CBO reports better terms for GSEs to repay Treasuries
As the mortgage industry debates its future and coming under, Congressional Budget Office (CBO) released a study on Friday that suggests recapitalization of government-sponsored enterprises (GSEs) could be profitable. in most scenarios.
That followed a separate CBO study on Thursday that found the federal government could save $14.7 billion by expanding the matching supplement to credit-buying limits and imposing tighter limits since 2016.
In reviewing the 2020 analysis, the nonpartisan CBO concluded that, under current conditions, about 60% of the 250 scenarios considered would raise the funds to pay off the Treasury's ownership stake in Fannie and Freddie. On the contrary, in 2020, this result occurred in only 12% of scenarios.
An updated analysis examining the feasibility of recapitalizing the GSEs through administrative action was requested by Rep. Patrick McHenry of the House Financial Services Committee.
Scenarios under consideration include the GSEs retaining profits for an initial three or five years before selling their common stock to investors to replace the Treasury's estimated $190 billion ownership stake. The Treasury warrants, which give the right (but not the obligation) to purchase common stock at par in the future, expire on September 7, 2028.
The report evaluates factors such as recapitalization time, capital requirements, earnings growth rate and shareholder value estimates. But since the initial analysis in 2020, a lot has changed.
In December 2019, Fannie Mae and Freddie Mac reported holding $24 billion in equity, or 0.4% of their total assets of $5.7 trillion. By December 2023, their equity had grown to $125 billion, or 1.6% of their $7.6 trillion in assets.
Growth in assets and income exceeded projections in the CBO's 2020 analysis. Rising home values increased the principal balances of mortgage loans guaranteed by the GSEs through mortgage-backed securities, boosting their overall financial performance.
“The potential value of the GSEs to investors is greater now than during the previous analysis, resulting in more scenarios in which the GSEs could be recapitalized through the sale of common stock and the Treasury could pay its share to the Treasury. businesses,” the CBO report said.
Changes to eligibility limits
In a separate study released Thursday, the CBO said that under current law, the costs of mortgage guarantees provided by the GSEs are projected to exceed the fees they collect.
The GSEs operate by buying mortgages from lenders, bundling them (MBS) and selling them to investors, while in exchange for a fee they guarantee against losses from defaults.
To close this funding gap, CBO recommended extending for two more years—through 2034—the 10 basis points per year surcharge transferred to the Treasury as part of the GSEs' guarantee fees. This would keep the fee at an average of 58 basis points in line with the projected level in 2025.
The second proposed alternative would eliminate the higher eligible loan limit in high-cost areas and cap the ceiling for other areas at $691,800, about 10% above the maximum limit.
Late last month (FHFA) set a new base level for the loan limit for single-family properties in 2025. For areas where 115% of the local median home value exceeds this base limit, the Housing and Economic Recovery Act (HERA) sets the ceiling at 150%. from the base limit. Finally, next year, the high-value credit limit for single-family properties will be $1,209,750.
Extending the guarantee premiums an additional basis point and reducing the matching limits could save the government $14.7 billion from 2025 to 2034, CBO estimates.
