The cost of subsidizing the operations of Fannie Mae and Freddie Mac should be accounted for in the federal budget as if they were federal agencies, the Congressional Budget Office argues in a new report — an accounting change that would add nearly $400 billion to the growing national deficit.

The Obama administration has argued that only cash the Treasury Department pumps directly into Fannie and Freddie — about $95.6 billion since the mortgage guarantors were placed into conservatorship in September 2008 — should be included as budget expenditures.

The cost of subsidizing the operations of Fannie Mae and Freddie Mac should be accounted for in the federal budget as if they were federal agencies, the Congressional Budget Office argues in a new report — an accounting change that would add nearly $400 billion to the growing national deficit.

The Obama administration has argued that only cash the Treasury Department pumps directly into Fannie and Freddie — about $95.6 billion since the mortgage guarantors were placed into conservatorship in September 2008 — should be included as budget expenditures.

The government received preferred stock in Fannie and Freddie and warrants to purchase common stock in return for those investments, and projects it will invest another $65 billion in the companies over the next decade.

But the CBO maintains that the government will incur $389 billion in additional costs to subsidize Fannie and Freddie’s operations by standing behind their obligations — an amount CBO says should also be included in tallying up the federal budget deficit.

The government’s promise to stand behind Fannie and Freddie’s commitments amounts to a sort of insurance policy, which has a value that can be determined, CBO maintains in its report.

Before Fannie and Freddie were placed in conservatorship, the government’s promise to stand behind their obligations was merely implied, but allowed the federally chartered companies to borrow money at lower rates, the CBO report said. …CONTINUED

That not only lowered rates on mortgages purchased or guaranteed by Fannie and Freddie, but helped boost the publicly traded companies’ profits, the report said.

Now that the commitment to stand behind Fannie and Freddie’s obligations has become explicit, the cost of subsidizing their operations should be included in the federal budget, CBO argues.

Substantial losses on $5 trillion in mortgages held or guaranteed by Fannie Mae and Freddie Mac means that the government provided a subsidy worth an estimated $248 billion when it placed the companies into conservatorship and allowed them to continue operating, the CBO report said.

That’s how much it would have cost to pay a private company to take on the risk of Fannie and Freddie’s commitments without federal backing, CBO said.

The value of government backing as Fannie and Freddie continued to buy and guarantee mortgages after they were placed in conservatorship totals an additional $43 billion, and will amount to another $99 billion in the next decade, CBO said.

Some Republicans are pushing for the Obama administration to adopt CBO’s approach in accounting for federal support of Fannie and Freddie in the budget. Assistant Treasury Secretary Michael Barr told the Wall Street Journal the Obama administration has no plans to do so.

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