion in 2000.
They pass on subsidies to mortgage borrowers, in our
estimate about $7 billion in total in the year 2000. Looking at
just Fannie and Freddie, as many of your Members have this
morning, we estimate they received $10.6 billion in subsidies
and passed through $6.7 billion to mortgage borrowers in 2000.
[The chart referred to can be found on page 75 in the
appendix.]
Some have argued, Mr. Chairman, that there is no subsidy
because there are no Federal dollars granted to GSEs. Of
course, as many of your Members have said, that is not the
case, and indeed the intention of Congress was to grant the
subsidy.
To argue otherwise would be to deny any tangible advantage
of their Federal affiliation and raises the question of why
that association should be continued if indeed there is no
benefit.
It is an irrelevant issue I think, to look for Federal
dollars in a case like this. I suspect, however, as we have
already heard from most of your Members, most folks in and out
of this room recognize there is a subsidy, whatever you choose
to call it.
In case there any doubters amongst you, let me just put it
this way:
The advantages granted the GSEs have a significant value,
one that other firms would be willing to pay for if those
advantages were offered at auction.
So the question becomes, Mr. Chairman, how do we measure
such a subsidy, since it is not directly observable through
dollar flow?
The short answer is to compare subsidized firms with those
that are not. The advantage of the subsidy is reflected in the
lower cost of capital the GSEs enjoy, and also in this case in
tax and regulatory exemptions granted by the charter.
The flow of estimated future subsidies is converted to
present value using the discount rate equal to GSEs' borrowing
costs to obtain the current year's total subsidy.
Now a number of our critics contend that it is somehow
inappropriate to capitalize these subsidies, which I find
curious at best.
Some of the commentary of economic consultants seems to
deny their very heritage by suggesting present values are
somehow illegitimate in this case.
And the GSEs themselves, while charging that we have no
understanding of the market, seem to deny that capitalization
is precisely what the market does every day. Ask any bond
trader what happens when interest rates change, and he will
tell you the values of all future interest payments are
capitalized in the bond price.
I know we will talk more about how we arrived here at these
estimates today, Mr. Chairman, but I think it is worth noting
here that not one of the many--and I do mean many--independent
reviewers of this study in and out of Government, in and out of
academia, in and out of Wall Street, not one questioned the
approach and the methodology.
That is not surprising, because this measure is consistent
with the objective of generally accepted Federal accounting
principles and budgetary practices.
So let me ask a question. If we are so fundamentally wrong,
don't you think someone would have noticed?
Now, Mr. Chairman, I hope we can turn to the heart of the
matter and discuss our results and the assumptions that
underlie our $14 billion subsidy estimate for 2000. Here is
where, of course, there can be very legitimate debate.
The single largest component of the subsidy is the
reduction in borrowing costs from the implicit Federal
guarantee of GSEs' debt. By our estimate, they have a borrowing
advantage of 41 cents per $100 of debt, a 41 basis points, due
to their special status.
During 2000, the housing GSEs increased their debt
outstanding by $227 billion to have a total of more than $1.6
trillion. I was just thinking that $227 billion is more than
the amount of debt held by the public that we paid off last
year.
In the process, the GSEs were able to lock in reduced debt
servicing costs with a present value, we estimate, of $8.8
billion. The Federal credit enhancement of GSE guarantees of
the $66 billion increase in mortgage-backed securities also
added $3.6 billion to the value of the securities issued in
2000.
Finally, the value of the tax and regulatory exemptions has
risen significantly over the years, to about $1.2 billion
annually.
So that is how we measure the subsidy. Then the question
becomes, how do we measure the benefits? Simply by comparing
the cost of those mortgages touched by the GSEs, the fixed-rate
conforming mortgages allowed by the charter with those not
eligible for the GSEs.
Our net estimate is that conforming mortgages benefit from
an interest rate reduction of 25 basis points compared to the
rates for other non-conforming loans. Because of competition in
the MBS market, the same subsidy is passed through on bundled
mortgages.
On that basis, a little more than half the total subsidy,
$7 billion in 2000, was passed through.
What is left is retained by GSEs and their various
stakeholders. In the case of Fannie and Freddie, an estimated
$3.9 billion, or 37 percent of the subsidy.
As with all such estimates, Mr. Chairman, data limitations
and the complexity of the underlying processes imply that
significant uncertainty attaches to all of these numbers. There
are legitimate questions about our various assumptions.
However, our critics are quick to point to those
assumptions that they believe, if changed, would help their
case. You are probably not surprised to know that they almost
universally fail, however, to talk about assumptions that, if
changed, would leave them in a worse light.
I will examine just a few on both sides of this issue. I am
sure we will get into more as the day progresses.
First, as to the subsidy, some of our assumptions tend to
raise the estimated subsidy. For example, the fact that there
are so few financial institutions that have a financial rating
the same as the housing GSEs' led us to base the GSE debt
funding advantage on a sample of non-GSE securities, which
included more A than AA issues.
This comparison may penalize the GSEs by a few basis
points--in our estimation, about 6 or 7 by one measure of our
data--so it is possible that we have overstated the subsidy
given this comparative.
Further, CBO attributed none of the GSEs' borrowing
advantage to managerial superiority over their competitors.
Frankly, because at this point, we have no evidence the GSEs
managed their debt better than their close competitors.
In fact, it also seems likely that the sophisticated
financial institutions with which the GSEs compete also manage
their debt operations so as to capture any available gains from
advanced liquidity.
However, several of our assumptions reduced the size of the
estimated subsidy likely by at least as much as the examples I
just gave you could have increased it.
Faced with uncertainty over the duration of the benefit
from the implied guarantee, CBO chose a relatively short
horizon, despite the history of consistent growth in debt which
makes a perpetual horizon more realistic.
Using a perpetual horizon would add $5.5 billion to the
estimated subsidy for 2000, making it $19 billion, not $14
billion.
Similarly, the GSEs were able to exploit those times when
the debt markets turn in their favor and issue more debt. You
expect them to do so. However, we chose not to compute their
advantage by using a weighted average of yield spreads, but,
rather used the simple average, understating their advantage by
several basis points.
And there are other assumptions on both sides.
When we talk about the benefit, Mr. Chairman, the amount of
the subsidy passed through to borrowers depends on the degree
of competition in the fixed-rate conforming mortgage market.
CBO estimates that Fannie and Freddie have at least 71
percent of the relevant market, as detailed in table A-1 in our
report. This share has grown over time and suggests that they
have a significant competitive advantage in the markets in
which they operate.
Ultimately, the GSEs would like us to credit them with
market effects that accrue outside the mortgages they
intermediate, as Mr. LaFalce suggested, even though they do not
disgorge any subsidies to provide them.
More importantly, I suspect they do not want to talk about
the potential costs to the capital markets that are not charged
directly to them either.
For example, I think the GSEs would admit that their
borrowing in the market raises the cost of capital to other
borrowers, including the U.S. Government.
If, for example, the interest charged for U.S. debt held by
the public were raised by as little as one basis point, it
could mean $3 billion more in cost to taxpayers a year.
So any time we wander outside the square of the GSEs--that
is, outside the boundaries of the institutions--certainly,
there are benefits to be found, but there are, equally, costs
to be found, neither of which have we incorporated in this
study.
Mr. Chairman, there are many questions policymakers might
ask:
Is large annual growth, especially of the portfolio,
necessary to fulfill the mission of the charter?
Or could the same benefits be delivered to home buyers even
if stakeholders receive less?
Or would the claimed benefits disappear if the subsidies
were discontinued?
But let me conclude by repeating what you asked of us, what
this study addresses. What is the value of the subsidy of the
GSEs because of their affiliation with the Federal Government?
And who gets it?
Our estimates are, of course, not perfect and subject to
uncertainty, but I believe the preponderance of criticism of
this study I have seen thus far, whether intentional or not, is
largely irrelevant.
Where our assumptions can be questioned, I am comfortable
we have erred more on the side of conservatism, that we have
likely understated the value of the subsidy and overstated the
benefits of the GSEs.
It is not surprising the GSEs and their consultants reach
the opposite conclusion.
With that, Mr. Chairman, I will conclude.
Thank you.
[The prepared statement of Hon. Dan L. Crippen can be found
on page 64 in the appendix.]
Chairman Baker. Thank you very much, Mr. Crippen, for that
summary and analysis.
I would like to start with the process questions. It would
appear in the view of some that yourself and the two principal
researchers are the ones who generated the information
contained in the report presented today.
For the record, it is my understanding that there were 13
team members within the CBO beyond the two principal
researchers that you introduced to the subcommittee this
morning.
By the way, Dr. Phaup, for the record, and restating,
happens to be a Fulbright Scholar, and Dr. Lucas, a professor
at Northwestern in matters relating to the operations of the
enterprises, appears to me to be eminently qualified to make
observations about the GSEs.
Were they insufficient in their skill or reach of subject
matter, then there are additionally 13 individuals who are
listed in the preface of the report I would direct the Members
to within the CBO who were consulted.
In addition to that, 9 outside Federal agencies, including
the Office of Federal Housing Enterprise Oversight of HUD, the
Department of the Treasury, the Federal Reserve Board, the
Federal Reserve Bank of Minneapolis, the General Accounting
Office, and the Congressional Research Service.
So we now are out to nine outside agencies. I have no idea
how many people that represents.
Beyond that, I am advised that you had a contract with
Ambrose & Warga, which was a report prepared to help you
analyze the methodology of the report finding.
Beyond that, I understand your general rules of operation
do not provide for the disclosure of the academicians who
conducted the peer review, but for our purposes can you at
least give us some generic description and number of
individuals involved in that peer review process?
Mr. Crippen. I believe, Mr. Chairman, in this case there
were four. The folks we use for most studies, and for this one
as well, are economists who specialize in public finance. Many
of them, including several in this panel, have served in
Government, are academicians. But also in this case, because of
the subject matter, we submitted the study to some Wall Street
folks to look at, particularly with the question, is this an
appropriate methodology?
Chairman Baker. And how many of those people would you
guess are firms?
Mr. Crippen. Two in this case. I mean, we did not ask that
the outside reviewers, or even the agency reviewers, endorse
the result, and I do not want to imply that they did so. But
they did not question the methodology. They endorsed the
general approach. And, of course, there are assumptions in here
that we have made, and they are our assumptions, not somebody
else's.
Chairman Baker. Let me interrupt and restate.
Those who criticized the findings of the report were a
minimal number of people inside the CBO who do not understand
GSE business operations, who have made unsupported claims
resulting in a methodology that is not an accurate reflection
of the value, and to which I respond there were 13 individuals
in the CBO, 9 outside agencies, 4 academicians involved in peer
review, 2 Wall Street firms, and a consultant, all who colluded
to ignore the facts.
I merely point out by way of information--and I know you
are comfortable with this, or otherwise I would not say it--
that in a former life you also were a consultant for one of the
GSEs and perhaps have some modest insight into their business
operations, as well.
I make these points because the first challenge to the
finding is that the CBO Report is without merit. That is
ludicrous. This is a professionally generated document based on
data provided to you by the GSEs.
Is that correct, as well?
Mr. Crippen. There is certainly some data, both publicly
available and otherwise, that we have used. I would not say
that they provided us with the data that led to the results.
But, yes, we have used a fair amount of their data in making
our assumptions and analysis.
Chairman Baker. In skimming over the list, staff of Fannie
Mae and Freddie Mac are also cited as sources of information.
From that, I concluded that it must be data, historic
performance data, or something that they provided to you in
order to facilitate your observations.
Mr. Crippen. Yes.
Chairman Baker. That is correct?
Mr. Crippen. Yes.
Chairman Baker. I also requested this study last July. And
for those who think there is some reason that is insidious in
the request, I can provide any Member who chooses a copy of the
correspondence from Chairman Greenspan, who I also happen to
think is a fairly substantive person on matters of finance,
suggesting to me that I request an update of the subsidy value
in light of changing market conditions.
So the genesis of the update was Alan Greenspan. I wrote
the letter in July. You have taken 10 months to respond, to my
great frustration, and I have now learned that the reason for
the delay is to ensure that the methodology to reach the
conclusions was thoroughly vetted with professionals across a
broad spectrum of financial participation.
I just think it important in the court of public opinion to
establish that this is a decent report that reached reasonable
conclusions, and that it is not an aberrant finding based upon
the facts as we know them.
Mr. Crippen. As you probably know, Mr. Chairman, I have
thanked Chairman Greenspan for this opportunity.
Chairman Baker. I am confident that every member of your
staff has had a very enjoyable 10 months.
Mr. Crippen. Thank you.
Chairman Baker. I would like to turn to Appendix A. For
Members, that follows page 30. It is an unnumbered page, the
first page in the appendices, in which Fannie and Freddie and
their contractors have suggested that the CBO focus on a
different question.
Now mind you, the opening line is ``The current study
revisits those same issues'' raised in the 1996 subsidy study,
as requested by Chairman Baker.
I am to understand from reading this that the GSE's first
response as a criticism of your report is that CBO should not
answer the question that I asked.
I find that a bit amusing. It seems that the Congressional
Budget Office should work for the Congress and, upon a finding
by a committee that inquiry is warranted, you should perhaps
respond to the question that is posed.
I commend you for your bravery.
CBO believes that the questions addressed in its studies
not only reflect the questions asked by the Congress, but are
also a better way to look at the benefits provided by the
Federal Government.
Now I am reading from the appendices which are provided as
a response by the GSEs to somehow balance more appropriately
the view presented by CBO in the study. And I just realized I
have exceeded my time by a couple of minutes, Mr. Crippen. I
will be back.
Mr. Kanjorski.
Mr. Kanjorski. I guess, first and foremost, we are dealing
with approximately $10.6 billion in subsidies? Is that correct?
Mr. Crippen. For the?
Mr. Kanjorski. That is for the year 2000?
Mr. Crippen. For Fannie and Freddie.
Mr. Kanjorski. And the prior subsidies that these GSEs
received in your prior report was what?
Mr. Crippen. The prior report ended with 1995.
Using the current methodology, we have, in Table 1, the
1995 through 2000 results, and in 1995, $3.2 billion plus $2
billion--$5.3 billion. Did I do that right?
Mr. Kanjorski. So it is approximately----
Mr. Crippen. About half.
Mr. Kanjorski. Half?
Mr. Crippen. Yes.
Mr. Kanjorski. And the growth of business in the secondary
mortgage market between 1995 and 2000 was approximately what?
Mr. Crippen. Well, for the conforming fixed-rate market, it
was less than that. Over the last few years, Fannie and Freddie
have, between issuance of debt and the MBSs that they
guarantee, actually financed more than the number of new
mortgages in the conforming market. In fact, I think we have a
little poster here, if you would like to see it graphically.
[The chart referred to can be found on page 76 in the
appendix.]
Mr. Kanjorski. The overall growth, as I understand it, was
somewhere around 80 percent growth from 1995 to 2000? Is that
correct?
Mr. Crippen. What we have tried to do here is look at the
relevant market for the GSEs, which is that market that they
can play in, the conforming market.
And of that, over this time period, you can see the growth
in the market overall, which is the left blue bar, and the
right side of each comparison is the amount of debt and MBSs
issued each year by the GSEs.
So if the subsidy doubled, the relevant market here looks
like it did not grow quite as much.
Mr. Kanjorski. How much did it grow?
Mr. Crippen. I do not know. I will have to----
Mr. Kanjorski. Could you give me a rough estimate,
percentagewise? Was it 60 or 70 percent?
Mr. Crippen. That is a good number for now. I am sure
someone behind me will correct both of us here before too long.
Mr. Kanjorski. So, in arguably the largest economic boom in
the history of the United States, with a mortgage market
growing somewhere between 60 or 70 percent, that portion
handled by the GSEs, their subsidies have grown approximately
100 percent? Is that a fair statement?
Mr. Crippen. Yes. That is fair.
Mr. Kanjorski. Is that shocking?
Mr. Crippen. I am not shocked, no.
Mr. Kanjorski. If we did not have the GSEs, if we suspended
them today, do you have any opinion as to what the actual cost
would have been either to the Federal Government to provide the
subsidies to drive this type of a housing market, or what the
loss to home ownership would have been?
Mr. Crippen. Well, if you believe our estimates, the cost
would be something like $7 billion because that was what was
actually passed through to mortgage borrowers. So if we
directly subsidized the same group of people, the same mortgage
borrowers, we could effectively do it for $7 billion.
But that assumes the same kind of delivery and efficiency
and lots of other things that the GSEs have, and I am not sure
that is the case.
Mr. Kanjorski. In your estimation, is there any other
Government subsidy program that would be more efficient in the
delivery of mortgages and the reduction of cost of mortgages
for home ownership than the existing GSE system?
Mr. Crippen. I am not sure there is one in existence. You
could think of one that would involve direct provision of funds
to buy down mortgages for these same mortgage borrowers.
Again, I do not know how that program would work, and you
would have administrative costs, and I cannot tell you whether
it would be as efficient or not. But at least in theory, one
could provide the same amount of stimulus to the housing
market--again, if you believe our estimates--for $7 billion.
Mr. Kanjorski. Would that subsidy be provided by a
Government entity or a private-sector entity?
Mr. Crippen. Probably Government. You would substitute
direct subsidies for indirect.
Mr. Kanjorski. So, if we were to do away with the GSEs, we
would basically bring the Government into a very strong and
positive position in this field. Is that correct?
Mr. Crippen. That would be one way to substitute Government
for the GSEs, and, as you suggested, perhaps have some
efficiencies. But I think the situation we need to keep in
mind, too, is not a market with or without Freddie and Fannie:
the question is whether they operate with or without subsidies.
They would still exist, presumably, although they might not
have gotten started. But they would still exist today in some
form even without subsidies. And the question, the relevant
question for us, the baseline question is, what would happen if
they did not have subsidies?
How many of these benefits would go away?
Mr. Kanjorski. I understand their subsidies are a result of
their preferential interest rate received in the marketplace
because of the presumption that they are Government backed.
Mr. Crippen. Right.
Mr. Kanjorski. How could we deny them whatever the
misperception of the market is that they are Government
supported?
Mr. Crippen. Well, I am assuming that--and to the extent it
is true, and we believe it is--they have an advantage because
of this perception and that there are ways that the Federal
Government could cut the ties to make it clear there is no
support. I mean, this misperception could be corrected.
Mr. Kanjorski. Is there a stronger way to do that than
including in a disclaimer in agency documents that they do not
have the full faith and support of the Federal Government? I
mean, what more could they do? Take out billboards or
something?
Mr. Crippen. Well, you could deny them the access to the
Treasury they have now and the benefits of exemptions from
State and local taxation. There are lots of ties here that one
could cut that would change the nature of the beast.
Mr. Kanjorski. I understand that. But, the reality of where
their subsidy comes from is the perception of the marketplace
that they are Government supported, is it not?
Mr. Crippen. Yes.
Mr. Kanjorski. I mean outside of their connection with the
Treasury or anything.
Mr. Crippen. The Federal Government effectively is
perceived to be backing this debt.
Mr. Kanjorski. I guess what I am getting at is, tell me
what the problem is that we are trying to solve here.
Mr. Crippen. I am not sure, Mr. Kanjorski. We were asked to
look at what the subsidies are and where they go, and that is
what we have tried to do here.
We have not been asked, nor would we, I think, be able to
opine much about what the alternatives are, other than in a
kind of a theoretical way.
I do not know what problem the subcommittee is trying to
address, but we have been asked to try and quantify these
indirect subsidies and try and figure out where they go, and
that is what we have given our best effort to do.
Mr. Kanjorski. Well, I am all for oversight of the GSEs by
Congress and for having hearings, and we have had a number of
them, but I am still trying to define a problem. Can you help
me with that? Is there a problem of inefficiency or
ineffectiveness? Are we lacking something in providing the most
efficient price for home ownership in the United States? Is
there something we could be doing better than we are doing?
Mr. Crippen. Well, again, we were not asked what the
possible problems are. I mean, there are certainly public
policy issues here that you have, as you say, legitimate
oversight over whether it is the risk of default by the GSEs
and what you would have to do, whether it is market distortion,
whether there are other ways you would like to give a subsidy.
The point is that it is up to you to look at the subsidy
the Congress has granted and see where it is going and decide
whether that is appropriate or not.
We are not in the business of saying what is appropriate or
what should happen. Frankly, that is your oversight role, and
we were not asked if there was a problem. We were asked to
measure these two phenomena.
Mr. Kanjorski. I understand you were not that question.
But, having made this indepth study, have you found a problem?
Mr. Crippen. We did not look for a problem so we could not
have found one.
Chairman Baker. Thank you, Mr. Kanjorski.
Mr. Ney.
Mr. Ney. Thank you, Mr. Chairman.
I wanted to ask you a question about the calculation. I
understand that the CBO calculated Fannie Mae and Freddie Mac's
funding advantage for long-term debt to be worth 47 basis
points, right?
Mr. Crippen. Right.
Mr. Ney. In the calculation. Thanks.
Fannie Mae and Freddie Mac, as we had read, objected to
this debt rating which you believe that they would be given
absent their Government charter, if they did not have the
Government charter that would be their debt rating?
Mr. Crippen. That was assigned to them by the debt rating
agencies, not us. The AA-minus was an assessment of the GSEs'
risk to the Government.
As with many debt ratings, it is a pretty theoretical
exercise. It is not unlike the equivalent of saying, if I had
wheels, I would be a truck. I do not know how accurate the AA-
minus rating is, but we take that. We understand that is the
rating they have been given.
It is, of course, a bit ironic that for a long time, the
GSEs did not want to be rated, and now we are putting a lot of
stock into the precision of the rating. But I understand and I
accept the criticism. There are not many AA-rated firms in the
world. And so it is hard to make a strict comparison between
private and public.
We have done that. We have acknowledged that there may be
some overstatement, albeit slight, of the subsidy given that,
but there are lots of things on the other side that may have
caused us to understate the subsidy.
Mr. Ney. Or AA-minus with their rating.
I wanted to ask about the 71 comparison firms that were
used. Many had an A rating.
Mr. Crippen. Right.
Mr. Ney. And it was compared to the AA-minus rating. That
is the thrust of my question. You know where I am coming from.
Is that a real good way to compare 71, maybe 8 had AA, but
comparing 71 with A to Fannie and Freddie with AA-minuses. Is
that a good way to compare it is my question.
Mr. Crippen. It is not an ideal way. I mean, if there were
more AA firms in the world, we would use exclusively AAs. But
having a comparison group of 8 AA firms does not give you much
information, either.
Statistically speaking, it is not nearly enough to do
anything that you could measure. But there are not enough AAs
to make an accurate computation here.
Mr. Ney. So I wonder what the debt comparison would be if
you took the 71 firms, take the 60-some out, and you compare
only to AA, I wonder what the debt rating would be. That was
not done, but I wonder what that would be?
Mr. Crippen. It would clearly show less subsidy. I do not
know what the number would be----
Mr. Ney. Do you think that would be a fairer way to do it?
Or is that too small of a sample?
Mr. Crippen. It is too small of a sample. It would be much
less accurate.
Mr. Ney. But the other sample, though, is too large, in a
way.
Mr. Crippen. Well, it is the closest we could get and have
a sample that is large enough to draw some inferences from.
We have done some--and you will see in the report--two or
three sensitivity analyses to say, if you changed the subsidy
estimates up or down, if you changed the spread estimates up or
down, what would the effect be? And the net result, frankly, is
the picture is roughly the same.
Now, clearly, if you take the extremes of all assumptions
on one side or the other, you can turn the result. But under
various assumptions, you still get the picture that we present
here, which is there are subsidies--which I do not think
anybody disagrees with--and that roughly two-thirds of them
consistently are passed through to mortgage borrowers.
Mr. Ney. It is just issues raised of should it be compared
to AA only and one sample is too small, and one is too large,
so you start to wonder where the midpoint is.
Mr. Crippen. Sure. Well, we have done, for example, a
weighted average, giving 50 percent to the AA firms and 50
percent to the A firms; and this would change the calculation
by about 6 basis points.
Mr. Ney. About six?
Mr. Crippen. So the result does change, certainly. But as I
said, there are things on the other side of this equation,
assumptions we have made that actually reduce the subsidy
estimates.
A number of these assumptions we have had to make because
of a lack of data, and we hopefully made them even-handedly.
But this is clearly an assumption one could question.
Mr. Ney. Looking at low-income home buyers, my district,
like a lot of areas, has a lot of low-income home buyers. You
have got now two CBO studies in the last 5 years confirming, of
course, due to their status, Fannie and Freddie are Government-
sponsored entities and have a certain amount of subsidy.
Based on your research, does research tend to say what
Fannie and Freddie may do in targeting to low- and moderate-
income? Or does the research not touch that issue?
Mr. Crippen. Not directly. We look at what goes through to
conforming mortgages. But the quantity of any of those targeted
subsidies would be quite small.
Mr. Ney. I want to ask one quick--my time has expired.
Thank you.
Chairman Baker. Thank you, Mr. Ney.
Mr. Bentsen?
Mr. Bentsen. Thank you, Mr. Chairman..
Mr. Crippen, in your assumptions do you assume--do you
assume in the retained subsidy, is there a loan loss component
of that----
Chairman Baker. Mr. Bentsen, we need you to pull your mike
a little closer. We cannot hear you.
Mr. Bentsen. In the retained subsidy, do you assume a loan-
loss reserve, or some risk reserve?
Mr. Crippen. No. We do not take the calculation any further
than to say this is the total value of the subsidy. This is the
apparent amount that gets passed through to mortgage holders.
And, because the GSEs are so severely limited in what they
can invest in and in which kind of mortgages they can buy, we
assume the rest is retained by the GSEs to do whatever they
need to do, whether it is to build capital or pay taxes.
The amount retained could be used for any number of things.
We have not looked at what they do with whatever it is they
retain.
Mr. Bentsen. So, but any comparable loan-loss reserve of a
private MBS, let's say, or a remake, or whatever would be
assumed to be within the retained subsidy.
Mr. Crippen. Yes.
Mr. Bentsen. And I apologize, because I am just reading the
report right now because I just saw it this morning. You assume
a 7-year average life on the mortgage portfolio, I think, in
terms of prepayment. But you also assume an ever-growing
portfolio.
The income off a portfolio is, of course, the spread
between the purchased mortgage rate and the borrowing costs,
and then you net out everything else.
You assume a constant 47 basis point average of the spread
on borrowing costs over the comparable market.
Mr. Crippen. On long-term. The combined long/short subsidy
is 41 basis points.
Mr. Bentsen. Does your prepayment factor then assume just a
constant prepayment, and thus the spread for retained earnings
is assumed always to be the same going forward?
Mr. Crippen. The spread for retained subsidy is constant,
yes.
Mr. Bentsen. The spread, right.
Mr. Crippen. Yes.
Mr. Bentsen. Let me shift gears for a second.
The $3.9 billion subsidy you assume for 2000 works out as
sort of a leverage factor. I mean, you are getting about $6
billion in benefits out of leveraging about $3.9 billion of
subsidy. Out of that $3.9 billion is $1.2 billion of fees and
taxes that might otherwise be paid if it were a fully private
entity.
Can you tell me whether or not--I guess what I am trying to
figure out is how would you compare this to anything else? And
if you try and do a quantitative comparison and you say, OK,
well the Government is just going to take $1.2 billion in
direct appropriation in fiscal year 2000, would we be able to
leverage that amount of benefit in the mortgage market and
reach that many beneficiaries?
Mr. Crippen. With $1.2 billion, my guess is no. Obviously,
it depends on the kind of program. But, again, if you believe
the nature of these kinds of estimates, the $3.9 billion of
retained subsidy in 2000 would in theory be available. You
could use that to target more mortgages and buy down the
mortgage rate more than 25 basis points, or expand the benefit
over more mortgages.
Mr. Bentsen. Of the $3.9, how much of that is paid to
shareholders versus operations costs?
Mr. Crippen. We do not know for sure. Again, we have not
tried to say what happens to the subsidies other than that they
go to mortgage holders or they are retained. After that, we do
not imply that the entire amount goes to earnings, or that all
of it goes to shareholders. It is retained by the GSEs, and it
may show up in any number of places.
Mr. Bentsen. But the amount going to leverage itself, the
amount going to shareholders itself, would that be considered a
form of leverage as well in order to expand the volume----
Mr. Crippen. Well, the amount going to shareholders is very
high, if you take stock appreciation into account. So I am not
sure that the leverage notion would give you a very good
picture.
We can show you comparing----
Mr. Bentsen. Well, I guess my time is up, and hopefully we
will have a second round, but I guess the point I would make
is, in order to raise capital in the public markets, you
obviously have to show the shareholders you are going to give
them the return on equity.
Mr. Crippen. I agree.
Mr. Bentsen. So I will wait for a second round.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Bentsen.
Mr. Shays.
Mr. Shays. Thank you.
Mr. Crippen, it is nice to have you--on this side, Mr.
Crippen. Right here. Thank you.
Mr. Crippen. Yes. I am with you.
Mr. Shays. I first want to know if you stand by your
report.
Mr. Crippen. Yes.
Mr. Shays. You are comfortable with this report? You feel
that the criticisms have answers, and so on. So you are not
backing off this report at all?
Mr. Crippen. No.
Mr. Shays. Thank you. It strikes me that the two basic
issues are:
Are they passing on the subsidies and the tax regulatory
exemptions to the consumer?
And are they using--the other issue that I am interested in
is, are they using their competitive advantage in an unfair way
to gain business at the expense of the private sector?
Those are the two issues that I am very interested in.
On page 1, the Federal subsidy comes to basically, in 1995
it was $6.8 billion, in 1995, to $15.6 billion, the line of
credit.
Why would the GSEs not consider that a subsidy? I mean I do
not understand the logic. It is a line of credit available to
them that is not available to the private sector.
Mr. Crippen. I cannot make their case for them. The essence
of the argument is there are no Federal tax dollars. There are
no direct payments. There are no dollars involved.
Mr. Shays. Because we are not spending, they say therefore
it is not a subsidy. But we are giving tax credits; correct?
Mr. Crippen. Not tax credits, but they are, we believe,
enjoying an advantage in the cost of capital because of the
implied----
Mr. Shays. Yes. Exactly.
OK, on page 14 you say the housing GSEs receive two
distinct related benefits from the Government. First, the
number of regulatory and tax exemptions reduce the GSEs
operating costs. And you stand by that?
Mr. Crippen. Yes.
Mr. Shays. And second, Federal backing enhances the
perceived credit quality of debt issue and mortgage-backed
securities guaranteed by the GSEs.
The perception is, we in Congress--and that perception
would be right--will be there to back it up.
Mr. Crippen. Yes.
Mr. Shays. So when you say ``perceived,'' I mean, while it
is not in law we are going to be there. And that has to be a
huge benefit.
Mr. Crippen. We agree with you.
Mr. Shays. So let me just ask. In your report, do you form
a conclusion as to whether the subsidy that they receive
through the line of credit and the tax and regulatory
exemptions, do you put a quantified number as to how much they
pass on the consumer, and how much ultimately accrues to the
stockholders, or the GSEs?
Mr. Crippen. Yes. Those are the two questions the Chairman
asked us to address.
Mr. Shays. And tell me specifically what they are?
Mr. Crippen. Well, for 2000, the total for all of GSEs was
$13.6 billion in estimated subsidies, of which about $7 billion
got passed through.
Mr. Shays. So for a percent?
Mr. Crippen. A little over half here. In the case of both
Freddie and Fannie, however, if you took just those two, the
proportion passed through is closer to two-thirds. It is 70
percent.
Mr. Shays. So basically, the benefit is about a third to
them that they do not pass on to the consumer.
Mr. Crippen. By our estimates, yes, they retain about a
third of the implied subsidy, the value of it.
Chairman Baker. Mr. Crippen, excuse me, just for the sake
of the record, I believe the figure cited is 37 percent. Is
that correct?
Mr. Crippen. Thirty-seven?
Chairman Baker. Yes.
Mr. Crippen. Yes.
Chairman Baker. Thank you.
Mr. Shays. And my apologies, I got a little lost in your
answer to him. I know he answered it, but I did not understand
it.
Mr. Chairman, I am all set. Thank you.
Chairman Baker. Thank you, Mr. Shays. I just wanted to
clear the record on the point of the 37 percent. Is that
attributable to pass-through to shareholders on Fannie and
Freddie, and is there a different calculus for the Federal Home
Loan Banks?
Thank you.
Mr. Sandlin.
Mr. Shays. Excuse me. What is it for the Home Loan Bank?
Mr. Crippen. It is a little harder to tell, because all of
the loans that the Federal Home Loan Banks make, the advances
as they are called in this case, to member institutions.
In the old days, it was a little easier to tell, because
member institutions were almost all S&Ls. That is no longer the
case. There are many banks and other basic financial
institutions that can borrow or get advances from Home Loan
Banks.
We looked at all of those institutions as best we could and
determined that they are not much into the fixed-rate
conforming mortgage market that Fannie and Freddie are in; the
market accounts for about 15 percent of their assets.
So, we calculate that a small amount of what they get as
subsidy gets passed through to conforming borrowers. So it is a
much smaller amount.
Mr. Shays. Is that a ``yes'' or a ``no''? The bottom line
is, it is lower than 37?
Mr. Crippen. For all three, yes. For Fannie, Freddie, and
the Federal Home Loan Banks.
Chairman Baker. Mr. Sandlin.
Mr. Sandlin. Thank you, Mr. Chairman, and thank you, Mr.
Crippen, for being here this morning.
I wanted to ask you some questions along the same line as
my friend Mr. Ney about the funding advantages to Fannie Mae
and Freddie Mac.
Now you indicated in your testimony that the methodology
used was not an ideal way to do it. You said there was not
enough data to do it accurately; that you had to make some
assumptions due to a lack of data.
It appears to me that one way to do that would be to run
the numbers and exclude the As and A-minuses. Would that not be
one way to try to compare?
Mr. Crippen. It would be if we had enough AA firms in the
world to measure against, but we have, I think, only 8 in this
group. There are not many AA firms. Firms either tend to be
AAA--and there are not many of those--or A, because they have a
riskier portfolio than Fannie and Freddie.
Mr. Sandlin. But if you excluded--one way to look at that
is to try to get an accurate idea would be to run the numbers,
exclude the As and A-minuses, and compare them to what you
have. I mean that would be a valuable piece of data, would it
not?
Mr. Crippen. We do not think eight firms in any class is
enough to give you much of an indication.
Mr. Sandlin. So you feel like you should use 71 firms and
have only 8 that are comparable and get an inaccurate number,
and that number that is inaccurate is OK. But a number to
compare it to 8 firms that would be the same is not OK? Is that
right?
Mr. Crippen. That is one way to put it.
Mr. Sandlin. That is what I thought. The numbers speak for
themselves. That is what I thought you said.
Would it surprise you to learn that by doing it that way
the advantage would be from 47 to 30? Would that surprise you?
Mr. Crippen. It would not surprise me if you were using
only 8 firms as comparators. That is not a good enough sample
to compare to.
Mr. Sandlin. OK. So if you use 8 firms to get to 30, that
would not be good. But if you use 71 firms who are not
comparable to get to 47, that would be good? Is that what you
are saying?
Mr. Crippen. No, what we are saying is there are not enough
firms that are AA to reach any valid conclusions about those
private-sector AA firms.
Mr. Sandlin. So since there are not enough firms for any
valid conclusions, then your conclusions of 47 are not valid?
Is that correct?
Mr. Crippen. No. I do not believe that is the case.
Mr. Sandlin. You have heard of comparing apples to oranges,
haven't you?
Mr. Crippen. Yes.
Mr. Sandlin. OK. Let me ask you about your share of short-
term debt and long-term debt, what you have in the report.
I notice that the CBO assumes the share of short-term to be
20 percent, and 80 percent for long-term debt, using a debt
measurement. Do you know what the actual reported weights for
Freddie Mac and Fannie Mae were?
Mr. Crippen. The actual reported weights? I am not sure I
understand.
Mr. Sandlin. Were they 40 percent and 60, as compared to 20
and 80?
Mr. Crippen. Well, we assumed 20 and 80, because much or
some good portion of the short-term debt is converted to long-
term debt by engaging in synthetic derivatives. So the
effective long-term debt is what is the right measure, not the
amount or face value of short-term debt.
Mr. Sandlin. So you think that using your assumptions is
better than using the actual reported numbers?
Mr. Crippen. I think the reported data is misleading.
Mr. Sandlin. Oh, so the actual reported data is misleading,
but your assumptions are on target?
Mr. Crippen. Yes, the actual reported data on short-term
debt is misleading.
Mr. Sandlin. OK. I will say, this is all consistent. I will
say that.
Now Fannie Mae and Freddie Mac have certain goals that they
have to meet in affordable housing; right?
Mr. Crippen. Right.
Mr. Sandlin. Now do you place any value, any monetary
value, on them reaching those goals and making that housing
available?
Mr. Crippen. Other than what gets passed through to
conforming mortgage borrowers, no.
Mr. Sandlin. But you would admit that is a value to the
public? I mean, there is some value to getting that housing out
there, isn't there?
Mr. Crippen. Presumably.
Mr. Sandlin. OK. I noticed last August that Chairman
Greenspan wrote that the GSE subsidy effectively lowers the
rates on all mortgages, not just those purchased by Fannie Mae
and Freddie Mac.
Do you feel like that is so?
Mr. Crippen. Well, certainly on all conforming mortgages
that is pretty clearly so.
Mr. Sandlin. OK. Then why does the CBO Report only measure
the effects of the lower mortgage on loans that Fannie Mae and
Freddie Mac purchase or guarantee, instead of attempting to
measure the impact of the lower mortgage rates on all the
conforming mortgages?
Mr. Crippen. Because we were not asked. And, two, because
we did not take into account any of the costs of Freddie and
Fannie outside of their mortgage markets, either.
As I said, their activity in the debt markets likely raises
funding and capital costs to everybody else, and it doesn't
take much to have an impact. As I said, one basis point on
Treasury debt alone is $3 billion a year.
Ms. Jones. Excuse me, would you slow down and talk in the
mike?
Chairman Baker. Ms. Jones, if you might, this is Mr.
Sandlin's time.
Ms. Jones. I know, I just----
Chairman Baker. Would you like to yield to the lady?
Mr. Sandlin. I will yield to the lady.
Chairman Baker. Ms. Jones, you are recognized.
Ms. Jones. I apologize. I wanted to be sure I heard what he
said.
Mr. Sandlin. If you could just repeat that part for us.
Mr. Crippen. Sure. The question was why do we not take into
account the broader range of benefits that are likely to accrue
to other mortgages that Fannie and Freddie do not touch, or do
not back, or do not bundle, or do not guarantee.
The answer is, there are both positive things that they may
cause outside of their relevant market, or even outside those
loans they touch, but there are also negative things that can
happen because they are in the market.
I am not sure how the balance would come out. If you took
all benefits and all costs, I do not know what the numbers
would be, but we were precisely asked, what are the subsidies
that go to these institutions worth, and how much do they pass
through to the mortgages that they do handle?
So that is a more precise question in some ways, but we do
not know the costs and benefits of the larger picture.
Chairman Baker. Mr. Sandlin, your time has expired.
Mr. Sandlin. My time has expired. Thank you for your
questions. Thank you, Mr. Chairman.
Chairman Baker. Mr. Paul.
Mr. Paul. Thank you, Mr. Chairman.
Mr. Crippen, I want to ask a little bit about the special
status that the GSEs have. It is assumed, I guess, that the
special status comes in the implicit Federal guarantees, that
is from the $2.5 billion line of credit to the Treasury which
they have not used.
It seems like if we in the Congress do not deal with that,
I do not know in my own mind how we can be fair to the private
mortgage companies unless we deal with that subsidy which your
report claims is a major part of the subsidies.
But, I want to ask about another subsidy which is almost
explicit, or it actually is a direct subsidy that not too many
people talk about. That has to do with the purchase of GSEs by
the Federal Reserve.
Because, if a private company such as AT&T all of a sudden
had their securities bought by the Federal Reserve, it would
imply a big subsidy in that they would be guaranteeing these
securities.
But, in the fall of 1999, because of the possible crisis
with Y2K, the Fed said they did not have enough securities to
buy, so they started buying GSEs in order to provide liquidity
to the financial system.
But, they never backed off from that and they continue to
do that. And even today they own over $20 billion worth, a lot
more than an implied $2.5 billion. But this has sent a message
around the world, and the other central banks of the world now
own over $100 billion of the GSEs.
This is a tremendously important message sent out that the
GSEs are something very, very special, and that the Fed will
come to their rescue. They are not going to let this system
collapse.
And we have to also realize as a Banking Committee, how do
they buy GSE securities? The same way they buy Treasuries. They
buy them with credit out of the clear blue, out of thin air.
They just create it.
This has an inflationary impact. The Fed buys these GSE
securities with new credit. The fact that you did not mention
this, is this something you have not thought about? Or is this
not a significant subsidy that is every bit, if not a whole lot
more, important than a line of credit to the Treasury?
Mr. Crippen. I have to confess, Mr. Paul, I have not
thought a great deal about it. My colleagues may have. But it
is not unusual in this sense:
GSE securities, certainly in the recent past, have been
viewed--and presumably rightfully so--as very secure
securities. They get counted in a different way for bank
capital, for example. They get a superior position in the
capital calculations.
So it is widely recognized that they are superior credit,
and it is in large measure because they are treated and traded
as agency debt, as backed by the Federal Government.
I am not sure that having the Fed buy Fannie Mae-guaranteed
MBSs or other instruments says any more about that tie with the
Federal Government than we have already seen.
No matter how that works, it would get measured by our
method. That is to say, we are measuring the spread between
Fannie and what we think is comparable private debt. So to the
extent this Federal Reserve imprimatur was a factor, it would
be in that spread.
Mr. Paul. Thank you.
Chairman Baker. By time of arrival, Ms. Jones, you are
next. Ms. Jones is next, and you will be after Ms. Jones, Ms.
Hooley.
Ms. Jones.
Ms. Jones. Thank you, Mr. Chairman.
Mr. Sandlin, as I said, just for the record if you would
like some more time because I interrupted you, I would gladly
yield some time to you.
Mr. Sandlin. Thank you, no.
Ms. Jones. Mr. Crippen, I want to review some of your prior
testimony. You said there were two questions you were asked to
respond to. One, the value of the subsidy? Is that correct?
Mr. Crippen. Correct.
Ms. Jones. And second, how that subsidy is distributed.
Correct?
Mr. Crippen. Right.
Ms. Jones. Define ``value'' for me, please.
Mr. Crippen. How much it is worth to the institutions in
lowered capital costs. They pay less in interest on long-term
debt because they have the implied Federal guarantee.
Put another way, if these advantages that are granted in
the charter and the perceived backing by the Federal Government
were auctioned off in an open market, firms would be willing to
pay for the exemptions and the lower interest rates.
So there is a value to these advantages that is fairly
widely recognized that has to do with lower borrowing costs.
Ms. Jones. Now I believe in response to someone else's
question you said that you did not calculate in value--maybe it
was even Mr. Sandlin--the benefit, other than the lower
mortgage cost to the public.
Is that correct?
Mr. Crippen. That's correct.
Ms. Jones. Why not? If that is value. If it is included in
value, it was not specifically said to you--did Mr. Baker
define value as you just defined it in making the request for
the value of the subsidy?
Mr. Crippen. No.
Ms. Jones. So you just assumed in your decisionmaking that
the value would not include the benefit to the general public
of the work that Fannie and Freddie do?
Is that a fair statement?
Mr. Crippen. It is fair with this caveat. We did not also
consider any of the costs to the general public for Fannie and
Freddie.
Ms. Jones. We are talking about value right now.
Mr. Crippen. I understand.
Ms. Jones. We are talking about value.
Mr. Crippen. OK.
Ms. Jones. And since you did not include that, and you did
not include the cost, you cannot then say I did not include.
Correct?
Mr. Crippen. No, I am saying we did not include either.
Ms. Jones. But maybe you should have in order to, if you
are really talking about the value to the public, or the
diminishment of any value to the public, you should have
included both of those things?
Mr. Crippen. We probably should have--I mean, not should
have, but we could have included----
Ms. Jones. What else didn't you think about, after having
talked to other people about what value is in your
decisionmaking with regard to this report?
Mr. Crippen. We measured value the only way we thought we
knew how, which was to compare what subsidized and non-
subsidized debt issues look like, and in turn mortgages that
are handled by these companies and mortgages that are not.
Ms. Jones. But, now that you have been given an opportunity
to think that your thought was not what you should have
thought, perhaps the value that you have given to the subsidy
may need to be amended in some way?
Mr. Crippen. Well, you are asking a different question than
we were asked to address.
Ms. Jones. No. Huh-uh. I am not asking you to answer my
questions and that way we will just get through my quick little
5 minutes.
Mr. Crippen. All right.
Ms. Jones. Now that we have gotten past what you have
defined ``value'' is, and you were also asked to understand how
that was distributed. Correct?
Mr. Crippen. Correct.
Ms. Jones. Now, did you take into consideration in the
distribution the obligations that Fannie and Freddie have that
all these other institutions who, if they could--I want to
quote you correctly--others would be willing to pay for the
advantages that Freddie and Fannie have to take their place in
the market.
Did you include that in how the value was distributed?
Mr. Crippen. No, we didn't. We do not have auction results
at all. All I am suggesting is that there is a value to these
advantages that others would pay for, that the subsidy exists.
Ms. Jones. What would they pay?
Mr. Crippen. Presumably, they would pay billions of
dollars. I mean, the point is there is a value in the market
for these advantages. We think it is worth $13 or $14 billion
currently.
Ms. Jones. But, I guess my dilemma, sir, is that you give
us a report and you want us to take it at face value and say it
has X amount of value, or importance. But then you--I hope I
can find the right report--make a whole bunch of assumptions.
Let me find one. On page 7, I do not know what this is, the
CBO Testimony, this one right here [indicating], whatever that
is. It says ``CBO assumes that the portion of the subsidy not
passed through is retained by shareholders and other
stakeholders.''
You were pretty precise in the work that you were doing,
right?
Mr. Crippen. Yes.
Ms. Jones. So there should be no assumptions with regard to
any dollars.
Mr. Crippen. Well, we would say that the total subsidy was
worth $14 billion in 2000. Is that your question?
Ms. Jones. No, my question is that you were precise in the
work that you were doing, so there should be no assumption that
the portion of the subsidy not passed through is retained by
shareholders or stakeholders. You found that to be true.
Chairman Baker. And, Ms. Jones, that needs to be your last
question. Your time has expired.
Ms. Jones. Oh, fine.
Chairman Baker. Please respond, sir.
Mr. Crippen. May I respond?
Chairman Baker. Yes.
Mr. Crippen. The way that we did the calculation, Ms.
Jones, was to look at what we thought was the total value of
the subsidy, and then calculate how much of that went to the
mortgage holders.
So, what was left was retained by the GSEs.
Ms. Jones. But, you assumed that. You did not find that to
be fact.
Mr. Crippen. We did not trace the dollars, no. So if you
had $20 and we know you gave $15 of it away, we expect that you
still have $5. And that is the way we did the calculation.
Ms. Jones. So if you were my tax accountant, they would
take that from me?
Chairman Baker. Ms. Jones.
Ms. Jones. I am sorry. I yield the balance--I do not have
any time to yield.
Chairman Baker. We will be back. We will be here as long as
the people want to stay.
Mr. Bachus.
Mr. Bachus. Thank you, Mr. Chairman.
Director, I want to commend you on the fine work that the
Congressional Budget Office does, and for your attention to
this matter.
Last year, Chairman Greenspan said that the GSE subsidy
effectively lowers rates on all mortgages, all conforming
mortgages?
Mr. Crippen. All conforming mortgages in this fixed-rate
market, yes.
Mr. Bachus. Not just those purchased by Fannie Mae and
Freddie Mac. Do you agree with that assessment?
Mr. Crippen. Yes.
Mr. Bachus. Does the CBO Report attempt to measure the
impact of lower mortgage rates on all conforming mortgages and
not just on those mortgages that Fannie Mae and Freddie Mac buy
or securitize?
Mr. Crippen. No. As I said, we did not try to estimate
benefits outside of those mortgages that Fannie and Freddie
actually deal with, which turn out, we think, to be about 70
percent of the stock of conforming mortgages. So there are not
many others left that would be affected anyway.
But there certainly can be positive effects on other
mortgages that they do not handle. But there are also costs in
the capital markets because of their presence.
We did not try to do a cost/benefit analysis of the
existence of GSEs. We looked more at, what is the value of the
subsidy, and what happens to it?
Mr. Bachus. Could you assess that benefit, that additional
benefit, in that what we are trying to determine here is public
benefit, whether or not it is a direct benefit that flows
through or a secondary benefit?
Mr. Crippen. Probably, but we then would have to start
calculating direct costs, as well. Asking, for example, how
much do borrowing rates on Treasuries go up because of the
participation of the debt markets?
So there are two sides to this broader consideration of the
benefits and the costs. I do not know if I am being responsive,
but yes, we could figure out, I think, what the extra effect is
on conforming mortgages that are not handled by Freddie and
Fannie.
We believe those are about 30 percent of the market. So
they are a small, relatively small, number. But, even if there
are advantages there--and we think there are, the mortgage
rates are lower--there are also costs that occur on the other
side of the ledger that are not attributed to this analysis,
either.
So it would be inappropriate, if you will, to say, yes,
there are other benefits--go measure them--but, ignore that
there are other costs, and not measure those.
Mr. Bachus. Mr. Chairman, I have been summoned to the
Judiciary for a vote. I would like to reserve the balance of my
time, if I could.
Chairman Baker. When you return, Mr. Bachus, we would be
happy to recognize you. I have a suspicion we are going to be
here.
Mr. Bachus. Thank you.
Chairman Baker. Thank you, Mr. Bachus.
Ms. Hooley.
Ms. Hooley. Yes, thank you, Mr. Chair.
I just want to follow up on some of the things that a
couple other people have talked about. That is, in this report
did you measure as you developed the report, did you measure
the benefit to the consumer that Fannie and Freddie have to
meet the statutory affordable housing goals?
Did you measure that impact to the consumer?
Mr. Crippen. Not directly, no. We measured the lower
mortgage costs on conforming mortgages as being the primary
source of the benefit that Fannie and Freddie pass through,
with literally billions of dollars.
Ms. Hooley. Do you think the GSEs are achieving their
Congressional intended purpose of making housing more
affordable?
Mr. Crippen. We are not in a position to evaluate if they
are achieving their objectives. Certainly, the conforming
mortgage market enjoys a lower interest rate on mortgages than
would be without them.
So, yes, there is a benefit for that market, certainly.
They make the housing in that market more affordable.
Ms. Hooley. Not only for their mortgages, but for those
that are not under Freddie and Fannie, right? Those are lower
too? Was that number--did you come up with a number for that?
Mr. Crippen. No, we didn't. Again, there are potential
benefits that the GSEs have outside of the mortgages that they
finance. But there are also costs outside in the capital
markets.
So we did not take either of those into account in part
because the Chairman did not ask us those questions but, more
importantly, because that analysis would have been very
difficult. It gets even murkier, of course, as you go outside.
Here is the value of the subsidies based on the amount of
debt issued, and here is the value to the mortgage borrowers of
the reduced interest rates.
To go well beyond that, to say there are other effects in
the capital markets: Other conforming mortgages probably have
lower interest rates. But Treasury debt, U.S. Treasury debt,
probably has higher interest rates because of the activity of
borrowing close to $300 billion in the capital markets.
So there are positives and negatives outside those
mortgages that Fannie holds. But the benefits are not ones that
they pay for. I mean, they do not use the subsidy for those
benefits, and the costs are not ones that they are made to
realize, either.
So, yes, this is a narrow question, but it is probably the
right question in terms of the activities of the GSEs. And once
you go to the larger issue of effects outside of the mortgages
they handle, you have to start incorporating the costs in the
capital markets as well.
And I am not sure that you would say, on balance, the
benefits outweigh the costs. But we do not know.
Ms. Hooley. One of the things you did say, and I think at
least with Freddie and Fannie that about two-thirds went back
to the consumer for savings and the other third, at least you
believe, goes to the shareholders and operation of Freddie and
Fannie. Is that right?
Mr. Crippen. Yes. We do not know where the other third
went, I mean, in the sense of, as I have said----
Ms. Hooley. You think that is where it went?
Mr. Crippen. We believe it was retained, but it could have
been used to help pay Federal taxes, to create capital. I mean,
there are lots of places it could have gone. We do not know.
We believe that a third of it was not passed through to the
borrowers.
Ms. Hooley. How did you figure the number that was passed
through? I mean, how did you come up with that number that was
passed through?
Mr. Crippen. We looked at mortgages that the GSEs can
finance, the conforming mortgages. Largely, they participate in
the 30-year fixed mortgage market. And by looking at mortgages
next to that--that is, jumbo mortgages, which is the term for
those mortgages just above the threshold limiting the size of
mortgages that Fannie and Freddie can finance--versus the ones
that Fannie and Freddie can finance, we observed a spread
between the interest rates.
And those that the GSEs can finance have a lower interest
rate. So that your mortgage bought with the help of the GSEs
has about a quarter of a percent lower interest rate than if
you had to buy a loan outside the range that they can finance.
So we measured the amount passed through by comparing loans
that they can finance and do finance, and those just around
those that they can, and the difference we assume they are
passing through to mortgage borrowers.
Ms. Hooley. Is that an unusual number? I mean, if you
compare that to some other business or company, would that be
an unusual number, that when they pass this much money down,
this much money is retained for shareholders, operations,
whatever?
Mr. Crippen. I don't know. I mean, this is in some sense a
difficult calculation. Because you cannot watch dollars move
around, you have to make comparisons about the activities of
these entities in the debt markets that they borrow in and in
the mortgage markets that they participate in, and assume that
differences between those entities and ones that are as close
to them as we can measure, are due to the GSEs special status.
So we do not know of any other similarly-subsidized
company--I mean, these are very unique operations. I do not
think there are other entities about which we could perform
this calculation and have a comparison--but it is certainly not
surprising, I think, as several of the Members on both sides
have said today, that some of the advantage, the borrowing
advantage, would be used, for example, to pay shareholders. I
mean that is part of the deal here.
These are quasi-private organizations that have
shareholders who expect a return. So that activity is not a
surprise.
Ms. Hooley. So that is not a number that you would be
alarmed at or surprised by?
Mr. Crippen. I do not have a basis to be either alarmed or
surprised. But it is certainly not surprising that some
retained subsidy would have to go to shareholders to keep them
interested in the company.
Ms. Hooley. Thank you.
Chairman Baker. Thank you, Ms. Hooley.
Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman.
Mr. Crippen, I want to make sure I understand here. It
sounds to me like we are discussing the quantified value that
accrues to the GSEs by virtue of having one credit rating
versus another credit rating when they go to market to get
their fundamental product, which is money.
Mr. Crippen. They do not really have a credit rating in the
market. The AA-minus that the credit agencies have given them,
or based their evaluations on, would be. But, that is
counterfactual. Of course, they do have that relationship.
And so it is not necessarily true that AA-minus is the
right comparator. But the point is, what we are trying to
measure is the affiliation with the Federal Government,whether
it is worth anything?
And the method that we used to answer that was to ask the
following: Do they get a lower cost of capital in the debt
markets?
Do investors buy Fannie Mae debt at a lower interest rate
than they would buy that of a similarly-situated private firm?
The answer is, yes, there is a spread.
Now we can and should debate: is that the right measure?
And if so, is that the right quantity? But that is how we
measure the subsidy, comparing the GSEs to non-subsidized firms
and assuming the difference is due to the Federal relationship.
Mr. Ose. The implicit guarantee.
Mr. Crippen. Yes. That, plus there are other subsidies;
namely, the GSEs do not have to pay SEC fees, do not pay State
and local taxes--that kind of stuff.
Mr. Ose. Is there any reason why the Federal Government
could not provide an implicit guarantee of the nature it has
given to the GSEs to some of the other industrial companies
that we have around this country?
Mr. Crippen. Some would argue we already do in some limited
cases. There is no reason you couldn't do it. But every time
you grant another subsidy, you are creating, of course, as we
economists would say, a distortion in the market, not letting
the market allocate capital.
But more importantly, you are also going to raise the cost
of capital to everyone else, including the Federal Government.
So U.S. debt will be more expensive because you have other
entities out with an advantage in borrowing.
Mr. Ose. One of the points in the letter that was sent to
us--actually sent to Chairman Baker, signed by--well it is not
signed, but it came apparently from Mitchell Delk, was that the
basis of the study focused on noncomparables. In other words,
the firms that were used as the test against which you measured
the GSEs were not comparable.
Mr. Crippen. Right.
Mr. Ose. Do you have any observations on that?
Mr. Crippen. Strictly speaking, that is a fair observation.
There were only eight AA firms in the sample that we used to
measure the subsidy.
Chairman Baker. Would the gentleman yield to me on that
point?
Mr. Ose. Certainly.
Chairman Baker. I understand Mr. Crippen's response, but in
a direct answer to the AA-minus stand-alone rating, it is not
stand-alone absent all Federal Government support. It is absent
direct Federal dollars being injected into the corporation, not
absent the other Federal relationships that exist.
The only statement we have that I have had access to as to
the rating of Fannie Mae was done in the early 1990's by the
Treasury Department as a true stand-alone. If they were to be
viewed as a separate enterprise absent all Government
relations, that rating came out to be a single A.
Now I am not suggesting today that that is an accurate
reflection. What I am telling the gentleman is that the AA-
minus rating is not a stand-alone absent the Government ties
rating, and I think that is important for the record.
Mr. Ose. This is what I am trying to get at is whether the
AA-minus includes the implicit guarantee, and you are telling
me it does.
Chairman Baker. Yes, sir.
Mr. Ose. It does not include Federal monies----
Chairman Baker. Direct Federal appropriations.
Mr. Ose. OK, that is what I was trying to get at.
Now if we remove the implicit guarantee, what would the
rating be?
Mr. Crippen. I don't know. It would certainly be lower, but
I do not know.
Chairman Baker. Well, let me interject there for the
record, in fairness to the GSEs, we do not know. They could
well be rated AA-minus as a true stand-alone, but we do not
know that.
So the criticism of the comparison that Mr. Crippen has
made in using the 71 enterprises double A and single A is not
without some merit.
Mr. Crippen. And I think it is equally important to note
that the difference is likely not going to be much. So, yes,
there is a possibility of overstating the subsidy. But, as I
have to keep reminding the subcommittee, I think, to be fair,
there are some assumptions we made that would go the other way;
if we had made them differently, they would have increased the
value of the subsidy.
So we have made assumptions on both sides of this number,
if you will, some that would make the number better for the
GSEs, some that would make it worse.
So we can focus on one side, and in so doing, I think,
leave a distorted impression of the value of the subsidy.
Mr. Ose. I appreciate the comments. What I am trying to get
at is the continuing reason, if any, to extending the implicit
guarantee.
So with that, Mr. Chairman, I see my time is up.
Chairman Baker. I thank the gentleman.
I believe the next in time of arrival is Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman.
Let me first just ask a question. What was your basis
points used to estimate the jumbo and conforming spread number?
I was trying to find that in the report. I was not sure.
Mr. Crippen. We made one adjustment to the spread, I think
it was 22 before adjustment and 25 after. We made the
adjustment because mortgage holders also receive a little
subsidy through the Federal Home Loan Banks.
So that we conclude the difference between subsidized and
unsubsidized borrowing for mortgages is about 25 basis points.
That is the advantage that the GSEs pass through to mortgage
holders.
Mr. Meeks. OK, wouldn't you say that is a little low?
Because in 1996, didn't you use a spread basis of 35 points?
Mr. Crippen. We did. I can't tell you, because I didn't
review that study as closely as I should have before I came--I
would say that the data has changed considerably.
There was a different result, but there are a handful of
studies, three, four, five studies that are fairly current--
including one Dr. Phaup looked at just this morning--that
suggest that a number in the low 20s is probably about right.
The one this morning suggested 22 basis points or 23 basis
points.
So more recent studies, independent academic studies,
suggest the low 20s is probably about right, which is where we
ended up as well independently. So, yes, we used 35 before. Is
22 exact? It could be 23. It could be 24. But we think we are
probably pretty close.
Mr. Meeks. Now in response to this [inaudible], I just
wanted to know in value----
Chairman Baker. Mr. Meeks, we are having a hard time
hearing you.
Mr. Meeks. I am sorry.
Chairman Baker. That's all right, sir.
Mr. Meeks. When my colleague, Stephanie Tubbs-Jones was
talking about value, I just was wondering whether you
considered at all as value Freddie Mac or Fannie Mae's
charitable giving, which also includes home buyer education,
which increases the opportunities for home ownership.
Was that considered at all as part of the value?
Mr. Crippen. It did not get counted as part of what we say
gets passed through to mortgage buyers. It would be part of
what we estimate they retain.
So again, the 30-odd percent of the subsidy that we think
they hold can go to any number of activities: it could go to
charitable activities; it could go to paying taxes; it could go
to building capital; it could end up anywhere. So it is not
part of our calculation.
What we did was look at mortgages that they finance, and
the interest rate on those, compared to mortgages they do not
finance, or ones that are just outside their range. And so we
attributed the benefit to mortgage holders, those people buying
homes that Fannie and Freddie directly finance.
So there may be other things they do with the piece of
subsidy that we believe they retain that are good things. It
may well be. They may all be good things. We did not attempt to
measure those, or look at them, or count them, other than to
say they do not get passed through to mortgage holders.
Mr. Meeks. So in other words, I think this is what you
testified to before, you did not look at whether or not Fannie
Mae and Freddie Mac were accomplishing the mission that they
had set out to by Congress?
Mr. Crippen. We did not answer that question.
Mr. Meeks. That wasn't considered at all.
Now in considering the market perception--and I understand
that some say that there is an advantage because of the
perception that the Federal Government will come in and save
the day, if you will.
I am wondering, and considering that market perception of
those Federal ties in calculating the subsidy, were there other
financial firms in your study who might be receiving a similar
type of subsidy by advertising to their customers, for example,
their link to the Federal insurance by the FDIC or FSLIC?
Mr. Crippen. Yes. I mean, it is entirely possible that
Federal insurance of deposits is a subsidy to the banking
system, not the GSEs. Not only were we not asked that question,
but, more importantly, the deposits and the insurance on
deposits are generally viewed as short-term assets. So banks
are inclined to use them for short-term investments, not 30-
year fixed mortgages.
And, indeed, the fact pattern suggests that. The GSEs do
not deal much in ARMs, the adjustable rate mortgages, whereas
banks are predominant in that market.
So they probably get a subsidy. It probably goes in part to
holders of ARMs, but not to the 30-year fixed-rate mortgages
that Fannie and Freddie tend to dominate in.
Mr. Meeks. Finally, according to your study I believe the
GSEs' lower cost of borrowing is based on market perception of
Federal support and not legislation or any false advertising on
the part of GSEs.
Doesn't this provide an advantage not only to the GSEs and
its borrowers, but also to the primary lenders that they have
mortgages, the mortgages that were purchased by the GSEs
increasing liquidity for their investments as well as the
economy as a whole by encouraging housing startups and making
real estate more liquid?
Mr. Crippen. Certainly, that was the objective. One of the
primary objectives of establishing the GSEs was to create more
liquidity in the mortgage market, and they do that.
The question, though, is, do they need a Federal subsidy,
whatever that is, to create that liquidity?
If, for example, you took them today and removed the
subsidy, they would still certainly be in existence and
operate. Would there still be a liquid mortgage market?
Probably there would.
Now, the rates would clearly be different. So the advantage
of liquidity is certainly an objective. It is one that they
have met. But there is no additional, if you will, benefit of
the liquidity provided by these GSEs over liquidity in other
markets.
I mean, the Treasury market is considered to be quite
liquid, the Treasury debt, in part because it is big and
because it has clearly Federal guarantees. It is good debt. For
the same reasons, the GSE debt, which is large and has an
implied guarantee, is liquid. But that is not something they
created, if you will. It is inherent in the debt structure.
Chairman Baker. Mr. Meeks, your time has expired, sir.
Thank you.
Mr. Jones.
Mr. Jones. Mr. Chairman, thank you. I want to apologize. We
have been in a classified closed hearing with Secretary
Rumsfeld, so I was just able to get here.
I believe at this time I would like to yield to you, Mr.
Chairman, my time.
Chairman Baker. Well thank you, Mr. Jones. I appreciate
your courtesy.
Mr. Crippen. Is there anything you want to tell us before
you start?
Chairman Baker. I am sorry, that is confidential. And as we
know, in this town nothing leaks.
[Laughter.]
Mr. Jones. You can read it in the paper tomorrow.
[Laughter.]
Mr. Crippen. Well, that means I am going to be here
tomorrow, which is really what my question had to do with.
Chairman Baker. Although you may check the newspapers, I am
sure there will be a story out in the morning about it.
There has been some concern raised by some Members as to
whether there is a problem, and it is not necessarily a
statement to which you need to respond, Mr. Crippen.
Clearly the significant growth of the GSEs in the
marketplace with the intention to become a new financial
benchmark domestically and internationally is probably a
worthwhile thing for the GSEs to do from their perspective, but
we should not sit idly by as since they are a governmentally-
chartered enterprise and not understand fully the risk they may
present to taxpayers should economic conditions deteriorate.
For example, there are about 8500 insured financial
depository institutions of which in excess of 4100 by recent
analysis have 100 to 500 percent of total capital invested in
GSE securities.
Now I have been comforted by the knowledge that that is not
100 percent Fannies and Freddies. I was told, you know, it
could be Farmer Macs.
So for that reason, I am sure there is no cause for
concern. But should there be a downturn in housing demand and
uptick in interest rates, one would worry about capital
adequacy of financial institutions and potential impact on the
deposit insurance fund.
That is one reason why I think we need to act with this
caveat in mind. I have said it at every hearing. Today all the
GSEs are very well managed. They are very profitable, and for
the foreseeable future present no demonstrable risk to the
American taxpayer.
However, we cannot ignore that business cycles are just
that. And should we not prepare, given the fact that some have
the view that the current regulatory structure is inadequate by
virtue of its lack of funding on a comparable basis with other
financial regulators? And the GSEs have alleged that this
report is off the mark and is not understanding of their
business model. We should perhaps analyze the need to have
adequate regulatory oversight in order to adequately assess the
business risk?
Therefore, the justification for this study.
Second, it has been asked whether or not others enjoy
subsidies of comparable value.
I would point out that an FDIC insurance sticker on the
front door is a premium assessed on the operational cost of
that business enterprise to pay back depositors in the event of
a closure of a failed institution. So it is a premium charged
up front to pay off your death benefits.
The subsidy in question today is a subsidy given to the
acquisition of the product, which is then subsequently resold
in the market. So it is an up-front advantage going into the
marketplace which generates a profit for shareholders.
There is nothing wrong with profit, but I think we ought to
analyze it carefully when we recognize the profit is generated
by a special governmental charter coming from the United States
Congress.
Finally, there is a question and a line of defense used by
some as to whether or not the subsidy really does, in fact,
wind up in shareholder pockets. Let us put that aside for the
moment and merely go at the question of mission compliance and
the ability of the enterprises to meet the needs of low-income
individuals.
I refer now to Freddie Mac Information Statement, March 30,
2001, page A-10. In my prior life in the real estate business,
most people who were low-income individuals trying to buy a
modest home generally had difficulty with a 10 percent
downpayment.
Let's assume for the moment it is a $60,000 house. They
have to come up with $6,000 down, plus closing costs, in
Louisiana 3 percent, estimate about another $1800, total
$67,800 required to have a 90 percent loan.
Now that usually requires PMI and other charges related to
the assumption of risk, because the person does not have a
conforming loan, which we have talked about today. There is a
maximum of a $275,000 for an 80-percent-of-value loan.
When we look at the way in which the distribution of loan
portfolios is assembled, again referencing this data, on the
original loan-to-value ratio range we find that those
individuals paying less than 5 percent down--in other words, in
the portfolio, how many folks have higher than 95 percent loans
or even let's go to higher than 90 percent. Let's assume that
poor folks can come up with something less than 10 percent down
for that $60,000 house.
The aggregate is 13 percent of the portfolio goes to those
individuals. Amazingly enough, when you look at those
conforming loans that are below 70 percent--that means we go
out and we do the appraisal and we are going to loan them
$275,000 max, and that is less than 70 percent of the value of
the property in question, that represents 31 percent of
Freddie's portfolio.
Now far be it from me to allege that the result of the
subsidy is to help upper income individuals get access to home
ownership. I would bet it is probably not the first front door
they have walked through. But it appears that 73 percent of the
portfolio of Freddie Mac represents loans and portfolio value
at 80 percent or below LTV.
Now if we want to talk about subsidies, that is a pretty
good one to talk about, too. I would suspect most Members on
either side of the aisle who have come to the aid of the
enterprises today on the basis that they are doing charitable
benevolent work in society would be shocked to learn than 73
percent of one GSE's portfolio was helping high-income
individuals.
I would point out that the current loan limit of $275,000
applied in Baton Rouge would allow you to purchase a $343,000
house with an 80 percent LTV. I invite you to come to Baton
Rouge and see what that house looks like.
Thank you, Mr. Jones, for yielding.
Let's see. Mr. Ford, you are next.
Mr. Ford. The Chairman is fired up.
Chairman Baker. He is. I have a mild interest. Thank you,
Mr. Ford.
[Laughter.]
Mr. Crippen. You should have been here earlier.
[Laughter.]
Mr. Ford. Thank you, Mr. Crippen. I was not a part of any
confidential briefing like my good friend Mr. Jones. I was at
Starbucks getting a coffee is why I was late this morning, so I
do apologize for being tardy.
I appreciate the Chairman sort of educating all of us on
the subcommittee about some of the concerns and really the
motivation for this study and for his interests, and quite
frankly a legitimate and understandable interest on the part of
this subcommittee.
I guess I have a couple of questions. And this is something
I think that I think the Chairman has an understanding of this
that surpasses many on this subcommittee, with the exception of
the leadership on our side. So if my questions seem somewhat
sophomoric, just bear with me, Director.
I guess my first question deals with the use of what some
have said is this artificially low spread of 22 basis points as
a differential between conforming and jumbo mortgage rates.
I do not have, again, a master of these, but as I looked
through my local newspaper in Memphis, which may not
necessarily be the best newspaper in the country, but as I
looked through the real estate sections there, it shows a rate
difference that is pretty consistently greater than that
spread.
I guess my question is, why did CBO not use a range for
this number, or even an average over some set period of time
over the last year or two as you went about doing this? Maybe I
am reading this wrong, but perhaps you can answer that
question.
Mr. Crippen. I think I can eventually answer to your
satisfaction. There are no sophomoric questions, only
sophomoric answers.
I will fall back on what I do know. That is, that over time
some of these spreads have lessened. And so the amount of pass-
through would have gone down. We used a higher number in 1995.
We used 35 basis points as a spread.
But more recent studies--and we were just talking about one
a few minutes ago, in fact, one that we reviewed just this
morning before coming over--suggest that something in the low
20's is about the right number for the spread between
conforming and jumbos. So those studies just repeat what we
have said and do not really answer your question. I will give
you a more thorough answer in writing as to the exact
methodology of why what you are seeing in the Memphis paper
does not match 22 or 25.
[The information referred to can be found on page 171 in
the appendix.]
But we are comforted that the most recent studies,
including our own, and other independent studies, are coming up
with about the same conclusion. So the preponderance of
evidence we have at least is that the low 20's is about right.
But I will further answer your question.
Mr. Ford. Switching gears just slightly, the report
estimates--and I guess the front cover gives us the pie chart--
that Fannie and Freddie received roughly $10.6 billion in
subsidies in the year 2000, and that they passed on to
conforming mortgage borrowers about $6.7 billion, retaining
close to $4 billion in benefits.
You estimate that the $3.6 billion subsidy on their MBS in
2000. You estimate that. Does that mean that their charters
create an additional $3.6 billion in revenues that they would
not get if they were not Government Sponsored Enterprises or
GSEs?
Mr. Crippen. No, no. In fact, these numbers do not speak to
revenues at all. They speak to implied value of the Federal
relationship.
The MBS pass-through we assume is 25 basis points, as it is
on mortgages, because the MBS and mortgage markets, out in the
real world, are quite competitive.
So any subsidies granted to whole mortgages we assume is
also available through arbitrage or directly into MBSs, into
bundled mortgages. So that if a mortgage has a subsidy or is
getting a subsidy pass-through, an advantage from the GSEs, and
if it is put into a bundle, it is going to have the same
advantage.
So when it is all said and done, there is not as much
retained subsidy by the GSEs on MBS. It is a few basis points.
I think we assume 5.
Mr. Ford. So is this more of an estimate or more of a
theory?
Mr. Crippen. Well, it is an estimate. I mean, it is an
estimate and a theory in the sense that if you assume whole
mortgages get one interest rate, and that interest rate is
subsidized, and you bundle them, then presumably the bundled
mortgages have roughly the same subsidy or advantaged interest
rate.
So in that sense it is a theory, but it is based on the
fact. I mean, one of the arguments, of course, that a lot of
folks are making is that the MBS market is very competitive.
And to the extent that is true--and we think it is--there would
not be any way to not have the value of the lower mortgage rate
in a bundle when you have it in the individual mortgages.
So, all of these figures are estimates. Nothing is directly
observable, which is why the assumptions we make are subject to
question/criticism.
We have to observe firms that are not GSEs and infer that
the differences between them--both on the borrowing side and on
their mortgages, what they do with what they borrow--are due to
the fact they have a Federal imprimatur.
Now, there may be other reasons for them. We do not think
they are very compelling reasons. So none of this is very
satisfactory in the sense that you cannot point to it. But we
think these are very reasonable ways to try and measure these
phenomena.
Mr. Ford. I know my time is up, Mr. Chairman. I know there
are really a couple of concerns I know that you addressed and
other defenses from this side, or positions taken on this side
regarding the benefit that Fannie Mae and Freddie Mac have
provided communities across this country, and I can certainly
speak to some of the wonderful things being done across my
entire State, including my District.
As much as we are concerned on this subcommittee about the
solvency and really about the vibrancy of this economy and the
GSE's ability to perform as well as they have, I would hope
that we would apply that same caution and carefulness later
today as we are prepared to vote on any tax reconciliation
bill, in which many in this Congress believe some of the
resources and some of the projections that your office, Mr.
Crippen, has made about how this country will perform and how
our economy will perform, I hope that many in the Congress and
in this room understand some of us who may vote differently
than some may want us to vote, and those on the other side who
are expressing caution, I would hope that caution will find its
way to the House floor a little later today.
I thank you, Mr. Chairman, for allowing me to go a little
bit over. And I look forward to visiting you in Louisiana to
learn about those houses you talked about.
Chairman Baker. You will be welcome. You will get some good
food.
Mr. Crowley.
Mr. Crowley. Thank you, Mr. Chairman. I will try to be
brief.
Just to follow up on what Mr. Ford was talking about in
terms of the value of GSEs, and I think also to follow up--I
was not here when Mr. Bachus was questioning, but I understand
he had a similar line of questioning--and you will have to
forgive me, because I have been going back and forth between
this subcommittee and the Relations Committee hearing.
Mr. Crippen. I understand. I just hope I give you the same
answer I gave before.
Mr. Crowley. That is all right. I do not think you will,
because some I am going to ask for short answers, and I think
you are going to like the line of questioning.
I have before me a February 9th, 2000, Wall Street Journal
Index of Mortgage Rates, jumbo and conforming mortgage rates.
It is interesting to note that--and I think Mr. Bachus was
talking about the benefits of, and you may have been answering
the benefits of your involvement in the conforming mortgage
rates and the spillover effect that it may have.
It is interesting to note that in the New York Metro
region, 30-year fixed is at 7.43, and a 30-year fixed on the
conforming mortgage rate is 7.02, or 41 basis points difference
between the two.
Could you explain the 41 points difference could be caused
by having the GSEs in the conforming market rate?
Mr. Crippen. Some portion of it is. We would not think that
41----
Mr. Crowley. You don't want to take all the credit for it.
Mr. Crippen. Pardon?
Mr. Crowley. You don't want to take all the credit for it.
Mr. Crippen. No. No, not all of it. We don't want to give
all credit for it, either.
Certainly, some portion of the difference is attributable
to the GSEs, but it is a fairly precise market that the GSEs
are involved in, which is the conforming as we know, the 30-
year fixed rate. Although they can invest in ARMs and in other
markets, that is where they predominate.
And so the comparison just of jumbos with 30-year fixed in
the newspaper is not quite the right comparison. Again, I told
Mr. Ford--who asked us, why aren't the numbers what I see in
the Memphis paper?--that I would give him a further answer in
writing. I am not sure exactly how we would disaggregate the 41
down to what we think is 22, but I can address that, and will.
We are comforted by the fact, as I told Mr. Ford, that not
only do we think the difference is about 22 basis points, but
there are a number of independent studies, some very recent,
that have come out in about that range, the low 20's.
So there is a reason for it. I am not very good at telling
you precisely the difference between 41 and 22, but I will.
Mr. Crowley. Well, I do. It benefits my constituents to
have that conforming mortgage rate.
I am just going to ask you a series of questions, and
``yes'' and ``no'' might be the best way to answer them.
Has Fannie Mae or Freddie or any of the Federal Home Loan
Banks ever received any taxpayer funds?
Mr. Crippen. No. Not that I'm aware of.
Mr. Crowley. And even during the S&L crisis of the 1980's
and 1990's when taxpayers spent billions of dollars to bail out
many of those institutions, did you receive any funding?
Mr. Crippen. No.
Mr. Crowley. Do you pay Federal taxes?
Mr. Crippen. The GSEs pay a lot of Federal taxes.
Mr. Crowley. So it is fair to say that you are producing
income for the Federal Government?
Mr. Crippen. That the GSEs are producing income for the
Federal Government, yes.
Mr. Crowley. So, the Federal GSEs do not cost the Federal
Government, and by extension, do not cost the taxpayers a
single cent, do they?
Mr. Crippen. Not directly, no. The implied subsidy has a
value, but there are no Federal dollars that are passing
directly back and forth.
Mr. Crowley. Thank you. I yield back the balance of my
time.
Chairman Baker. Thank you, Mr. Crowley.
I think we can start round two.
Mr. Crippen, on the point Mr. Crowley was just making, from
1979 to 1984, what was Fannie Mae's financial condition?
Mr. Crippen. Pretty close to nonexistent.
Chairman Baker. Did the Congress take any action in those
years to assist the institutions to remain solvent by waiving
Federal income taxes or taking other bookkeeping measures?
Mr. Crippen. I suspect you know the answer to the question
better than I do.
Chairman Baker. Not that that 5-year period of insolvency
reflects today's current management or current financial
condition, I merely point out that business cycles have a
strange way of repeating themselves.
In the rebuttal provided by the enterprises, I only got to
the first which related to the fact that you were responding to
the question which I asked, and they thought it would be more
appropriate for you to answer somebody else's question.
Second, that the GSEs assert that intense competitive
forces require the pass-through of all subsidies, and that none
is retained by the GSEs.
And to prove that point they allege that they only hold
22.7 percent of the fixed-rate single-family mortgages today.
Your analysis of that statement, if I am understanding it
correctly, is that removing the fixed-rate mortgages that are
ineligible reduces the size of the market in which Fannie and
Freddie operate. When that action is taken, so that you are
comparing--as some suggest--apples with apples, the resulting
analysis says that they are now involved in about 71 percent of
the market as opposed to 22.7.
If the line of defense by the agencies was we can't have a
subsidy, because we have no advantage in the market with only
22 percent, and then we look at the market as analyzed through
your perspective and they have 71 percent, should I draw the
conclusion that perhaps the subsidy is responsible for them
being so predominant in the market which they occupy?
Mr. Crippen. I do not know how to answer that exactly.
Chairman Baker. That's OK. I have another one.
[Laughter.]
Chairman Baker. In the 1996 study, the CBO estimated the
subsidy rates for callable and non-callable debts separately.
The agencies have argued that the subsidy rates applied to
callable debt were implausibly high.
As I read it, the CBO now makes a much more conservative
assumption that the GSEs receive no more subsidy on the
callable debt than on non-callable debt. And you modified the
assumptions of the 1996 approach to reflect that view.
Is that correct?
Mr. Crippen. Yes. We still believe, frankly, that there is
some further advantage on callable debt, but we do not have a
good case for how much.
Chairman Baker. So you make an assumption, basically, that
seems to have fallen in their favor on this point.
Mr. Crippen. Yes, this one is in their favor.
Chairman Baker. The CBO used the same rate for short-and
long-term debt in the 1996 study. In this study you are now
using a lower funding advantage assumption for short-term debt
than long-term debt. That is also a modification.
Is that correct?
Mr. Crippen. Yes.
Chairman Baker. And that tended to move in the GSEs
direction----
Mr. Crippen. Yes.
Chairman Baker.----in response to their----
Mr. Crippen. It lowers the spread of the amount of the
subsidy we calculate.
Chairman Baker. So it is another one of those troubling
assumptions that were bothering people earlier.
Although the GSEs contend that liquidity is a major source
of their funding advantage, CBO does not estimate the value of
liquidity separately. And you go on in that paragraph, or
summary, to conclude:
``It seems likely, however, that the sophisticated
financial institutions with which the GSEs compete also manage
their debt operations so as to capture any available gains from
enhanced liquidity.''
Your view is that although these institutions are very well
managed and very well run, there are others in the marketplace
who should exercise similar levels of skill? Is that what I can
draw from that?
Mr. Crippen. Yes. And, to the extent they are any better,
it certainly can't be by very much, a basis point or two. But
certainly, the statement would have to be supported by evidence
that somehow they are better than their closest competitors at
debt management.
Now, this does not have anything to do with mortgage
issuance; it is debt management.
Chairman Baker. So in the rebuttal provided by the
enterprises to the efficacy of the report, their first said you
answered the wrong question; then that there is no subsidy that
is passed on to shareholders.
As to the remaining elements to which they responded, in
most cases there was a modification or a movement in the
agency's direction to ameliorate their concerns.
Is that correct?
Mr. Crippen. If I followed it, yes. Certainly the latter
part, yes.
Chairman Baker. I have again expired my time.
Mr. Bentsen, did you want to follow up?
Mr. Bentsen. Thank you, Mr. Chairman.
Mr. Crippen, I have a few questions for you. Let me start
out, though, by saying to my friend from Louisiana, I am not
sure you can make the statement that there is no subsidy in the
federally insured depository institution market. And I think
our friend, Mr. Greenspan, would concur that there is a subsidy
that occurs.
And I think if you go back and look at the S&L bailout that
you and I have lived through--because our States, I think, have
been unfairly criticized beyond our excesses--that there was a
subsidy.
But let me go forward. In Appendix B, Subsidy Estimates
From Growth Is Permanent, you may have mentioned this earlier,
but I was just looking at it.
You have a huge ramp-up in the subsidy primarily--well,
actually for both Fannie and Freddie in the 1998-2000 period.
Is that an interest rate factor?
Mr. Crippen. It is more the quantity of debt that they
issued. Just in 2000, it was under $300 billion of new debt. So
a good piece of that is the new debt issues.
Mr. Bentsen. Is that a cyclical factor, do you think? Is it
just in relation to the marketplace occurring or growth in the
economy.
Mr. Crippen. No, well, there is certainly cyclicality that
can affect their operations, but what we have seen is a very
consistent pattern of increasing debt issues and mortgage-
backed securities.
Mr. Bentsen. Is that a spread-factor, also?
Mr. Crippen. Sure.
Mr. Bentsen. That they were getting a better spread?
Because there was, in the 1998 period I think the Corporates
over Treasury spread widened in that period. So I guess the
same would apply, because GSEs would track Treasury debt more
closely?
Mr. Crippen. I am told the answer is, yes.
Mr. Bentsen. And I do not want to quibble over this.
In your sensitivity analysis, which I think is actually
pretty interesting, the discount rate you use--and the idea
would be when you are capitalizing the subsidy you would use
the lower discount rate, you try and use a discount rate that
is associated with what you assume the borrowing costs to be--
--
Mr. Crippen. Yes.
Mr. Bentsen. But in your sensitivity analysis you use a
spread between 610 basis points that you say is between the
Treasury rate and a AAA-minus. But are we assuming they are a
AA or a AA-minus? And that is a de minimis amount, but----
Mr. Crippen. We are not assuming, I think, either. I am
going to refer to my colleagues who did the sensitivity
analysis. I think it is probably worth noting, though, that in
the point estimates, the ones that are on the cover, we used
their cost of capital. And so actually that is again another
advantage, because it is risk-adjusted.
Mr. Bentsen. Fair enough. I want to get back to this whole
issue of the subsidy, because I think there are quantitative
questions, and then there are just philosophical qualitative
questions.
Mr. Crippen. Sure.
Mr. Bentsen. Is it fair to say--well, two things.
One, you said before if we assume the $1.2 billion, if we
were to compare this to just a straight appropriation, whether
to the private market or the Government doing it through the
FHA or whatever, we might also include the $3.9 billion,
although that is a non-cash subsidy. The $1.2 billion is
theoretically a cash subsidy. It is foregone taxes or revenues
that would otherwise--so you would have to--to add that $3.9
billion it seems to me you would have to have that
appropriation.
But I guess the bigger question is this: $3.9 billion, you
do need to deduct the return to shareholders, dividends paid
out to shareholders, and I know my colleague brought that up as
to whether or not that may be--I don't know whether or not he
was going this way--whether or not that is a red herring.
But the fact is, again, there is some leverage because
Congress established these entities to be able to raise more
capital to have better market reach. And obviously we cannot
expect investors to invest if they do not think they are going
to get some dividend.
Now as you point out, their stock prices have accumulated
quite dramatically in recent years, if I can read that
properly, above various indices.
Mr. Crippen. Yes.
[The chart referred to can be found on page 77 in the
appendix.]
Mr. Bentsen. But, so have others. And historically it has
not been as great as it has been in recent years. And so it is
not just a growth stock, it has been I assume an income-
producing stock. I don't happen to own any.
But it would seem to me that you would have to deduct
payment to shareholders, and you would have to deduct operating
costs, and you would have to deduct some loan loss reserve. And
it is fair to say you do not know what that is.
Mr. Crippen. No.
Mr. Bentsen. But, is it fair to say that those are costs to
the subsidy?
Mr. Crippen. Sure. The amount retained, we do not--as you
suggested--try to figure out where it goes, because we are not
chasing dollars. We are looking at differences in mortgage
yield and debt market instruments. But certainly the subsidy
could contribute to anything else they need to do, whether it
is charitable giving, advertising, you know, all of those
things.
Mr. Bentsen. With the Chairman's indulgence, because this
is getting to the heart of my question, I mean, those are costs
of doing business.
Mr. Crippen. Um-hmm.
Mr. Bentsen. Is that fair to say? I do not care about
charitable giving right now.
Mr. Crippen. Sure.
Mr. Bentsen. I am talking about operating costs of the
entity, the costs to raise capital, which is the payment to
shareholders, and your loan loss reserves. And we can debate
whether or not there is sufficient loan loss reserve. That is
another issue for another day.
But is that a fair assumption?
Mr. Crippen. Well, some of the operating costs certainly
are in the pricing of other non-GSE debt. So certainly, the
subsidy can go to shareholders. As I said, it is not surprising
that you would not pass through other----
Mr. Bentsen. If the Chairman will let me ask this question,
then my question is to you--and this is more of a qualitative
of a philosophical question.
Are we getting a good deal for our investment, which from a
Federal standpoint is somewhat of a non-dollar investment. We
are leveraging our credit, in effect, our credit quality. Are
we getting a good deal for that? And I do not want you to
confuse it with--but you can answer it this way--or should we
be doing this at all?
And obviously Congress decided some time ago that we should
be doing it, but the question is, on a dollar basis and a
leverage basis, are we getting a good deal? Should we be
getting a little bit better than 63 percent leverage, or what?
Mr. Crippen. There is no way to compare. I mean the
question can be cast in a couple of ways.
One, if the Federal Government were to spend directly the
$10 billion in subsidy we estimate last year, what could you
buy for it?
The answer is, if you did not have any costs, you could
probably support more mortgages, or more than tha 25 basis
point spread than you are getting now. But that assumes a lot
of things in between. We do not have any good comparison.
But second, the question that you may want to think about a
bit is--it is not whether they are here or not--what would the
GSEs look like, and what would the benefits of their operation
be if they did not have the subsidy any longer?
Because the choice is not between having them out of
existence or as we know them today, you have other choices in
between about the continuation of their relationship with the
Federal Government and how you manage that.
So I cannot answer the normative or the qualitative
question, are we getting a good deal? I do not have anything to
compare it to. Clearly, the shareholders have been getting a
good deal. That is not to say it is inappropriate. But the
mortgage market we know, the conforming market, has lower rates
because of their activities. So that is a good thing from the
objective of their charter.
Mr. Bentsen. Thank you.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Bentsen. I would point out,
there are a lot of expenditures that could be in the calculus,
$14 million for lobbying expense last year for example.
Mr. Bachus.
Mr. Bachus. Thank you.
Director, we talked about the amount of the subsidy that is
passed through, but then we talked about what is retained.
Mr. Crippen. Right.
Mr. Bachus. On the retained part, what part of that would
go to say payment of Federal income tax?
Mr. Crippen. Well, we do not know how much of the subsidy
goes anywhere. I mean, we are not tracing the dollars. One
could say that it is retained for shareholders.
The fact that there are other payments being made could be
part of what the money is used for, what the value of the
spread is used for. But we don't know. We did not try to trace
any dollars. All we did was look at differences between the
operation in the financial markets of these firms and those
that are not subsidized. So we do not know.
There are certainly other things that they have,
obligations to the Treasury, regulatory requirements of
capital, and other things, but we do not know. We did not do
that assessment, and I do not think you can.
Mr. Bachus. Well, you could determine what they pay in
Federal income taxes. Aren't they publicly traded?
Mr. Crippen. Presumably, it is in the annual reports.
Mr. Bachus. So if we talk about what is retained by them,
you would--obviously what the Government gets back in income
tax or other taxes would be a return to the Government and
would reduce the cost of that subsidy. Am I right?
Mr. Crippen. Well again, the value of the subsidy is the
spread in the markets. There are no direct dollars to offset.
Yes, they pay Federal taxes. I think at one time they may have
been close to the largest Federal taxpayer, and maybe still
are, as a single entity. But that is the cost of their doing
business just like private firms.
They do not pay State and local taxes, which is an
advantage other firms do not have. Other firms do pay Federal
taxes. The GSEs do not pay SEC fees, which other firms do. So
they have these advantages.
The Federal tax payment happens to not be one of them. But
certainly, some portion of the retained subsidy could be used
for paying taxes or other things. We do not know.
Mr. Bachus. If they bring stability to the housing market,
that would be hard for you to assess a value or put a dollar
value on that. Is that correct?
Mr. Crippen. Yes.
Mr. Bachus. And you made no attempt to do that?
Mr. Crippen. We did not.
Mr. Bachus. And if we said that they bring stability and
predictability to the mortgage housing market, that would be
more for us to determine the value of that?
Mr. Crippen. It is very hard to quantify. Similarly, it is
hard to quantify how much increase in cost of capital there is
for non-housing entities. We did not try to do that either.
Mr. Bachus. Now when we talk about a Government subsidy, if
Fannie Mae and Freddie Mac were shut down, the Government
certainly would not get any of that money back?
Mr. Crippen. Right.
Mr. Bachus. It is not as if----
Mr. Crippen. Right.
Mr. Bachus. So this is not a savings to the Government if
we shut it down, or to the taxpayer.
Mr. Crippen. No, not in this calculation. I mean there may
be other effects. But maybe I should put it this way:
If I were going to buy a home, and my parents, God bless
them, chose to help me, they could do it any number of ways.
They could buy down the mortgage rate. They could give me the
down payment. They could do it in ways that are very easy to
point to, in cash. Or they could co-sign the mortgage and lend
me their credit rating, or their collateral, use their house.
And in so doing, you would not see a cash transfer, but the
effect would be the same. That is a little bit like what we
have here.
The subsidy is real. Just because you cannot watch a dollar
flow does not mean there is not a subsidy.
Mr. Bachus. I guess what I am saying, just because there is
a subsidy, ending that subsidy would not necessarily benefit
the Government and the people.
Mr. Crippen. Not in direct dollars, no. But there are lots
of other implications.
Anyway, there are not dollars flowing to Fannie or Freddie
from the Federal treasury, so you would not see dollars
returned. But again, I think we need to keep in mind that the
elimination of the institutions is not at issue so much as the
elimination of the subsidy, because the institutions would
survive in some form.
The question is, what do you want to do with the
relationship with the Federal Government?
Mr. Bachus. But, if there is not a cost of that subsidy to
the taxpayer, and yet a large percentage of that subsidy is
passed through to homeowners, you know, one could ask the
question, why end it at all?
Mr. Crippen. Well, despite what we would like to think,
nothing is free. While there may not be Federal dollars
associated with it, certainly it does have an impact on other
people trying to raise money in the capital markets, private
companies.
So it is not free. It certainly has an impact on the rest
of what the Federal Government can do. It may impact even the
Federal Government's borrowing cost.
So there are lots of things we have not calculated here,
one could argue, but the fact that there are no dollars flowing
is probably not the right way to look at it, from our point of
view.
Mr. Bachus. And I agree, but the fact that it is not free
does not mean it is not effective, or is not good public policy
in and of itself.
Mr. Crippen. We have not opined on any of those questions,
but simply, what is the value of what their affiliation with
the Federal Government, and how much appears to go back to the
mortgage borrowers in the conforming market?
Mr. Bachus. Another thing that I think it is hard that you
did not address is that Fannie Mae and Freddie Mac provide a
lot of the funding for multi-family housing for low-income
housing.
Mr. Crippen. Right.
Mr. Bachus. And that is a value to us as a country, but
hard to quantify.
Mr. Crippen. Beyond what shows up in the reduced mortgage
rates, yes, it is hard to quantify. There may be values there
that are non-economic, and we certainly could not----
Mr. Bachus. Let me end by saying to the Chairman that I
appreciate, I think the Chairman is raising an issue and
exploring an issue that is important, and I commend him for
that. It is a thankless job.
Chairman Baker. I can verify that.
[Laughter.]
Chairman Baker. Thank you very much, Mr. Bachus. I
appreciate your courtesy.
Ms. Jones.
Ms. Jones. I had to run out and see 35, 13-year-old
constituents of mine who were visiting Capitol Hill, so
therefore I have no idea what anybody asked while I was out the
door.
Mr. Crippen. But they all have a mortgage now, I bet.
[Laughter.]
Ms. Jones. Of some sort. Maybe not a home mortgage, though.
[Laughter.]
Ms. Jones. How many other implied-subsidy studies have you
done, CBO I mean, not you personally.
Mr. Crippen. I should know the answer to that, because I
think we asked ourselves. A half-a-dozen or so?
Ms. Jones. Well, even if you do not know the number, what
kind of agencies? Who?
Mr. Crippen. Actually, we have a list, I think. We have a
list that I will give to you.
Ms. Jones. Should I go on to something else while you find
it?
Mr. Crippen. Probably.
Ms. Jones. OK. I want to go back to this value that you
give to Fannie Mae and Freddie Mac's ability to have the
subsidy, and that others would like to stand in their shoes.
What is that value? How do you calculate or put it into
numbers?
Mr. Crippen. We do it by looking at companies that do not
have this implied relationship with the Federal Government, and
that also issue debt and try to----
Ms. Jones. These are the A and the AA----
Mr. Crippen. The 70-odd companies we have been talking
about this morning. We look at what it cost them to borrow.
Ms. Jones. So when you took a look at these other
companies, I am assuming that you just did a paper look? You
did not discuss with them other issues and other
responsibilities that Fannie and Freddie and Federal Home Loan
Bank----
Mr. Crippen. Right.
Ms. Jones. Because if they really wanted to stand in the
place, that would mean they would have to assume all the
responsibilities. Fair?
Mr. Crippen. That is true.
Ms. Jones. But in your assessment of the value, you did not
I guess put a human side to determining whether they really
want to do it, or do they just talk about doing it.
Mr. Crippen. I do not know that there is anybody, Ms.
Jones, that would really want to step in. All I was trying to
say is, there is a value to the relationship with the Federal
Government that companies would probably be willing to pay for.
The method we used to try and estimate the value of the
relationship with the Federal Government that presumably other
companies might be willing to pay for is by comparing Fannie
and Freddie and GSE debt with these other companies.
Ms. Jones. Then in the other implied subsidy studies that
you did, what was the value that you were looking at there?
I am assuming nobody has asked these questions; right?
Mr. Crippen. No. Well, as I said to Mr. Crowley, maybe--I
just hope that if these are repeat questions that I have the
same answer.
Ms. Jones. OK.
Mr. Crippen. Here are some examples. As I said, I have a
list, and then I will get to your last question.
We looked at the subsidies implied by the Federal Financial
Support of Business, writ large, which turned out to be about
$32 billion.
Ms. Jones. Business at who?
Mr. Crippen. Just Federal Financial Support of Business.
Ms. Jones. OK.
Mr. Crippen. July, 1995, Who Gains and Who Pays Under
Carbon Allowance Trading?, June 2000;
The Outlook for Farm Commodity Program Spending. This was
in 1992;
Federal Home Loan Banks and the Housing Finance System,
1993;
Government Sponsored Enterprises and Their Implicit
Subsidy: The Case of Sally Mae, which was in 1985.
And then each year, we have some options in our big options
book that include other smaller estimates, of subsidies.
So there are not a lot. There are a half a dozen here. The
value generally that we look for is the direct and indirect
value of the relationship with the Federal Government.
Sometimes, there may be dollar flows to promote R&D or
other things. Sometimes, we give the implied credit, or we give
the credit of the Federal Government backing to other entities
so they can borrow at better rates. Sometimes, we buy down loan
rates directly and give loans through the SBA and other
programs.
Ms. Jones. The value that you attribute is the value to the
corporation or the entity, not the value to the United States
or the banking industry, or the home loan buyer, or the
mortgage broker, or whatever else. Right?
Mr. Crippen. Yes. That is fair.
Ms. Jones. Then has anybody ever asked you to do a study of
what the value to us of giving the subsidy to the GSEs is to
the American public?
Mr. Crippen. No. We have talked a bit about it this
morning. There is certainly a value that we have not measured,
and some of it is measurable because there are other mortgages
affected, and we could look at is just as we have.
Ms. Jones. I probably could go on and on and on and bring
witnesses who would testify to that value. But in your opinion
in doing this report, that value was not part of what you
should consider in your assessment?
Mr. Crippen. Just as we did not consider costs.
Ms. Jones. Hold on a second.
Mr. Crippen. Yes.
Ms. Jones. I do not want you to think I am harassing you.
Just answer that question.
Mr. Crippen. Yes, there are certainly----
Ms. Jones. Those are values that you did not consider?
Mr. Crippen. Yes, that is correct.
Ms. Jones. OK. And you would have wanted to consider--or
you did not consider either. Now you can tell me what you
wanted to say.
Mr. Crippen. What I wanted to say is, one, such an analysis
is very hard. But, two, there are also costs involved that we
did not measure.
As an example, when the GSEs last year issued somewhere in
the neighborhood of $300 billion in new debt and MBS
guarantees. The fact that they borrowed or were active in the
capital markets means that the price for other people who were
borrowing in the capital markets was probably higher.
And it does not have to be a lot higher. As I said, just as
an example, let's say we are paying 1 basis point----
Ms. Jones. Well, you are not saying, even if that is the
impact there is nothing wrong with that? Right?
Mr. Crippen. Not necessarily. But you have to understand,
what I am saying is, if there are big benefits----
Ms. Jones. There is nothing illegal about it. Right?
Mr. Crippen. No.
Ms. Jones. And if you were clearly, if you were running, if
I name a bank then somebody is going to accuse me of picking on
a particular bank, but a financial institution, you would do
what Fannie did or Freddie did because that is good business
judgment?
Mr. Crippen. But they have the ability to do it in part,
because of the Federal guarantee. Without it, they probably
would not be in the debt markets as much, and they would not
get the same breaks that they do.
All I am trying to say is, yes, there are benefits we did
not calculate, and you are right in saying that. There are also
costs of their activities that we did not calculate. And I do
not know where, on balance, the assessment would come out.
Ms. Jones. OK, then being the independent evaluator that
your agency is----
Mr. Crippen. Thank you.
Ms. Jones. ----What impact does that have on me as a
Congresswoman sitting and accepting this report for determining
as we go down this--how many more of these hearings are we
going to have, Mr. Chairman?
Chairman Baker. Until you are happy.
Ms. Jones. Until I am happy?
[Laughter.]
Ms. Jones. Then I want to get to be Chairperson. That is
when I will be happy.
[Laughter.]
Ms. Jones. We are going to be going through this until I am
happy. Now you made me forget my question, Mr. Chairman. Can
you read that back? In the courtroom we can read it back. No,
just kidding.
I am done. Thank you a lot.
Mr. Crippen. You said we were objective and all of that; so
that is the good part.
Ms. Jones. Oh, you liked that part?
Mr. Crippen. I did, yes.
[Laughter.]
Mr. Crippen. We have got to make sure that is in the
record.
Ms. Jones. I was going to say--I know where I was----
Mr. Crippen. OK.
Ms. Jones. In light of the fact that you did not consider
these values or these costs, what impact does that have on the
validity or value of your report?
Mr. Crippen. I think, Ms. Jones, the report gives you some
information as a Congressperson that you would want to take
into account as you think about how you want to provide for
your constituents' housing.
The GSEs may be the best way to do it in your district or
in the country. I do not know the answer to that. All I can
tell you is that there is a value to the implied guarantee that
the Federal Government lends them. The relationship with the
Federal Government is worth something. And by our estimation,
it is worth more than the mortgage holders who are affected
directly are getting.
Now that is not to say that it is inappropriate or anything
else.
Ms. Jones. Worth more in how you determine value, not in
how----
Mr. Crippen. Absolutely, yes.
Ms. Jones. See, that is the problem I am having.
Mr. Crippen. But you could evaluate other policies. I mean,
you might get the same or similar values from the GSEs if they
did not have the same subsidy, or had no subsidy. I do not know
the answer to that. You do not know.
Ms. Jones. I think we are saying the same thing.
Mr. Crippen. Yes. But you may want to take the Federal
guarantee and do something else with it.
Ms. Jones. Or I may want to leave it where it is.
Mr. Crippen. You may.
Ms. Jones. OK.
Thanks, Mr. Chairman.
Chairman Baker. Thank you, Ms. Jones. I am going to wrap up
here--I know, mercifully, you are thinking. I would merely
point out, Ms. Jones, in that exchange that my point in trying
to provide this source of information is that Members can come
to better understanding as to----
Ms. Jones. Mr. Chairman, if you will just yield, I did not
mean to infer that you were not.
Chairman Baker. I am taking no offense.
Ms. Jones. OK.
Chairman Baker. I am merely saying that the purpose of this
is to have Members get access to what we believe to be
constructive, professional information, to make assessments
about where benefits actually flow, and measure the value of
those benefits to your constituents. In Fannie Mae's 2000
Annual Report, the same figure for Fannie is 71 percent--that
is, for the 80 percent or less LTV conforming loan portfolio.
If you look at where the benefit appears to go, it is a fairly
expensive mechanism by which to facilitate home ownership.
On the other side of the coin, however, if I were to take
every argument proffered on the side of the GSEs today, it is a
persuasive argument to nationalize home mortgage debt. If this
is a good thing, let's do it for everybody.
Now we may want to means-test it, but we do not means-test
the benefit today, because there are people who are very high
income who may be borrowing 50 percent of the sale cost in a
mortgage, and we are subsidizing we do not know how many of
those individuals.
So if one is concerned about nationalizing the home
mortgage debt, one ought to have a concern about the current
system.
I think it is incumbent to involve myself for the
significant long term in the analysis of this set of concerns
and hopefully come to some logical resolution that even the
GSEs might find to be an appropriate resolution.
To that end, there are a couple of remaining items that I
wanted to bring to your attention, Mr. Crippen, that I thought
deserve further analysis.
On page 28 of your review, there is Table 8, which has an
analysis of year-by-year retained subsidy. What caught my eye
is that even though the aggregate subsidy declined in value
from 1999 to 2000, the amount retained by Fannie Mae, though
not by Freddie Mac, actually went up.
I do not need a detailed explanation today as to why that
occurred, but for the record I would like to get something back
from you as to how that occurred, if you have the factual basis
on which to make such analysis.
[Mr. Crippen submitted the following response at a
later date:
[Fannie Mae's retained subsidy increased in 2000
primarily because of a substantial increase in its
debt-financed portfolio, which more than offset the
effect of a reduction in new MBS guarantees.]
Second, there was some concern expressed about my press
release on Friday, which I have gone back and carefully read. I
did not allege that the GSEs released the document
inappropriately. I merely said somebody did. And that I thought
that was unfortunate because we were trying to close up the
final product.
And what was difficult for members of the press to
understand was that I had made assurances to Members on both
sides that upon receipt of the final document we would make it
available as soon as it was physically available, and there
were Members without copies who were reading summaries of the
report in national media coverage. That is unfortunate.
I do intend to have conversations with those reported in
the media as having access from the Wall Street community as to
the appropriateness of their comments, given Members of
Congress had not even seen the data. That troubled me greatly.
I know that you extended the report as a courtesy, as a
matter of professional practice, as you do customarily for
other agencies, and that you had hoped that that
confidentiality would have been maintained. And let me say
again, we are not alleging the GSEs were the source. It could
have come from any number of places. I simply can say without
fear of equivocation it was not from my office, nor was it from
your office.
Then I was troubled by a press release I got this morning
indicating some source saying that ``Baker himself, several
weeks prior, mentioned a $10 billion figure,'' as if that were
the basis for the early release. That was a guess, which was
actually inaccurate, and I just want to assure Members who may
read the record later that I did not, nor did any member of my
staff, release to anyone the information contained in this
important report.
As to where we go from here, some Members have asked, now
what?
I will have a meeting on June 14th of the subcommittee
relating to analyst issues that had been previously announced.
Between now and then we will determine if the scope of that
hearing will be enlarged. But it would be my intention to
invite the GSEs and interested parties to make further comment
on this report at a subsequent hearing.
I do not want anyone to think that we would take only the
Agency's view and not afford all interested parties an
opportunity to express publicly their concerns, if they choose
to participate in approximately a month. We do not have a
hearing date.
I further am taking to heart the observations of Members
today who said that the scope of your study, based on my
request, was too myopic and did not consider all the values nor
all the costs associated with the effects of the GSEs on
mortgages and debt more broadly.
We will take under advisement--and I will visit with Mr.
Kanjorski and others--as to whether we may come back to you at
a later time and request a broader examination. But my intent
is to give you time off for good behavior.
You have certainly paid your dues, suffered long hours to
give us a professional product, for which you have not been
given appropriate recognition, and I wish to thank you for your
courtesies, the patience of your staff, and your willingness to
stay in the saddle here for almost 4 hours in listening to
rebuttals of your recommendations.
I appreciate your work. I look forward to continuing our
relationship with regard to this matter. Hopefully, at the end
of the day, the GSEs, Senator Gramm, Senator Sarbanes, Chairman
Oxley, and myself, hope to be able to have a professional
discussion on these matters.
I will again try to diffuse what I think has been an
unfortunate 2-year history, but make clear I am not going away
on this. I think public policy demands resolution, and we will
stick to it until we get it done.
Hearing adjourned. Thank you.
[Whereupon, at 12:47 p.m., the hearing was adjourned.]
A P P E N D I X
May 23, 2001
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