U.S. GOVERNMENT PRINTING OFFICE

72–911 PS WASHINGTON : 2001

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

(

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: (202) 512–1800 Fax: (202) 512–2550

Mail: Stop SSOP, Washington DC 20402–0001

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missiouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND

GOVERNMENT SPONSORED ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

ROBERT W. NEY, Ohio, Vice Chairman

CHRISTOPHER SHAYS, Connecticut

CHRISTOPHER COX, California

PAUL E. GILLMOR, Ohio

RON PAUL, Texas

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

BOB BARR, Georgia

WALTER B. JONES, North Carolina

STEVEN C. LATOURETTE, Ohio

JOHN B. SHADEGG, Arizona

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

VITO FOSSELLA, New York

JUDY BIGGERT, Illinois

GARY G. MILLER, California

DOUG OSE, California

PATRICK J. TOOMEY, Pennsylvania

MIKE FERGUSON, New Jersey

MELISSA A. HART, Pennsylvania

MIKE ROGERS, Michigan

PAUL E. KANJORSKI, Pennsylvania

GARY L. ACKERMAN, New York

NYDIA M. VELA ́ ZQUEZ, New York

KEN BENTSEN, Texas

MAX SANDLIN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

FRANK MASCARA, Pennsylvania

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

BRAD SHERMAN, California

GREGORY W. MEEKS, New York

JAY INSLEE, Washington

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

STEVE ISRAEL, New York

MIKE ROSS, Arizona

(V)

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

(1)

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.

2

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.

3

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 twothirds 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.

4

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.

5

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

6

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

7

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.

8

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.

9

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 alltime 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,

10

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.

11

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.

12

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.

13

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 esti- mated 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.

14

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 DepartVerDate 11-MAY-2000 09:33 Sep 21, 2001 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 72911.TXT HBANK1 PsN: HBANK1
15

ment 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,

16

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?

17

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

18

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

19

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.

20

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

21

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.

22

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.

23

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.

24

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?

25

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.

26

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 longterm 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?

27

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.

28

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.

29

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.

30

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.

31

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.

32

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?

33

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.

34

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?

35

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 standalone 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 AAminus 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.

36

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

37

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.

38

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.

39

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

40

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.

41

[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.

42

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.

43

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.

44

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——

45

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.

46

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 AAminus? 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 noncash 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.]

47

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.

48

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

49

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?

50

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.

51

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.

52

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

53

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.

54

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

55

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 asVerDate 11-MAY-2000 09:33 Sep 21, 2001 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 72911.TXT HBANK1 PsN: HBANK1
56

sociated 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.]

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