[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]





                               BEFORE THE

                            SUBCOMMITTEE ON
                    CAPITAL MARKETS, INSURANCE, AND 

                                 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

72-911                     WASHINGTON : 2001

 For sale by the Superintendent of Documents, U.S. Government Printing 
 Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2550
               Mail: Stop SSOP, Washington DC 20402-0001


                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD, Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSELLA, New York               JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missiouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         

             Terry Haines, Chief Counsel and Staff Director
            Subcommittee on Capital Markets, Insurance, and 
                    Government Sponsored Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

ROBERT W. NEY, Ohio, Vice Chairman   PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER COX, California          NYDIA M. VELAZQUEZ, New York
PAUL E. GILLMOR, Ohio                KEN BENTSEN, Texas
RON PAUL, Texas                      MAX SANDLIN, Texas
SPENCER BACHUS, Alabama              JAMES H. MALONEY, Connecticut
MICHAEL N. CASTLE, Delaware          DARLENE HOOLEY, Oregon
EDWARD R. ROYCE, California          FRANK MASCARA, Pennsylvania
FRANK D. LUCAS, Oklahoma             STEPHANIE TUBBS JONES, Ohio
BOB BARR, Georgia                    MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, North Carolina      BRAD SHERMAN, California
JOHN B. SHADEGG, Arizona             JAY INSLEE, Washington
DAVE WELDON, Florida                 DENNIS MOORE, Kansas
JIM RYUN, Kansas                     CHARLES A. GONZALEZ, Texas
BOB RILEY, Alabama                   HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York              RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
GARY G. MILLER, California           RONNIE SHOWS, Mississippi
DOUG OSE, California                 JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      STEVE ISRAEL, New York
MIKE FERGUSON, New Jersey            MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania

                            C O N T E N T S

Hearing held on:
    May 23, 2001.................................................     1
    May 23, 2001.................................................    57

                              May 23, 2001

Crippen, Hon. Dan L., Director, Congressional Budget Office......     9


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



                        WEDNESDAY, MAY 23, 2001

             U.S. House of Representatives,
       Subcommittee on Capital Markets, Insurance, 
              and Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                    Washington, DC.
    The subcommittee met at 10:00 a.m., in room 2128, Rayburn 
House Office Building, Hon. Richard H. Baker, [chairman of the 
subcommittee], presiding.
    Present: Chairman Baker; Representatives Ney, Shays, Paul, 
Bachus, Lucas, W. Jones, Weldon, Ryun, Riley, Biggert, Miller, 
Ose, Rogers, Kanjorski, Bentsen, Sandlin, J. Maloney of 
Connecticut, Hooley, S. Jones, LaFalce, Capuano, Sherman, 
Meeks, Inslee, Moore, Ford, Hinojosa, Lucas, Shows, Crowley, 
Israel and Ross.
    Chairman Baker. I would like to call this hearing of the 
Capital Markets Subcommittee to order and welcome all those who 
have modest interest in this subject matter.
    I want to begin this morning by drawing the subcommittee's 
attention to an article published just 5 days ago by the 
Associated Press, which I think has been distributed to the 
Members, that I found insightful with respect to the subject at 
hand today.
    The fourth paragraph of that release, which I have 
highlighted, reads: ``Last month's surplus''--referring to the 
budget surplus--``was bigger than the $180 billion many 
analysts projected, but matched predictions made by the 
Congressional Budget Office.''
    So I just want to make note that the CBO does get some 
things right, and others do not always hit it on the nose.
    Ordinarily I would not deem it necessary to make reference 
to the reliability of economic analyses that the CBO has 
historically provided Congress. However, in light of the effort 
by some over the past week to publicly discredit the integrity 
and ability of the CBO, I find myself compelled to dwell on the 
subject a bit.
    Through the years, both Democrat and Republican Majority 
Congresses, and even split Congresses, have rightly relied on 
the expertise of non-partisanship of the CBO to inform the 
Congress and Members on public policy issues.
    My point in quoting the AP story is to suggest that if the 
CBO can time and time again accurately assimilate the complex 
and myriad economic factors making up budget surplus forecasts, 
then surely it possesses the capacity to get a GSE subsidy 
pretty close.
    Certainly as the quote indicates, CBO works with a degree 
of accuracy and objectivity surpassing that of other so-called 
analysts who on the subject we take up today perhaps find their 
own interests clouding their own unbiased, objective 
assessment, but I will return to the analysts a bit later 
    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 
    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 
    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 
    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 
    As I understand, although the agency changed the 
methodology it used in 1996----
    Mr. LaFalce. Could Mr. Kanjorski speak up a bit louder, 
    Mr. Kanjorski. Oh, sure. OK?
    Mr. LaFalce. That is better, yes.
    Mr. Kanjorski. As I understand, although the Agency changed 
the methodology it used in 1996 to calculate this subsidy, its 
ultimate conclusions remain approximately the same in this new 
report. In short, Fannie Mae and Freddie Mac pass on about two-
thirds of the Federal subsidies to home buyers in the form of 
lower mortgage prices.
    The CBO analysts have also determined that the size of the 
Federal subsidy received by Fannie Mae and Freddie Mac has 
nearly doubled between 1995 and 2000 to $10.6 billion.
    Some will doubtlessly contend today that Congress should 
work to control this dramatic growth. The questions we should, 
however, be asking ourselves focus not on what caused the 
magnitude of the growth and how to control it, but rather where 
the subsidy flows, what it buys, and how well the GSEs manage 
their risks and operate their businesses.
    Additionally, I suspect that a number of my colleagues 
during this hearing will raise concerns about the methodology 
used by the CBO to calculate its latest estimates.
    We should examine these methodological concerns today, but 
in doing so we should not forget to look at the big picture. 
This report confirms that the GSEs are performing a function 
that the Congress wants them to perform. Namely, they are 
working to help lower the cost of home ownership at no real 
monetary cost to the Federal Government.
    In return, the stakeholders and shareholders in the GSEs 
receive a share of the Federal subsidy to provide a financial 
reward for their efforts.
    Moreover, just last week, the Wall Street Journal reported 
that the U.S. Census Bureau has found that demand for housing 
is actually rising at a faster pace than previously expected.
    We could, as a result, soon experience housing shortages in 
some parts of the country. The GSEs need to use their benefits 
to help us to attend to this looming need for affordable 
    If we did not have the GSEs to accomplish our Nation's 
housing objectives sufficiently, we would have to create new 
housing subsidy programs to address this imminent need, likely 
at a greater cost to our Federal Government.
    Ultimately, the latest CBO report offers us an additional 
piece of information for legislators and policymakers to 
analyze in a more complete and comprehensive manner the 
contributions brought by the GSEs to the housing marketplace.
    Although some have called for reforming GSE's statutory 
benefits and regulatory structure in recent months, these 
estimates in my opinion present us with no compelling reason 
for pursuing any legislation on this matter at this time.
    In closing, Mr. Chairman, I look forward to hearing from 
CBO Director Crippen today about his agency's study, and I 
yield back the balance of my time.
    [The prepared statement of Hon. Paul Kanjorski can be found 
on page 63 in the appendix.]
    Chairman Baker. Thank you, Mr. Kanjorski.
    I would like to recognize at this time the Ranking Member 
of the Full Committee, Mr. LaFalce. Welcome, sir.
    Mr. LaFalce. Thank you very much, Mr. Chairman. And again I 
want to commend you. You have certainly taken an interest in 
GSEs--that is an understatement--but I think we are all going 
to be better off for it.
    I do want to say what a joyous day this is for me as I look 
forward to working in the Senate with Chairman Paul Sarbanes on 
these issues. I want to congratulate Bernie Sanders for any 
work that he may have done to encourage the sunshine today.
    I also want to make a few comments about GSEs.
    First of all, I want to correct a misimpression. I think 
the misimpression has been created that somebody is attacking 
the integrity or the ability of the CBO. That is the furthest 
thing from the truth. But that insinuation, or not even 
insinuation, that statement almost implies that you cannot 
criticize in a constructive manner the work product of an 
organization saying that you would have done it differently 
without attacking their integrity or ability. No. Then we could 
not engage in any criticism. So I do not think that those who 
have given a critique of the work product should be accused of 
having attacked either the integrity or the ability of the CBO.
    Second, I am very surprised at the idea that GSEs might 
derive an economic benefit from their implied guarantee. That 
is not rather shocking to me at all. That is one of the reasons 
we created them, and then in privatizing them we realized that 
we were going to be helpful because of this implied guarantee, 
and that is what we wanted to do.
    And, of course, we do this in a lot of other areas, too. We 
have a lot of other explicit Government guarantees. That is 
Credit Allocation. That is a subsidy. We have direct Federal 
subsidies, dollars, and direct dollars.
    And then we have something called the Tax Expenditure, too. 
A lot of tax expenditures for housing. It might be interesting, 
Mr. Crippen, to do a study as to the efficiency of the tax 
expenditures for housing, and what percentage go to the 
consumers, and what percentage go to the developers. I 
personally think that is probably the least efficient subsidy 
we have, but it is the one that seems to be in currency right 
now and in favor.
    I think, too, that the energy plan that the President 
submitted has a few subsidies, explicit guarantees, implied 
guarantees, and so forth. So that is not something that is 
rather uncommon.
    And yet the implication is that something extraordinary is 
happening here with GSEs, because housing GSEs derive some of 
the benefit from their status as GSEs.
    Well, the simple truth is that that is what Congress 
intended. Let's look at what the CBO Report says.
    First and foremost it says that fully two-thirds of the 
benefits of GSE status for Fannie Mae and Freddie Mac accrue to 
the benefit of the consumer. Wow! I wonder if any other 
subsidy, explicit guarantee, implicit guarantee, tax 
expenditure, is that high? I do not know. It would be 
interesting, though, to look into that.
    And further, this ratio has stayed fairly constant 
according to the CBO over the years. Some say there are other 
things you have to consider, too. For example, does the 
existence of GSEs contribute to the competitiveness of the 
marketplace, and therefore lower the cost to consumers who are 
not using GSEs, and therefore create a benefit which should be 
considered, too, as part of the benefits in weighing the 
tradeoffs between cost benefits.
    In any event, as we consider the various questions today I 
would ask my colleagues to keep in mind that the CBO is today 
concluding that American consumers in their role as home buyers 
and homeowners securing a mortgage are receiving some $7 
billion a year in benefits in the form of lower mortgage rates 
as a result of our policies with respect to GSEs.
    It is most appropriate to study the issue before us today. 
And again I commend the Chairman for requesting this CBO Report 
and having these hearings.
    I think it is always appropriate to consider, discuss, 
debate if need be, what the appropriate role of Federal 
regulation of the GSEs should be.
    But again, let us not rush to a precipitous judgment on 
something that I think has not only worked well, but may have 
helped create a national mortgage market that is the envy of 
the world.
    I thank the Chair.
    Chairman Baker. I thank you for your generous support.
    Does any other Member have an opening statement?
    Mr. Ney.
    Mr. Ney. Thank you, Mr. Chairman.
    Mr. Chairman and Ranking Member Kanjorski, I think we 
should give both of you a commendation for calling this 
hearing. I think it is a good thing to do.
    There also can be no doubt that Fannie Mae and Freddie Mac 
do receive a benefit by way of their Congressional Charters. I 
wanted to stress ``Congressional Charters.'' In fact, Congress 
created both of these companies with a careful balance of 
advantages, but also restrictions.
    The advantages have been well stated, I believe. The 
companies do not pay State and local income taxes; they only 
pay Federal. They do not have to register as securities with 
the SEC their debt trades in the Agency Debt Market.
    You must, however, keep in mind Congress also placed some 
very clear restrictions on these companies, as well. The 
companies are restricted to a single line of business providing 
liquidity in the secondary mortgage market.
    They are confined to mortgages under a loan limit today of 
$275,000. They are required to operate in all markets at all 
times regardless of economic downturns.
    They must meet a percentage of their business goals for 
affordable housing. They must meet a rigorous safety and 
soundness regime.
    So there are two ends to this. And again it was 
Congressionally chartered.
    The benefit these companies receive is part of the compact 
that Congress granted to them as recently as 1992. However, 
beginning with the 1996 CBO Report on benefits received by the 
GSEs, questions have been raised about whether Fannie Mae and 
Freddie Mac have passed all of those benefits on to the 
     I know we meet today to receive an updated report on the 
benefits, much anticipated in recent days, some with 
controversy obviously, but there have been a number of concerns 
raised about the methodology used by CBO in determining the 
benefits that Fannie Mae and Freddie Mac receive.
    Mr. Chairman, I think we should welcome today as an 
opportunity for Members of Congress to raise their concerns 
with Mr. Crippen so that we may have a full and fair discussion 
about the way in which CBO determines how the GSEs receive a 
benefit and how it calculated the amount of the benefit 
retained by Fannie Mae and Freddie Mac.
    I also believe it is important for this subcommittee and 
your oversight efforts for Members to have every opportunity 
obviously to voice their concerns, and that also Mr. Crippen 
have an opportunity to provide a response to those concerns.
    While studies like the one we consider this morning have 
obvious value, I also believe we must also consider how well 
the U.S. housing market performs, how to encourage more not 
less investment in housing, and how we might improve the 
delivery of housing financing.
    Again, thank you for your hard work on the issue.
    Chairman Baker. Thank you, Mr. Ney.
    Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Mr. Crippen, it is always good to see you.
    My uncle, a former Member of this body and of the body 
across the street, once told me that everybody in this town has 
their own sets of numbers to say what it is they want to say, 
and today we get to hear Mr. Crippen and Congressional Budget 
Office, what their numbers are, which generally I would say 
tend to be pretty much on mark given the set of assumptions and 
whether you agree with those assumptions, and given the space 
in time that you are looking at.
    What we are going to learn today is something that we 
really comes as no surprise, that there is a subsidy. I think 
everybody understands that.
    But what we will also have to remember is is that this is 
something that did not happen by accident. This is something 
that the Congress created going back decades, and recreated a 
few decades after that. And the question I think is not 
necessarily whether or not there is a subsidy, but the question 
I think will be as compared to what.
    And so I look forward to the testimony by Mr. Crippen and 
to the discussion we are going to have today, and I appreciate 
the Chairman having this hearing.
    Chairman Baker. Thank you, Mr. Bentsen.
    Any Member on the Republican side have an opening 
    [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 
    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 
    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 
    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?
    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 
    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 
    Again, we are here to discuss the mission and the benefits 
of the Congressionally created and federally chartered GSEs, 
Freddie Mac and Fannie Mae.
    The Congressional Budget Office has just completed a study 
which says, among other things, that the aforementioned GSEs 
are being subsidized because of their exemption from certain 
fees and preferable tax status.
    My major concern with the GSEs is their ability to carry 
out their mission, which is to increase home ownership in 
America without an appropriation from the Federal Government.
    Congress asked the GSEs to bring private capital and 
private sector efficiencies to work for American home buyers. 
To help them achieve this mission, Congress has given them 
benefits and has also imposed clear restrictions. In fact, 
legal obligations that relate to affordable housing and the way 
they must operate.
    In addition, based on voluntary agreements negotiated with 
the Members of this subcommittee, the two GSEs have become a 
model of transparency and efficiency for financial companies 
    They do this while carrying out their mission to increase 
home ownership in America, a home ownership rate which is at an 
all-time high.
    My biggest concern with GSEs is what we can do to help them 
be more successful in achieving their mission, including 
closing the gap in home ownership between whites and 
    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 
    Mr. Crippen, welcome.


    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 
    The other co-author, Dr. Deborah Lucas. Fortunately, 
Northwestern was gracious enough to let us borrow her for a 
year or so, is a chaired professor in the Kellogg School there, 
in fact, a professor of finance, and teaches courses in many of 
the issues relevant to this study: courses on options, for 
example, and how markets work.
    So we are very fortunate to have her help, albeit for a 
short time. I have been trying to figure out how to talk her 
into staying longer.
    But they are the principal authors. As you suggested, Mr. 
Chairman, this report underwent a lot of review. We do that 
frequently, although perhaps not quite as thoroughly as we did 
in this case. That is to say, we have a process under which the 
authors inside CBO draft a report. It gets circulation inside. 
It goes through several drafts.
    We have some 70 Ph.D. economists at CBO, and about 80 folks 
who hold Master's Degrees. So they are a well-educated and 
probably the best core group of public finance economists in 
the world.
    Chairman Baker. Mr. Crippen, I hate to interrupt you, but 
we are all having trouble with the mikes this morning. You will 
have to pull it very close. I do not know if the volume is 
turned down somewhere.
    Mr. Crippen. How is this?
    Chairman Baker. This subject appears to create 
interference, for some reason. Do your best.
    Mr. Crippen. I could probably talk without it, as well. I 
was saying that our process is applied to many of our major 
studies. There is an internal draft, which is reviewed by the 
folks at CBO, some 70 Ph.D. economists and folks with, about 80 
folks with Master's Degrees.
    Then we very often go out to other Government institutions 
and have them have a shot at what we have said.
    And then finally for major reports such as this, we often 
do an outside review. We will select four or five, usually, 
outside reviewers and ask them to give us comments about the 
paper, as well.
    We take those comments into account, obviously, before we 
even have something we call a final draft, and certainly before 
we get to a final report. So we do take great care. That is not 
to say the report is perfect and could not be improved. We are, 
of course, fallible.
    But to summarize my lengthy introduction here, I am here as 
a representative of CBO and happy to be so. I will obviously 
try to answer all of your questions. I may need help from my 
colleagues. There may be a question or two that we will have to 
respond to in writing, but I am looking forward to our 
encounter today, Mr. Chairman.
    Thank you for your indulgence. I hope to speak for not much 
more than about 10 minutes or so to summarize our study so that 
we have as much time as you all want to answer questions.
    Ms. Jones. Mr. Chairman, I am with you. I am having a hard 
time hearing the witness.
    Chairman Baker. We have got somebody checking to make sure 
the volume is up on all the microphones. All of them seem to be 
under-performing this morning a bit, but keep it close to you 
if you can.
    Mr. Crippen. I will have more coffee.
    Mr. Chairman, is that any better? Is this better? Is this 
better? I feel like an optometrist. Is this better, or this 
    Mr. Crippen. Mr. Chairman, you asked us to answer two 
    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 
    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 
    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 
    It is an irrelevant issue I think, to look for Federal 
dollars in a case like this. I suspect, however, as we have 
already heard from most of your Members, most folks in and out 
of this room recognize there is a subsidy, whatever you choose 
to call it.
    In case there any doubters amongst you, let me just put it 
this way:
    The advantages granted the GSEs have a significant value, 
one that other firms would be willing to pay for if those 
advantages were offered at auction.
    So the question becomes, Mr. Chairman, how do we measure 
such a subsidy, since it is not directly observable through 
dollar flow?
    The short answer is to compare subsidized firms with those 
that are not. The advantage of the subsidy is reflected in the 
lower cost of capital the GSEs enjoy, and also in this case in 
tax and regulatory exemptions granted by the charter.
    The flow of estimated future subsidies is converted to 
present value using the discount rate equal to GSEs' borrowing 
costs to obtain the current year's total subsidy.
    Now a number of our critics contend that it is somehow 
inappropriate to capitalize these subsidies, which I find 
curious at best.
    Some of the commentary of economic consultants seems to 
deny their very heritage by suggesting present values are 
somehow illegitimate in this case.
    And the GSEs themselves, while charging that we have no 
understanding of the market, seem to deny that capitalization 
is precisely what the market does every day. Ask any bond 
trader what happens when interest rates change, and he will 
tell you the values of all future interest payments are 
capitalized in the bond price.
    I know we will talk more about how we arrived here at these 
estimates today, Mr. Chairman, but I think it is worth noting 
here that not one of the many--and I do mean many--independent 
reviewers of this study in and out of Government, in and out of 
academia, in and out of Wall Street, not one questioned the 
approach and the methodology.
    That is not surprising, because this measure is consistent 
with the objective of generally accepted Federal accounting 
principles and budgetary practices.
    So let me ask a question. If we are so fundamentally wrong, 
don't you think someone would have noticed?
    Now, Mr. Chairman, I hope we can turn to the heart of the 
matter and discuss our results and the assumptions that 
underlie our $14 billion subsidy estimate for 2000. Here is 
where, of course, there can be very legitimate debate.
    The single largest component of the subsidy is the 
reduction in borrowing costs from the implicit Federal 
guarantee of GSEs' debt. By our estimate, they have a borrowing 
advantage of 41 cents per $100 of debt, a 41 basis points, due 
to their special status.
    During 2000, the housing GSEs increased their debt 
outstanding by $227 billion to have a total of more than $1.6 
trillion. I was just thinking that $227 billion is more than 
the amount of debt held by the public that we paid off last 
    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 
    Finally, the value of the tax and regulatory exemptions has 
risen significantly over the years, to about $1.2 billion 
    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 
    On that basis, a little more than half the total subsidy, 
$7 billion in 2000, was passed through.
    What is left is retained by GSEs and their various 
stakeholders. In the case of Fannie and Freddie, an estimated 
$3.9 billion, or 37 percent of the subsidy.
    As with all such estimates, Mr. Chairman, data limitations 
and the complexity of the underlying processes imply that 
significant uncertainty attaches to all of these numbers. There 
are legitimate questions about our various assumptions.
    However, our critics are quick to point to those 
assumptions that they believe, if changed, would help their 
case. You are probably not surprised to know that they almost 
universally fail, however, to talk about assumptions that, if 
changed, would leave them in a worse light.
    I will examine just a few on both sides of this issue. I am 
sure we will get into more as the day progresses.
    First, as to the subsidy, some of our assumptions tend to 
raise the estimated subsidy. For example, the fact that there 
are so few financial institutions that have a financial rating 
the same as the housing GSEs' led us to base the GSE debt 
funding advantage on a sample of non-GSE securities, which 
included more A than AA issues.
    This comparison may penalize the GSEs by a few basis 
points--in our estimation, about 6 or 7 by one measure of our 
data--so it is possible that we have overstated the subsidy 
given this comparative.
    Further, CBO attributed none of the GSEs' borrowing 
advantage to managerial superiority over their competitors. 
Frankly, because at this point, we have no evidence the GSEs 
managed their debt better than their close competitors.
    In fact, it also seems likely that the sophisticated 
financial institutions with which the GSEs compete also manage 
their debt operations so as to capture any available gains from 
advanced liquidity.
    However, several of our assumptions reduced the size of the 
estimated subsidy likely by at least as much as the examples I 
just gave you could have increased it.
    Faced with uncertainty over the duration of the benefit 
from the implied guarantee, CBO chose a relatively short 
horizon, despite the history of consistent growth in debt which 
makes a perpetual horizon more realistic.
    Using a perpetual horizon would add $5.5 billion to the 
estimated subsidy for 2000, making it $19 billion, not $14 
    Similarly, the GSEs were able to exploit those times when 
the debt markets turn in their favor and issue more debt. You 
expect them to do so. However, we chose not to compute their 
advantage by using a weighted average of yield spreads, but, 
rather used the simple average, understating their advantage by 
several basis points.
    And there are other assumptions on both sides.
    When we talk about the benefit, Mr. Chairman, the amount of 
the subsidy passed through to borrowers depends on the degree 
of competition in the fixed-rate conforming mortgage market.
    CBO estimates that Fannie and Freddie have at least 71 
percent of the relevant market, as detailed in table A-1 in our 
report. This share has grown over time and suggests that they 
have a significant competitive advantage in the markets in 
which they operate.
    Ultimately, the GSEs would like us to credit them with 
market effects that accrue outside the mortgages they 
intermediate, as Mr. LaFalce suggested, even though they do not 
disgorge any subsidies to provide them.
    More importantly, I suspect they do not want to talk about 
the potential costs to the capital markets that are not charged 
directly to them either.
    For example, I think the GSEs would admit that their 
borrowing in the market raises the cost of capital to other 
borrowers, including the U.S. Government.
    If, for example, the interest charged for U.S. debt held by 
the public were raised by as little as one basis point, it 
could mean $3 billion more in cost to taxpayers a year.
    So any time we wander outside the square of the GSEs--that 
is, outside the boundaries of the institutions--certainly, 
there are benefits to be found, but there are, equally, costs 
to be found, neither of which have we incorporated in this 
    Mr. Chairman, there are many questions policymakers might 
    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 
    By the way, Dr. Phaup, for the record, and restating, 
happens to be a Fulbright Scholar, and Dr. Lucas, a professor 
at Northwestern in matters relating to the operations of the 
enterprises, appears to me to be eminently qualified to make 
observations about the GSEs.
    Were they insufficient in their skill or reach of subject 
matter, then there are additionally 13 individuals who are 
listed in the preface of the report I would direct the Members 
to within the CBO who were consulted.
    In addition to that, 9 outside Federal agencies, including 
the Office of Federal Housing Enterprise Oversight of HUD, the 
Department of the Treasury, the Federal Reserve Board, the 
Federal Reserve Bank of Minneapolis, the General Accounting 
Office, and the Congressional Research Service.
    So we now are out to nine outside agencies. I have no idea 
how many people that represents.
    Beyond that, I am advised that you had a contract with 
Ambrose & Warga, which was a report prepared to help you 
analyze the methodology of the report finding.
    Beyond that, I understand your general rules of operation 
do not provide for the disclosure of the academicians who 
conducted the peer review, but for our purposes can you at 
least give us some generic description and number of 
individuals involved in that peer review process?
    Mr. Crippen. I believe, Mr. Chairman, in this case there 
were four. The folks we use for most studies, and for this one 
as well, are economists who specialize in public finance. Many 
of them, including several in this panel, have served in 
Government, are academicians. But also in this case, because of 
the subject matter, we submitted the study to some Wall Street 
folks to look at, particularly with the question, is this an 
appropriate methodology?
    Chairman Baker. And how many of those people would you 
guess are firms?
    Mr. Crippen. Two in this case. I mean, we did not ask that 
the outside reviewers, or even the agency reviewers, endorse 
the result, and I do not want to imply that they did so. But 
they did not question the methodology. They endorsed the 
general approach. And, of course, there are assumptions in here 
that we have made, and they are our assumptions, not somebody 
    Chairman Baker. Let me interrupt and restate.
    Those who criticized the findings of the report were a 
minimal number of people inside the CBO who do not understand 
GSE business operations, who have made unsupported claims 
resulting in a methodology that is not an accurate reflection 
of the value, and to which I respond there were 13 individuals 
in the CBO, 9 outside agencies, 4 academicians involved in peer 
review, 2 Wall Street firms, and a consultant, all who colluded 
to ignore the facts.
    I merely point out by way of information--and I know you 
are comfortable with this, or otherwise I would not say it--
that in a former life you also were a consultant for one of the 
GSEs and perhaps have some modest insight into their business 
operations, as well.
    I make these points because the first challenge to the 
finding is that the CBO Report is without merit. That is 
ludicrous. This is a professionally generated document based on 
data provided to you by the GSEs.
    Is that correct, as well?
    Mr. Crippen. There is certainly some data, both publicly 
available and otherwise, that we have used. I would not say 
that they provided us with the data that led to the results. 
But, yes, we have used a fair amount of their data in making 
our assumptions and analysis.
    Chairman Baker. In skimming over the list, staff of Fannie 
Mae and Freddie Mac are also cited as sources of information. 
From that, I concluded that it must be data, historic 
performance data, or something that they provided to you in 
order to facilitate your observations.
    Mr. Crippen. Yes.
    Chairman Baker. That is correct?
    Mr. Crippen. Yes.
    Chairman Baker. I also requested this study last July. And 
for those who think there is some reason that is insidious in 
the request, I can provide any Member who chooses a copy of the 
correspondence from Chairman Greenspan, who I also happen to 
think is a fairly substantive person on matters of finance, 
suggesting to me that I request an update of the subsidy value 
in light of changing market conditions.
    So the genesis of the update was Alan Greenspan. I wrote 
the letter in July. You have taken 10 months to respond, to my 
great frustration, and I have now learned that the reason for 
the delay is to ensure that the methodology to reach the 
conclusions was thoroughly vetted with professionals across a 
broad spectrum of financial participation.
    I just think it important in the court of public opinion to 
establish that this is a decent report that reached reasonable 
conclusions, and that it is not an aberrant finding based upon 
the facts as we know them.
    Mr. Crippen. As you probably know, Mr. Chairman, I have 
thanked Chairman Greenspan for this opportunity.
    Chairman Baker. I am confident that every member of your 
staff has had a very enjoyable 10 months.
    Mr. Crippen. Thank you.
    Chairman Baker. I would like to turn to Appendix A. For 
Members, that follows page 30. It is an unnumbered page, the 
first page in the appendices, in which Fannie and Freddie and 
their contractors have suggested that the CBO focus on a 
different question.
    Now mind you, the opening line is ``The current study 
revisits those same issues'' raised in the 1996 subsidy study, 
as requested by Chairman Baker.
    I am to understand from reading this that the GSE's first 
response as a criticism of your report is that CBO should not 
answer the question that I asked.
    I find that a bit amusing. It seems that the Congressional 
Budget Office should work for the Congress and, upon a finding 
by a committee that inquiry is warranted, you should perhaps 
respond to the question that is posed.
    I commend you for your bravery.
    CBO believes that the questions addressed in its studies 
not only reflect the questions asked by the Congress, but are 
also a better way to look at the benefits provided by the 
Federal Government.
    Now I am reading from the appendices which are provided as 
a response by the GSEs to somehow balance more appropriately 
the view presented by CBO in the study. And I just realized I 
have exceeded my time by a couple of minutes, Mr. Crippen. I 
will be back.
    Mr. Kanjorski.
    Mr. Kanjorski. I guess, first and foremost, we are dealing 
with approximately $10.6 billion in subsidies? Is that correct?
    Mr. Crippen. For the?
    Mr. Kanjorski. That is for the year 2000?
    Mr. Crippen. For Fannie and Freddie.
    Mr. Kanjorski. And the prior subsidies that these GSEs 
received in your prior report was what?
    Mr. Crippen. The prior report ended with 1995.
    Using the current methodology, we have, in Table 1, the 
1995 through 2000 results, and in 1995, $3.2 billion plus $2 
billion--$5.3 billion. Did I do that right?
    Mr. Kanjorski. So it is approximately----
    Mr. Crippen. About half.
    Mr. Kanjorski. Half?
    Mr. Crippen. Yes.
    Mr. Kanjorski. And the growth of business in the secondary 
mortgage market between 1995 and 2000 was approximately what?
    Mr. Crippen. Well, for the conforming fixed-rate market, it 
was less than that. Over the last few years, Fannie and Freddie 
have, between issuance of debt and the MBSs that they 
guarantee, actually financed more than the number of new 
mortgages in the conforming market. In fact, I think we have a 
little poster here, if you would like to see it graphically.
    [The chart referred to can be found on page 76 in the 
    Mr. Kanjorski. The overall growth, as I understand it, was 
somewhere around 80 percent growth from 1995 to 2000? Is that 
    Mr. Crippen. What we have tried to do here is look at the 
relevant market for the GSEs, which is that market that they 
can play in, the conforming market.
    And of that, over this time period, you can see the growth 
in the market overall, which is the left blue bar, and the 
right side of each comparison is the amount of debt and MBSs 
issued each year by the GSEs.
    So if the subsidy doubled, the relevant market here looks 
like it did not grow quite as much.
    Mr. Kanjorski. How much did it grow?
    Mr. Crippen. I do not know. I will have to----
    Mr. Kanjorski. Could you give me a rough estimate, 
percentagewise? Was it 60 or 70 percent?
    Mr. Crippen. That is a good number for now. I am sure 
someone behind me will correct both of us here before too long.
    Mr. Kanjorski. So, in arguably the largest economic boom in 
the history of the United States, with a mortgage market 
growing somewhere between 60 or 70 percent, that portion 
handled by the GSEs, their subsidies have grown approximately 
100 percent? Is that a fair statement?
    Mr. Crippen. Yes. That is fair.
    Mr. Kanjorski. Is that shocking?
    Mr. Crippen. I am not shocked, no.
    Mr. Kanjorski. If we did not have the GSEs, if we suspended 
them today, do you have any opinion as to what the actual cost 
would have been either to the Federal Government to provide the 
subsidies to drive this type of a housing market, or what the 
loss to home ownership would have been?
    Mr. Crippen. Well, if you believe our estimates, the cost 
would be something like $7 billion because that was what was 
actually passed through to mortgage borrowers. So if we 
directly subsidized the same group of people, the same mortgage 
borrowers, we could effectively do it for $7 billion.
    But that assumes the same kind of delivery and efficiency 
and lots of other things that the GSEs have, and I am not sure 
that is the case.
    Mr. Kanjorski. In your estimation, is there any other 
Government subsidy program that would be more efficient in the 
delivery of mortgages and the reduction of cost of mortgages 
for home ownership than the existing GSE system?
    Mr. Crippen. I am not sure there is one in existence. You 
could think of one that would involve direct provision of funds 
to buy down mortgages for these same mortgage borrowers.
    Again, I do not know how that program would work, and you 
would have administrative costs, and I cannot tell you whether 
it would be as efficient or not. But at least in theory, one 
could provide the same amount of stimulus to the housing 
market--again, if you believe our estimates--for $7 billion.
    Mr. Kanjorski. Would that subsidy be provided by a 
Government entity or a private-sector entity?
    Mr. Crippen. Probably Government. You would substitute 
direct subsidies for indirect.
    Mr. Kanjorski. So, if we were to do away with the GSEs, we 
would basically bring the Government into a very strong and 
positive position in this field. Is that correct?
    Mr. Crippen. That would be one way to substitute Government 
for the GSEs, and, as you suggested, perhaps have some 
efficiencies. But I think the situation we need to keep in 
mind, too, is not a market with or without Freddie and Fannie: 
the question is whether they operate with or without subsidies.
    They would still exist, presumably, although they might not 
have gotten started. But they would still exist today in some 
form even without subsidies. And the question, the relevant 
question for us, the baseline question is, what would happen if 
they did not have subsidies?
    How many of these benefits would go away?
    Mr. Kanjorski. I understand their subsidies are a result of 
their preferential interest rate received in the marketplace 
because of the presumption that they are Government backed.
    Mr. Crippen. Right.
    Mr. Kanjorski. How could we deny them whatever the 
misperception of the market is that they are Government 
    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 
    Mr. Crippen. Well, you could deny them the access to the 
Treasury they have now and the benefits of exemptions from 
State and local taxation. There are lots of ties here that one 
could cut that would change the nature of the beast.
    Mr. Kanjorski. I understand that. But, the reality of where 
their subsidy comes from is the perception of the marketplace 
that they are Government supported, is it not?
    Mr. Crippen. Yes.
    Mr. Kanjorski. I mean outside of their connection with the 
Treasury or anything.
    Mr. Crippen. The Federal Government effectively is 
perceived to be backing this debt.
    Mr. Kanjorski. I guess what I am getting at is, tell me 
what the problem is that we are trying to solve here.
    Mr. Crippen. I am not sure, Mr. Kanjorski. We were asked to 
look at what the subsidies are and where they go, and that is 
what we have tried to do here.
    We have not been asked, nor would we, I think, be able to 
opine much about what the alternatives are, other than in a 
kind of a theoretical way.
    I do not know what problem the subcommittee is trying to 
address, but we have been asked to try and quantify these 
indirect subsidies and try and figure out where they go, and 
that is what we have given our best effort to do.
    Mr. Kanjorski. Well, I am all for oversight of the GSEs by 
Congress and for having hearings, and we have had a number of 
them, but I am still trying to define a problem. Can you help 
me with that? Is there a problem of inefficiency or 
ineffectiveness? Are we lacking something in providing the most 
efficient price for home ownership in the United States? Is 
there something we could be doing better than we are doing?
    Mr. Crippen. Well, again, we were not asked what the 
possible problems are. I mean, there are certainly public 
policy issues here that you have, as you say, legitimate 
oversight over whether it is the risk of default by the GSEs 
and what you would have to do, whether it is market distortion, 
whether there are other ways you would like to give a subsidy.
    The point is that it is up to you to look at the subsidy 
the Congress has granted and see where it is going and decide 
whether that is appropriate or not.
    We are not in the business of saying what is appropriate or 
what should happen. Frankly, that is your oversight role, and 
we were not asked if there was a problem. We were asked to 
measure these two phenomena.
    Mr. Kanjorski. I understand you were not that question. 
But, having made this indepth study, have you found a problem?
    Mr. Crippen. We did not look for a problem so we could not 
have found one.
    Chairman Baker. Thank you, Mr. Kanjorski.
    Mr. Ney.
    Mr. Ney. Thank you, Mr. Chairman.
    I wanted to ask you a question about the calculation. I 
understand that the CBO calculated Fannie Mae and Freddie Mac's 
funding advantage for long-term debt to be worth 47 basis 
points, right?
    Mr. Crippen. Right.
    Mr. Ney. In the calculation. Thanks.
    Fannie Mae and Freddie Mac, as we had read, objected to 
this debt rating which you believe that they would be given 
absent their Government charter, if they did not have the 
Government charter that would be their debt rating?
    Mr. Crippen. That was assigned to them by the debt rating 
agencies, not us. The AA-minus was an assessment of the GSEs' 
risk to the Government.
    As with many debt ratings, it is a pretty theoretical 
exercise. It is not unlike the equivalent of saying, if I had 
wheels, I would be a truck. I do not know how accurate the AA-
minus rating is, but we take that. We understand that is the 
rating they have been given.
    It is, of course, a bit ironic that for a long time, the 
GSEs did not want to be rated, and now we are putting a lot of 
stock into the precision of the rating. But I understand and I 
accept the criticism. There are not many AA-rated firms in the 
world. And so it is hard to make a strict comparison between 
private and public.
    We have done that. We have acknowledged that there may be 
some overstatement, albeit slight, of the subsidy given that, 
but there are lots of things on the other side that may have 
caused us to understate the subsidy.
    Mr. Ney. Or AA-minus with their rating.
    I wanted to ask about the 71 comparison firms that were 
used. Many had an A rating.
    Mr. Crippen. Right.
    Mr. Ney. And it was compared to the AA-minus rating. That 
is the thrust of my question. You know where I am coming from. 
Is that a real good way to compare 71, maybe 8 had AA, but 
comparing 71 with A to Fannie and Freddie with AA-minuses. Is 
that a good way to compare it is my question.
    Mr. Crippen. It is not an ideal way. I mean, if there were 
more AA firms in the world, we would use exclusively AAs. But 
having a comparison group of 8 AA firms does not give you much 
information, either.
    Statistically speaking, it is not nearly enough to do 
anything that you could measure. But there are not enough AAs 
to make an accurate computation here.
    Mr. Ney. So I wonder what the debt comparison would be if 
you took the 71 firms, take the 60-some out, and you compare 
only to AA, I wonder what the debt rating would be. That was 
not done, but I wonder what that would be?
    Mr. Crippen. It would clearly show less subsidy. I do not 
know what the number would be----
    Mr. Ney. Do you think that would be a fairer way to do it? 
Or is that too small of a sample?
    Mr. Crippen. It is too small of a sample. It would be much 
less accurate.
    Mr. Ney. But the other sample, though, is too large, in a 
    Mr. Crippen. Well, it is the closest we could get and have 
a sample that is large enough to draw some inferences from.
    We have done some--and you will see in the report--two or 
three sensitivity analyses to say, if you changed the subsidy 
estimates up or down, if you changed the spread estimates up or 
down, what would the effect be? And the net result, frankly, is 
the picture is roughly the same.
    Now, clearly, if you take the extremes of all assumptions 
on one side or the other, you can turn the result. But under 
various assumptions, you still get the picture that we present 
here, which is there are subsidies--which I do not think 
anybody disagrees with--and that roughly two-thirds of them 
consistently are passed through to mortgage borrowers.
    Mr. Ney. It is just issues raised of should it be compared 
to AA only and one sample is too small, and one is too large, 
so you start to wonder where the midpoint is.
    Mr. Crippen. Sure. Well, we have done, for example, a 
weighted average, giving 50 percent to the AA firms and 50 
percent to the A firms; and this would change the calculation 
by about 6 basis points.
    Mr. Ney. About six?
    Mr. Crippen. So the result does change, certainly. But as I 
said, there are things on the other side of this equation, 
assumptions we have made that actually reduce the subsidy 
    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 
    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 
    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, 
    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 
    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 
    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 
    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 
    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 
    Mr. Shays. Yes. Exactly.
    OK, on page 14 you say the housing GSEs receive two 
distinct related benefits from the Government. First, the 
number of regulatory and tax exemptions reduce the GSEs 
operating costs. And you stand by that?
    Mr. Crippen. Yes.
    Mr. Shays. And second, Federal backing enhances the 
perceived credit quality of debt issue and mortgage-backed 
securities guaranteed by the GSEs.
    The perception is, we in Congress--and that perception 
would be right--will be there to back it up.
    Mr. Crippen. Yes.
    Mr. Shays. So when you say ``perceived,'' I mean, while it 
is not in law we are going to be there. And that has to be a 
huge benefit.
    Mr. Crippen. We agree with you.
    Mr. Shays. So let me just ask. In your report, do you form 
a conclusion as to whether the subsidy that they receive 
through the line of credit and the tax and regulatory 
exemptions, do you put a quantified number as to how much they 
pass on the consumer, and how much ultimately accrues to the 
stockholders, or the GSEs?
    Mr. Crippen. Yes. Those are the two questions the Chairman 
asked us to address.
    Mr. Shays. And tell me specifically what they are?
    Mr. Crippen. Well, for 2000, the total for all of GSEs was 
$13.6 billion in estimated subsidies, of which about $7 billion 
got passed through.
    Mr. Shays. So for a percent?
    Mr. Crippen. A little over half here. In the case of both 
Freddie and Fannie, however, if you took just those two, the 
proportion passed through is closer to two-thirds. It is 70 
    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 
    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 
    We looked at all of those institutions as best we could and 
determined that they are not much into the fixed-rate 
conforming mortgage market that Fannie and Freddie are in; the 
market accounts for about 15 percent of their assets.
    So, we calculate that a small amount of what they get as 
subsidy gets passed through to conforming borrowers. So it is a 
much smaller amount.
    Mr. Shays. Is that a ``yes'' or a ``no''? The bottom line 
is, it is lower than 37?
    Mr. Crippen. For all three, yes. For Fannie, Freddie, and 
the Federal Home Loan Banks.
    Chairman Baker. Mr. Sandlin.
    Mr. Sandlin. Thank you, Mr. Chairman, and thank you, Mr. 
Crippen, for being here this morning.
    I wanted to ask you some questions along the same line as 
my friend Mr. Ney about the funding advantages to Fannie Mae 
and Freddie Mac.
    Now you indicated in your testimony that the methodology 
used was not an ideal way to do it. You said there was not 
enough data to do it accurately; that you had to make some 
assumptions due to a lack of data.
    It appears to me that one way to do that would be to run 
the numbers and exclude the As and A-minuses. Would that not be 
one way to try to compare?
    Mr. Crippen. It would be if we had enough AA firms in the 
world to measure against, but we have, I think, only 8 in this 
group. There are not many AA firms. Firms either tend to be 
AAA--and there are not many of those--or A, because they have a 
riskier portfolio than Fannie and Freddie.
    Mr. Sandlin. But if you excluded--one way to look at that 
is to try to get an accurate idea would be to run the numbers, 
exclude the As and A-minuses, and compare them to what you 
have. I mean that would be a valuable piece of data, would it 
    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 
    Mr. Crippen. That is one way to put it.
    Mr. Sandlin. That is what I thought. The numbers speak for 
themselves. That is what I thought you said.
    Would it surprise you to learn that by doing it that way 
the advantage would be from 47 to 30? Would that surprise you?
    Mr. Crippen. It would not surprise me if you were using 
only 8 firms as comparators. That is not a good enough sample 
to compare to.
    Mr. Sandlin. OK. So if you use 8 firms to get to 30, that 
would not be good. But if you use 71 firms who are not 
comparable to get to 47, that would be good? Is that what you 
are saying?
    Mr. Crippen. No, what we are saying is there are not enough 
firms that are AA to reach any valid conclusions about those 
private-sector AA firms.
    Mr. Sandlin. So since there are not enough firms for any 
valid conclusions, then your conclusions of 47 are not valid? 
Is that correct?
    Mr. Crippen. No. I do not believe that is the case.
    Mr. Sandlin. You have heard of comparing apples to oranges, 
haven't you?
    Mr. Crippen. Yes.
    Mr. Sandlin. OK. Let me ask you about your share of short-
term debt and long-term debt, what you have in the report.
    I notice that the CBO assumes the share of short-term to be 
20 percent, and 80 percent for long-term debt, using a debt 
measurement. Do you know what the actual reported weights for 
Freddie Mac and Fannie Mae were?
    Mr. Crippen. The actual reported weights? I am not sure I 
    Mr. Sandlin. Were they 40 percent and 60, as compared to 20 
and 80?
    Mr. Crippen. Well, we assumed 20 and 80, because much or 
some good portion of the short-term debt is converted to long-
term debt by engaging in synthetic derivatives. So the 
effective long-term debt is what is the right measure, not the 
amount or face value of short-term debt.
    Mr. Sandlin. So you think that using your assumptions is 
better than using the actual reported numbers?
    Mr. Crippen. I think the reported data is misleading.
    Mr. Sandlin. Oh, so the actual reported data is misleading, 
but your assumptions are on target?
    Mr. Crippen. Yes, the actual reported data on short-term 
debt is misleading.
    Mr. Sandlin. OK. I will say, this is all consistent. I will 
say that.
    Now Fannie Mae and Freddie Mac have certain goals that they 
have to meet in affordable housing; right?
    Mr. Crippen. Right.
    Mr. Sandlin. Now do you place any value, any monetary 
value, on them reaching those goals and making that housing 
    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 
    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 
    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 
    But, in the fall of 1999, because of the possible crisis 
with Y2K, the Fed said they did not have enough securities to 
buy, so they started buying GSEs in order to provide liquidity 
to the financial system.
    But, they never backed off from that and they continue to 
do that. And even today they own over $20 billion worth, a lot 
more than an implied $2.5 billion. But this has sent a message 
around the world, and the other central banks of the world now 
own over $100 billion of the GSEs.
    This is a tremendously important message sent out that the 
GSEs are something very, very special, and that the Fed will 
come to their rescue. They are not going to let this system 
    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. 
    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. 
    Mr. Crippen. Right.
    Ms. Jones. Define ``value'' for me, please.
    Mr. Crippen. How much it is worth to the institutions in 
lowered capital costs. They pay less in interest on long-term 
debt because they have the implied Federal guarantee.
    Put another way, if these advantages that are granted in 
the charter and the perceived backing by the Federal Government 
were auctioned off in an open market, firms would be willing to 
pay for the exemptions and the lower interest rates.
    So there is a value to these advantages that is fairly 
widely recognized that has to do with lower borrowing costs.
    Ms. Jones. Now I believe in response to someone else's 
question you said that you did not calculate in value--maybe it 
was even Mr. Sandlin--the benefit, other than the lower 
mortgage cost to the public.
    Is that correct?
    Mr. Crippen. That's correct.
    Ms. Jones. Why not? If that is value. If it is included in 
value, it was not specifically said to you--did Mr. Baker 
define value as you just defined it in making the request for 
the value of the subsidy?
    Mr. Crippen. No.
    Ms. Jones. So you just assumed in your decisionmaking that 
the value would not include the benefit to the general public 
of the work that Fannie and Freddie do?
    Is that a fair statement?
    Mr. Crippen. It is fair with this caveat. We did not also 
consider any of the costs to the general public for Fannie and 
    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. 
    Mr. Crippen. No, I am saying we did not include either.
    Ms. Jones. But maybe you should have in order to, if you 
are really talking about the value to the public, or the 
diminishment of any value to the public, you should have 
included both of those things?
    Mr. Crippen. We probably should have--I mean, not should 
have, but we could have included----
    Ms. Jones. What else didn't you think about, after having 
talked to other people about what value is in your 
decisionmaking with regard to this report?
    Mr. Crippen. We measured value the only way we thought we 
knew how, which was to compare what subsidized and non-
subsidized debt issues look like, and in turn mortgages that 
are handled by these companies and mortgages that are not.
    Ms. Jones. But, now that you have been given an opportunity 
to think that your thought was not what you should have 
thought, perhaps the value that you have given to the subsidy 
may need to be amended in some way?
    Mr. Crippen. Well, you are asking a different question than 
we were asked to address.
    Ms. Jones. No. Huh-uh. I am not asking you to answer my 
questions and that way we will just get through my quick little 
5 minutes.
    Mr. Crippen. All right.
    Ms. Jones. Now that we have gotten past what you have 
defined ``value'' is, and you were also asked to understand how 
that was distributed. Correct?
    Mr. Crippen. Correct.
    Ms. Jones. Now, did you take into consideration in the 
distribution the obligations that Fannie and Freddie have that 
all these other institutions who, if they could--I want to 
quote you correctly--others would be willing to pay for the 
advantages that Freddie and Fannie have to take their place in 
the market.
    Did you include that in how the value was distributed?
    Mr. Crippen. No, we didn't. We do not have auction results 
at all. All I am suggesting is that there is a value to these 
advantages that others would pay for, that the subsidy exists.
    Ms. Jones. What would they pay?
    Mr. Crippen. Presumably, they would pay billions of 
dollars. I mean, the point is there is a value in the market 
for these advantages. We think it is worth $13 or $14 billion 
    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 
    You were pretty precise in the work that you were doing, 
    Mr. Crippen. Yes.
    Ms. Jones. So there should be no assumptions with regard to 
any dollars.
    Mr. Crippen. Well, we would say that the total subsidy was 
worth $14 billion in 2000. Is that your question?
    Ms. Jones. No, my question is that you were precise in the 
work that you were doing, so there should be no assumption that 
the portion of the subsidy not passed through is retained by 
shareholders or stakeholders. You found that to be true.
    Chairman Baker. And, Ms. Jones, that needs to be your last 
question. Your time has expired.
    Ms. Jones. Oh, fine.
    Chairman Baker. Please respond, sir.
    Mr. Crippen. May I respond?
    Chairman Baker. Yes.
    Mr. Crippen. The way that we did the calculation, Ms. 
Jones, was to look at what we thought was the total value of 
the subsidy, and then calculate how much of that went to the 
mortgage holders.
    So, what was left was retained by the GSEs.
    Ms. Jones. But, you assumed that. You did not find that to 
be fact.
    Mr. Crippen. We did not trace the dollars, no. So if you 
had $20 and we know you gave $15 of it away, we expect that you 
still have $5. And that is the way we did the calculation.
    Ms. Jones. So if you were my tax accountant, they would 
take that from me?
    Chairman Baker. Ms. Jones.
    Ms. Jones. I am sorry. I yield the balance--I do not have 
any time to yield.
    Chairman Baker. We will be back. We will be here as long as 
the people want to stay.
    Mr. Bachus.
    Mr. Bachus. Thank you, Mr. Chairman.
    Director, I want to commend you on the fine work that the 
Congressional Budget Office does, and for your attention to 
this matter.
    Last year, Chairman Greenspan said that the GSE subsidy 
effectively lowers rates on all mortgages, all conforming 
    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 
    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, 
    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 
    Mr. Bachus. Thank you.
    Chairman Baker. Thank you, Mr. Bachus.
    Ms. Hooley.
    Ms. Hooley. Yes, thank you, Mr. Chair.
    I just want to follow up on some of the things that a 
couple other people have talked about. That is, in this report 
did you measure as you developed the report, did you measure 
the benefit to the consumer that Fannie and Freddie have to 
meet the statutory affordable housing goals?
    Did you measure that impact to the consumer?
    Mr. Crippen. Not directly, no. We measured the lower 
mortgage costs on conforming mortgages as being the primary 
source of the benefit that Fannie and Freddie pass through, 
with literally billions of dollars.
    Ms. Hooley. Do you think the GSEs are achieving their 
Congressional intended purpose of making housing more 
    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 
    So we did not take either of those into account in part 
because the Chairman did not ask us those questions but, more 
importantly, because that analysis would have been very 
difficult. It gets even murkier, of course, as you go outside.
    Here is the value of the subsidies based on the amount of 
debt issued, and here is the value to the mortgage borrowers of 
the reduced interest rates.
    To go well beyond that, to say there are other effects in 
the capital markets: Other conforming mortgages probably have 
lower interest rates. But Treasury debt, U.S. Treasury debt, 
probably has higher interest rates because of the activity of 
borrowing close to $300 billion in the capital markets.
    So there are positives and negatives outside those 
mortgages that Fannie holds. But the benefits are not ones that 
they pay for. I mean, they do not use the subsidy for those 
benefits, and the costs are not ones that they are made to 
realize, either.
    So, yes, this is a narrow question, but it is probably the 
right question in terms of the activities of the GSEs. And once 
you go to the larger issue of effects outside of the mortgages 
they handle, you have to start incorporating the costs in the 
capital markets as well.
    And I am not sure that you would say, on balance, the 
benefits outweigh the costs. But we do not know.
    Ms. Hooley. One of the things you did say, and I think at 
least with Freddie and Fannie that about two-thirds went back 
to the consumer for savings and the other third, at least you 
believe, goes to the shareholders and operation of Freddie and 
Fannie. Is that right?
    Mr. Crippen. Yes. We do not know where the other third 
went, I mean, in the sense of, as I have said----
    Ms. Hooley. You think that is where it went?
    Mr. Crippen. We believe it was retained, but it could have 
been used to help pay Federal taxes, to create capital. I mean, 
there are lots of places it could have gone. We do not know.
    We believe that a third of it was not passed through to the 
    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, 
    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 
    Ms. Hooley. So that is not a number that you would be 
alarmed at or surprised by?
    Mr. Crippen. I do not have a basis to be either alarmed or 
surprised. But it is certainly not surprising that some 
retained subsidy would have to go to shareholders to keep them 
interested in the company.
    Ms. Hooley. Thank you.
    Chairman Baker. Thank you, Ms. Hooley.
    Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman.
    Mr. Crippen, I want to make sure I understand here. It 
sounds to me like we are discussing the quantified value that 
accrues to the GSEs by virtue of having one credit rating 
versus another credit rating when they go to market to get 
their fundamental product, which is money.
    Mr. Crippen. They do not really have a credit rating in the 
market. The AA-minus that the credit agencies have given them, 
or based their evaluations on, would be. But, that is 
counterfactual. Of course, they do have that relationship.
    And so it is not necessarily true that AA-minus is the 
right comparator. But the point is, what we are trying to 
measure is the affiliation with the Federal Government,whether 
it is worth anything?
    And the method that we used to answer that was to ask the 
following: Do they get a lower cost of capital in the debt 
    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 
    Mr. Ose. Certainly.
    Chairman Baker. I understand Mr. Crippen's response, but in 
a direct answer to the AA-minus stand-alone rating, it is not 
stand-alone absent all Federal Government support. It is absent 
direct Federal dollars being injected into the corporation, not 
absent the other Federal relationships that exist.
    The only statement we have that I have had access to as to 
the rating of Fannie Mae was done in the early 1990's by the 
Treasury Department as a true stand-alone. If they were to be 
viewed as a separate enterprise absent all Government 
relations, that rating came out to be a single A.
    Now I am not suggesting today that that is an accurate 
reflection. What I am telling the gentleman is that the AA-
minus rating is not a stand-alone absent the Government ties 
rating, and I think that is important for the record.
    Mr. Ose. This is what I am trying to get at is whether the 
AA-minus includes the implicit guarantee, and you are telling 
me it does.
    Chairman Baker. Yes, sir.
    Mr. Ose. It does not include Federal monies----
    Chairman Baker. Direct Federal appropriations.
    Mr. Ose. OK, that is what I was trying to get at.
    Now if we remove the implicit guarantee, what would the 
rating be?
    Mr. Crippen. I don't know. It would certainly be lower, but 
I do not know.
    Chairman Baker. Well, let me interject there for the 
record, in fairness to the GSEs, we do not know. They could 
well be rated AA-minus as a true stand-alone, but we do not 
know that.
    So the criticism of the comparison that Mr. Crippen has 
made in using the 71 enterprises double A and single A is not 
without some merit.
    Mr. Crippen. And I think it is equally important to note 
that the difference is likely not going to be much. So, yes, 
there is a possibility of overstating the subsidy. But, as I 
have to keep reminding the subcommittee, I think, to be fair, 
there are some assumptions we made that would go the other way; 
if we had made them differently, they would have increased the 
value of the subsidy.
    So we have made assumptions on both sides of this number, 
if you will, some that would make the number better for the 
GSEs, some that would make it worse.
    So we can focus on one side, and in so doing, I think, 
leave a distorted impression of the value of the subsidy.
    Mr. Ose. I appreciate the comments. What I am trying to get 
at is the continuing reason, if any, to extending the implicit 
    So with that, Mr. Chairman, I see my time is up.
    Chairman Baker. I thank the gentleman.
    I believe the next in time of arrival is Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman.
    Let me first just ask a question. What was your basis 
points used to estimate the jumbo and conforming spread number? 
I was trying to find that in the report. I was not sure.
    Mr. Crippen. We made one adjustment to the spread, I think 
it was 22 before adjustment and 25 after. We made the 
adjustment because mortgage holders also receive a little 
subsidy through the Federal Home Loan Banks.
    So that we conclude the difference between subsidized and 
unsubsidized borrowing for mortgages is about 25 basis points. 
That is the advantage that the GSEs pass through to mortgage 
    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 
    So more recent studies, independent academic studies, 
suggest the low 20s is probably about right, which is where we 
ended up as well independently. So, yes, we used 35 before. Is 
22 exact? It could be 23. It could be 24. But we think we are 
probably pretty close.
    Mr. Meeks. Now in response to this [inaudible], I just 
wanted to know in value----
    Chairman Baker. Mr. Meeks, we are having a hard time 
hearing you.
    Mr. Meeks. I am sorry.
    Chairman Baker. That's all right, sir.
    Mr. Meeks. When my colleague, Stephanie Tubbs-Jones was 
talking about value, I just was wondering whether you 
considered at all as value Freddie Mac or Fannie Mae's 
charitable giving, which also includes home buyer education, 
which increases the opportunities for home ownership.
    Was that considered at all as part of the value?
    Mr. Crippen. It did not get counted as part of what we say 
gets passed through to mortgage buyers. It would be part of 
what we estimate they retain.
    So again, the 30-odd percent of the subsidy that we think 
they hold can go to any number of activities: it could go to 
charitable activities; it could go to paying taxes; it could go 
to building capital; it could end up anywhere. So it is not 
part of our calculation.
    What we did was look at mortgages that they finance, and 
the interest rate on those, compared to mortgages they do not 
finance, or ones that are just outside their range. And so we 
attributed the benefit to mortgage holders, those people buying 
homes that Fannie and Freddie directly finance.
    So there may be other things they do with the piece of 
subsidy that we believe they retain that are good things. It 
may well be. They may all be good things. We did not attempt to 
measure those, or look at them, or count them, other than to 
say they do not get passed through to mortgage holders.
    Mr. Meeks. So in other words, I think this is what you 
testified to before, you did not look at whether or not Fannie 
Mae and Freddie Mac were accomplishing the mission that they 
had set out to by Congress?
    Mr. Crippen. We did not answer that question.
    Mr. Meeks. That wasn't considered at all.
    Now in considering the market perception--and I understand 
that some say that there is an advantage because of the 
perception that the Federal Government will come in and save 
the day, if you will.
    I am wondering, and considering that market perception of 
those Federal ties in calculating the subsidy, were there other 
financial firms in your study who might be receiving a similar 
type of subsidy by advertising to their customers, for example, 
their link to the Federal insurance by the FDIC or FSLIC?
    Mr. Crippen. Yes. I mean, it is entirely possible that 
Federal insurance of deposits is a subsidy to the banking 
system, not the GSEs. Not only were we not asked that question, 
but, more importantly, the deposits and the insurance on 
deposits are generally viewed as short-term assets. So banks 
are inclined to use them for short-term investments, not 30-
year fixed mortgages.
    And, indeed, the fact pattern suggests that. The GSEs do 
not deal much in ARMs, the adjustable rate mortgages, whereas 
banks are predominant in that market.
    So they probably get a subsidy. It probably goes in part to 
holders of ARMs, but not to the 30-year fixed-rate mortgages 
that Fannie and Freddie tend to dominate in.
    Mr. Meeks. Finally, according to your study I believe the 
GSEs' lower cost of borrowing is based on market perception of 
Federal support and not legislation or any false advertising on 
the part of GSEs.
    Doesn't this provide an advantage not only to the GSEs and 
its borrowers, but also to the primary lenders that they have 
mortgages, the mortgages that were purchased by the GSEs 
increasing liquidity for their investments as well as the 
economy as a whole by encouraging housing startups and making 
real estate more liquid?
    Mr. Crippen. Certainly, that was the objective. One of the 
primary objectives of establishing the GSEs was to create more 
liquidity in the mortgage market, and they do that.
    The question, though, is, do they need a Federal subsidy, 
whatever that is, to create that liquidity?
    If, for example, you took them today and removed the 
subsidy, they would still certainly be in existence and 
operate. Would there still be a liquid mortgage market? 
Probably there would.
    Now, the rates would clearly be different. So the advantage 
of liquidity is certainly an objective. It is one that they 
have met. But there is no additional, if you will, benefit of 
the liquidity provided by these GSEs over liquidity in other 
    I mean, the Treasury market is considered to be quite 
liquid, the Treasury debt, in part because it is big and 
because it has clearly Federal guarantees. It is good debt. For 
the same reasons, the GSE debt, which is large and has an 
implied guarantee, is liquid. But that is not something they 
created, if you will. It is inherent in the debt structure.
    Chairman Baker. Mr. Meeks, your time has expired, sir. 
Thank you.
    Mr. Jones.
    Mr. Jones. Mr. Chairman, thank you. I want to apologize. We 
have been in a classified closed hearing with Secretary 
Rumsfeld, so I was just able to get here.
    I believe at this time I would like to yield to you, Mr. 
Chairman, my time.
    Chairman Baker. Well thank you, Mr. Jones. I appreciate 
your courtesy.
    Mr. Crippen. Is there anything you want to tell us before 
you start?
    Chairman Baker. I am sorry, that is confidential. And as we 
know, in this town nothing leaks.
    Mr. Jones. You can read it in the paper tomorrow.
    Mr. Crippen. Well, that means I am going to be here 
tomorrow, which is really what my question had to do with.
    Chairman Baker. Although you may check the newspapers, I am 
sure there will be a story out in the morning about it.
    There has been some concern raised by some Members as to 
whether there is a problem, and it is not necessarily a 
statement to which you need to respond, Mr. Crippen.
    Clearly the significant growth of the GSEs in the 
marketplace with the intention to become a new financial 
benchmark domestically and internationally is probably a 
worthwhile thing for the GSEs to do from their perspective, but 
we should not sit idly by as since they are a governmentally-
chartered enterprise and not understand fully the risk they may 
present to taxpayers should economic conditions deteriorate.
    For example, there are about 8500 insured financial 
depository institutions of which in excess of 4100 by recent 
analysis have 100 to 500 percent of total capital invested in 
GSE securities.
    Now I have been comforted by the knowledge that that is not 
100 percent Fannies and Freddies. I was told, you know, it 
could be Farmer Macs.
    So for that reason, I am sure there is no cause for 
concern. But should there be a downturn in housing demand and 
uptick in interest rates, one would worry about capital 
adequacy of financial institutions and potential impact on the 
deposit insurance fund.
    That is one reason why I think we need to act with this 
caveat in mind. I have said it at every hearing. Today all the 
GSEs are very well managed. They are very profitable, and for 
the foreseeable future present no demonstrable risk to the 
American taxpayer.
    However, we cannot ignore that business cycles are just 
that. And should we not prepare, given the fact that some have 
the view that the current regulatory structure is inadequate by 
virtue of its lack of funding on a comparable basis with other 
financial regulators? And the GSEs have alleged that this 
report is off the mark and is not understanding of their 
business model. We should perhaps analyze the need to have 
adequate regulatory oversight in order to adequately assess the 
business risk?
    Therefore, the justification for this study.
    Second, it has been asked whether or not others enjoy 
subsidies of comparable value.
    I would point out that an FDIC insurance sticker on the 
front door is a premium assessed on the operational cost of 
that business enterprise to pay back depositors in the event of 
a closure of a failed institution. So it is a premium charged 
up front to pay off your death benefits.
    The subsidy in question today is a subsidy given to the 
acquisition of the product, which is then subsequently resold 
in the market. So it is an up-front advantage going into the 
marketplace which generates a profit for shareholders.
    There is nothing wrong with profit, but I think we ought to 
analyze it carefully when we recognize the profit is generated 
by a special governmental charter coming from the United States 
    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 
    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 
    Let's assume for the moment it is a $60,000 house. They 
have to come up with $6,000 down, plus closing costs, in 
Louisiana 3 percent, estimate about another $1800, total 
$67,800 required to have a 90 percent loan.
    Now that usually requires PMI and other charges related to 
the assumption of risk, because the person does not have a 
conforming loan, which we have talked about today. There is a 
maximum of a $275,000 for an 80-percent-of-value loan.
    When we look at the way in which the distribution of loan 
portfolios is assembled, again referencing this data, on the 
original loan-to-value ratio range we find that those 
individuals paying less than 5 percent down--in other words, in 
the portfolio, how many folks have higher than 95 percent loans 
or even let's go to higher than 90 percent. Let's assume that 
poor folks can come up with something less than 10 percent down 
for that $60,000 house.
    The aggregate is 13 percent of the portfolio goes to those 
individuals. Amazingly enough, when you look at those 
conforming loans that are below 70 percent--that means we go 
out and we do the appraisal and we are going to loan them 
$275,000 max, and that is less than 70 percent of the value of 
the property in question, that represents 31 percent of 
Freddie's portfolio.
    Now far be it from me to allege that the result of the 
subsidy is to help upper income individuals get access to home 
ownership. I would bet it is probably not the first front door 
they have walked through. But it appears that 73 percent of the 
portfolio of Freddie Mac represents loans and portfolio value 
at 80 percent or below LTV.
    Now if we want to talk about subsidies, that is a pretty 
good one to talk about, too. I would suspect most Members on 
either side of the aisle who have come to the aid of the 
enterprises today on the basis that they are doing charitable 
benevolent work in society would be shocked to learn than 73 
percent of one GSE's portfolio was helping high-income 
    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.
    Mr. Crippen. You should have been here earlier.
    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 
    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 
    Mr. Crippen. I think I can eventually answer to your 
satisfaction. There are no sophomoric questions, only 
sophomoric answers.
    I will fall back on what I do know. That is, that over time 
some of these spreads have lessened. And so the amount of pass-
through would have gone down. We used a higher number in 1995. 
We used 35 basis points as a spread.
    But more recent studies--and we were just talking about one 
a few minutes ago, in fact, one that we reviewed just this 
morning before coming over--suggest that something in the low 
20's is about the right number for the spread between 
conforming and jumbos. So those studies just repeat what we 
have said and do not really answer your question. I will give 
you a more thorough answer in writing as to the exact 
methodology of why what you are seeing in the Memphis paper 
does not match 22 or 25.
    [The information referred to can be found on page 171 in 
the appendix.]
    But we are comforted that the most recent studies, 
including our own, and other independent studies, are coming up 
with about the same conclusion. So the preponderance of 
evidence we have at least is that the low 20's is about right. 
But I will further answer your question.
    Mr. Ford. Switching gears just slightly, the report 
estimates--and I guess the front cover gives us the pie chart--
that Fannie and Freddie received roughly $10.6 billion in 
subsidies in the year 2000, and that they passed on to 
conforming mortgage borrowers about $6.7 billion, retaining 
close to $4 billion in benefits.
    You estimate that the $3.6 billion subsidy on their MBS in 
2000. You estimate that. Does that mean that their charters 
create an additional $3.6 billion in revenues that they would 
not get if they were not Government Sponsored Enterprises or 
    Mr. Crippen. No, no. In fact, these numbers do not speak to 
revenues at all. They speak to implied value of the Federal 
    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 
    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 
    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 
    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 
    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 
    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 
    Mr. Crowley.
    Mr. Crowley. Thank you, Mr. Chairman. I will try to be 
    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 
    Mr. Crowley. You don't want to take all the credit for it.
    Mr. Crippen. Pardon?
    Mr. Crowley. You don't want to take all the credit for it.
    Mr. Crippen. No. No, not all of it. We don't want to give 
all credit for it, either.
    Certainly, some portion of the difference is attributable 
to the GSEs, but it is a fairly precise market that the GSEs 
are involved in, which is the conforming as we know, the 30-
year fixed rate. Although they can invest in ARMs and in other 
markets, that is where they predominate.
    And so the comparison just of jumbos with 30-year fixed in 
the newspaper is not quite the right comparison. Again, I told 
Mr. Ford--who asked us, why aren't the numbers what I see in 
the Memphis paper?--that I would give him a further answer in 
writing. I am not sure exactly how we would disaggregate the 41 
down to what we think is 22, but I can address that, and will.
    We are comforted by the fact, as I told Mr. Ford, that not 
only do we think the difference is about 22 basis points, but 
there are a number of independent studies, some very recent, 
that have come out in about that range, the low 20's.
    So there is a reason for it. I am not very good at telling 
you precisely the difference between 41 and 22, but I will.
    Mr. Crowley. Well, I do. It benefits my constituents to 
have that conforming mortgage rate.
    I am just going to ask you a series of questions, and 
``yes'' and ``no'' might be the best way to answer them.
    Has Fannie Mae or Freddie or any of the Federal Home Loan 
Banks ever received any taxpayer funds?
    Mr. Crippen. No. Not that I'm aware of.
    Mr. Crowley. And even during the S&L crisis of the 1980's 
and 1990's when taxpayers spent billions of dollars to bail out 
many of those institutions, did you receive any funding?
    Mr. Crippen. No.
    Mr. Crowley. Do you pay Federal taxes?
    Mr. Crippen. The GSEs pay a lot of Federal taxes.
    Mr. Crowley. So it is fair to say that you are producing 
income for the Federal Government?
    Mr. Crippen. That the GSEs are producing income for the 
Federal Government, yes.
    Mr. Crowley. So, the Federal GSEs do not cost the Federal 
Government, and by extension, do not cost the taxpayers a 
single cent, do they?
    Mr. Crippen. Not directly, no. The implied subsidy has a 
value, but there are no Federal dollars that are passing 
directly back and forth.
    Mr. Crowley. Thank you. I yield back the balance of my 
    Chairman Baker. Thank you, Mr. Crowley.
    I think we can start round two.
    Mr. Crippen, on the point Mr. Crowley was just making, from 
1979 to 1984, what was Fannie Mae's financial condition?
    Mr. Crippen. Pretty close to nonexistent.
    Chairman Baker. Did the Congress take any action in those 
years to assist the institutions to remain solvent by waiving 
Federal income taxes or taking other bookkeeping measures?
    Mr. Crippen. I suspect you know the answer to the question 
better than I do.
    Chairman Baker. Not that that 5-year period of insolvency 
reflects today's current management or current financial 
condition, I merely point out that business cycles have a 
strange way of repeating themselves.
    In the rebuttal provided by the enterprises, I only got to 
the first which related to the fact that you were responding to 
the question which I asked, and they thought it would be more 
appropriate for you to answer somebody else's question.
    Second, that the GSEs assert that intense competitive 
forces require the pass-through of all subsidies, and that none 
is retained by the GSEs.
    And to prove that point they allege that they only hold 
22.7 percent of the fixed-rate single-family mortgages today.
    Your analysis of that statement, if I am understanding it 
correctly, is that removing the fixed-rate mortgages that are 
ineligible reduces the size of the market in which Fannie and 
Freddie operate. When that action is taken, so that you are 
comparing--as some suggest--apples with apples, the resulting 
analysis says that they are now involved in about 71 percent of 
the market as opposed to 22.7.
    If the line of defense by the agencies was we can't have a 
subsidy, because we have no advantage in the market with only 
22 percent, and then we look at the market as analyzed through 
your perspective and they have 71 percent, should I draw the 
conclusion that perhaps the subsidy is responsible for them 
being so predominant in the market which they occupy?
    Mr. Crippen. I do not know how to answer that exactly.
    Chairman Baker. That's OK. I have another one.
    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 
    Mr. Crippen. Yes.
    Chairman Baker.----in response to their----
    Mr. Crippen. It lowers the spread of the amount of the 
subsidy we calculate.
    Chairman Baker. So it is another one of those troubling 
assumptions that were bothering people earlier.
    Although the GSEs contend that liquidity is a major source 
of their funding advantage, CBO does not estimate the value of 
liquidity separately. And you go on in that paragraph, or 
summary, to conclude:
    ``It seems likely, however, that the sophisticated 
financial institutions with which the GSEs compete also manage 
their debt operations so as to capture any available gains from 
enhanced liquidity.''
    Your view is that although these institutions are very well 
managed and very well run, there are others in the marketplace 
who should exercise similar levels of skill? Is that what I can 
draw from that?
    Mr. Crippen. Yes. And, to the extent they are any better, 
it certainly can't be by very much, a basis point or two. But 
certainly, the statement would have to be supported by evidence 
that somehow they are better than their closest competitors at 
debt management.
    Now, this does not have anything to do with mortgage 
issuance; it is debt management.
    Chairman Baker. So in the rebuttal provided by the 
enterprises to the efficacy of the report, their first said you 
answered the wrong question; then that there is no subsidy that 
is passed on to shareholders.
    As to the remaining elements to which they responded, in 
most cases there was a modification or a movement in the 
agency's direction to ameliorate their concerns.
    Is that correct?
    Mr. Crippen. If I followed it, yes. Certainly the latter 
part, yes.
    Chairman Baker. I have again expired my time.
    Mr. Bentsen, did you want to follow up?
    Mr. Bentsen. Thank you, Mr. Chairman.
    Mr. Crippen, I have a few questions for you. Let me start 
out, though, by saying to my friend from Louisiana, I am not 
sure you can make the statement that there is no subsidy in the 
federally insured depository institution market. And I think 
our friend, Mr. Greenspan, would concur that there is a subsidy 
that occurs.
    And I think if you go back and look at the S&L bailout that 
you and I have lived through--because our States, I think, have 
been unfairly criticized beyond our excesses--that there was a 
    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 
    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 
    Mr. Crippen. I am told the answer is, yes.
    Mr. Bentsen. And I do not want to quibble over this.
    In your sensitivity analysis, which I think is actually 
pretty interesting, the discount rate you use--and the idea 
would be when you are capitalizing the subsidy you would use 
the lower discount rate, you try and use a discount rate that 
is associated with what you assume the borrowing costs to be--
    Mr. Crippen. Yes.
    Mr. Bentsen. But in your sensitivity analysis you use a 
spread between 610 basis points that you say is between the 
Treasury rate and a AAA-minus. But are we assuming they are a 
AA or a AA-minus? And that is a de minimis amount, but----
    Mr. Crippen. We are not assuming, I think, either. I am 
going to refer to my colleagues who did the sensitivity 
analysis. I think it is probably worth noting, though, that in 
the point estimates, the ones that are on the cover, we used 
their cost of capital. And so actually that is again another 
advantage, because it is risk-adjusted.
    Mr. Bentsen. Fair enough. I want to get back to this whole 
issue of the subsidy, because I think there are quantitative 
questions, and then there are just philosophical qualitative 
    Mr. Crippen. Sure.
    Mr. Bentsen. Is it fair to say--well, two things.
    One, you said before if we assume the $1.2 billion, if we 
were to compare this to just a straight appropriation, whether 
to the private market or the Government doing it through the 
FHA or whatever, we might also include the $3.9 billion, 
although that is a non-cash subsidy. The $1.2 billion is 
theoretically a cash subsidy. It is foregone taxes or revenues 
that would otherwise--so you would have to--to add that $3.9 
billion it seems to me you would have to have that 
    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 
    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 
    Mr. Bentsen. With the Chairman's indulgence, because this 
is getting to the heart of my question, I mean, those are costs 
of doing business.
    Mr. Crippen. Um-hmm.
    Mr. Bentsen. Is that fair to say? I do not care about 
charitable giving right now.
    Mr. Crippen. Sure.
    Mr. Bentsen. I am talking about operating costs of the 
entity, the costs to raise capital, which is the payment to 
shareholders, and your loan loss reserves. And we can debate 
whether or not there is sufficient loan loss reserve. That is 
another issue for another day.
    But is that a fair assumption?
    Mr. Crippen. Well, some of the operating costs certainly 
are in the pricing of other non-GSE debt. So certainly, the 
subsidy can go to shareholders. As I said, it is not surprising 
that you would not pass through other----
    Mr. Bentsen. If the Chairman will let me ask this question, 
then my question is to you--and this is more of a qualitative 
of a philosophical question.
    Are we getting a good deal for our investment, which from a 
Federal standpoint is somewhat of a non-dollar investment. We 
are leveraging our credit, in effect, our credit quality. Are 
we getting a good deal for that? And I do not want you to 
confuse it with--but you can answer it this way--or should we 
be doing this at all?
    And obviously Congress decided some time ago that we should 
be doing it, but the question is, on a dollar basis and a 
leverage basis, are we getting a good deal? Should we be 
getting a little bit better than 63 percent leverage, or what?
    Mr. Crippen. There is no way to compare. I mean the 
question can be cast in a couple of ways.
    One, if the Federal Government were to spend directly the 
$10 billion in subsidy we estimate last year, what could you 
buy for it?
    The answer is, if you did not have any costs, you could 
probably support more mortgages, or more than tha 25 basis 
point spread than you are getting now. But that assumes a lot 
of things in between. We do not have any good comparison.
    But second, the question that you may want to think about a 
bit is--it is not whether they are here or not--what would the 
GSEs look like, and what would the benefits of their operation 
be if they did not have the subsidy any longer?
    Because the choice is not between having them out of 
existence or as we know them today, you have other choices in 
between about the continuation of their relationship with the 
Federal Government and how you manage that.
    So I cannot answer the normative or the qualitative 
question, are we getting a good deal? I do not have anything to 
compare it to. Clearly, the shareholders have been getting a 
good deal. That is not to say it is inappropriate. But the 
mortgage market we know, the conforming market, has lower rates 
because of their activities. So that is a good thing from the 
objective of their charter.
    Mr. Bentsen. Thank you.
    Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Bentsen. I would point out, 
there are a lot of expenditures that could be in the calculus, 
$14 million for lobbying expense last year for example.
    Mr. Bachus.
    Mr. Bachus. Thank you.
    Director, we talked about the amount of the subsidy that is 
passed through, but then we talked about what is retained.
    Mr. Crippen. Right.
    Mr. Bachus. On the retained part, what part of that would 
go to say payment of Federal income tax?
    Mr. Crippen. Well, we do not know how much of the subsidy 
goes anywhere. I mean, we are not tracing the dollars. One 
could say that it is retained for shareholders.
    The fact that there are other payments being made could be 
part of what the money is used for, what the value of the 
spread is used for. But we don't know. We did not try to trace 
any dollars. All we did was look at differences between the 
operation in the financial markets of these firms and those 
that are not subsidized. So we do not know.
    There are certainly other things that they have, 
obligations to the Treasury, regulatory requirements of 
capital, and other things, but we do not know. We did not do 
that assessment, and I do not think you can.
    Mr. Bachus. Well, you could determine what they pay in 
Federal income taxes. Aren't they publicly traded?
    Mr. Crippen. Presumably, it is in the annual reports.
    Mr. Bachus. So if we talk about what is retained by them, 
you would--obviously what the Government gets back in income 
tax or other taxes would be a return to the Government and 
would reduce the cost of that subsidy. Am I right?
    Mr. Crippen. Well again, the value of the subsidy is the 
spread in the markets. There are no direct dollars to offset. 
Yes, they pay Federal taxes. I think at one time they may have 
been close to the largest Federal taxpayer, and maybe still 
are, as a single entity. But that is the cost of their doing 
business just like private firms.
    They do not pay State and local taxes, which is an 
advantage other firms do not have. Other firms do pay Federal 
taxes. The GSEs do not pay SEC fees, which other firms do. So 
they have these advantages.
    The Federal tax payment happens to not be one of them. But 
certainly, some portion of the retained subsidy could be used 
for paying taxes or other things. We do not know.
    Mr. Bachus. If they bring stability to the housing market, 
that would be hard for you to assess a value or put a dollar 
value on that. Is that correct?
    Mr. Crippen. Yes.
    Mr. Bachus. And you made no attempt to do that?
    Mr. Crippen. We did not.
    Mr. Bachus. And if we said that they bring stability and 
predictability to the mortgage housing market, that would be 
more for us to determine the value of that?
    Mr. Crippen. It is very hard to quantify. Similarly, it is 
hard to quantify how much increase in cost of capital there is 
for non-housing entities. We did not try to do that either.
    Mr. Bachus. Now when we talk about a Government subsidy, if 
Fannie Mae and Freddie Mac were shut down, the Government 
certainly would not get any of that money back?
    Mr. Crippen. Right.
    Mr. Bachus. It is not as if----
    Mr. Crippen. Right.
    Mr. Bachus. So this is not a savings to the Government if 
we shut it down, or to the taxpayer.
    Mr. Crippen. No, not in this calculation. I mean there may 
be other effects. But maybe I should put it this way:
    If I were going to buy a home, and my parents, God bless 
them, chose to help me, they could do it any number of ways. 
They could buy down the mortgage rate. They could give me the 
down payment. They could do it in ways that are very easy to 
point to, in cash. Or they could co-sign the mortgage and lend 
me their credit rating, or their collateral, use their house. 
And in so doing, you would not see a cash transfer, but the 
effect would be the same. That is a little bit like what we 
have here.
    The subsidy is real. Just because you cannot watch a dollar 
flow does not mean there is not a subsidy.
    Mr. Bachus. I guess what I am saying, just because there is 
a subsidy, ending that subsidy would not necessarily benefit 
the Government and the people.
    Mr. Crippen. Not in direct dollars, no. But there are lots 
of other implications.
    Anyway, there are not dollars flowing to Fannie or Freddie 
from the Federal treasury, so you would not see dollars 
returned. But again, I think we need to keep in mind that the 
elimination of the institutions is not at issue so much as the 
elimination of the subsidy, because the institutions would 
survive in some form.
    The question is, what do you want to do with the 
relationship with the Federal Government?
    Mr. Bachus. But, if there is not a cost of that subsidy to 
the taxpayer, and yet a large percentage of that subsidy is 
passed through to homeowners, you know, one could ask the 
question, why end it at all?
    Mr. Crippen. Well, despite what we would like to think, 
nothing is free. While there may not be Federal dollars 
associated with it, certainly it does have an impact on other 
people trying to raise money in the capital markets, private 
    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 
    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 
    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.
    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 
    Mr. Crippen. But they all have a mortgage now, I bet.
    Ms. Jones. Of some sort. Maybe not a home mortgage, though.
    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 
    Mr. Crippen. Probably.
    Ms. Jones. OK. I want to go back to this value that you 
give to Fannie Mae and Freddie Mac's ability to have the 
subsidy, and that others would like to stand in their shoes.
    What is that value? How do you calculate or put it into 
    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 
    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, 
    Government Sponsored Enterprises and Their Implicit 
Subsidy: The Case of Sally Mae, which was in 1985.
    And then each year, we have some options in our big options 
book that include other smaller estimates, of subsidies.
    So there are not a lot. There are a half a dozen here. The 
value generally that we look for is the direct and indirect 
value of the relationship with the Federal Government.
    Sometimes, there may be dollar flows to promote R&D or 
other things. Sometimes, we give the implied credit, or we give 
the credit of the Federal Government backing to other entities 
so they can borrow at better rates. Sometimes, we buy down loan 
rates directly and give loans through the SBA and other 
    Ms. Jones. The value that you attribute is the value to the 
corporation or the entity, not the value to the United States 
or the banking industry, or the home loan buyer, or the 
mortgage broker, or whatever else. Right?
    Mr. Crippen. Yes. That is fair.
    Ms. Jones. Then has anybody ever asked you to do a study of 
what the value to us of giving the subsidy to the GSEs is to 
the American public?
    Mr. Crippen. No. We have talked a bit about it this 
morning. There is certainly a value that we have not measured, 
and some of it is measurable because there are other mortgages 
affected, and we could look at is just as we have.
    Ms. Jones. I probably could go on and on and on and bring 
witnesses who would testify to that value. But in your opinion 
in doing this report, that value was not part of what you 
should consider in your assessment?
    Mr. Crippen. Just as we did not consider costs.
    Ms. Jones. Hold on a second.
    Mr. Crippen. Yes.
    Ms. Jones. I do not want you to think I am harassing you. 
Just answer that question.
    Mr. Crippen. Yes, there are certainly----
    Ms. Jones. Those are values that you did not consider?
    Mr. Crippen. Yes, that is correct.
    Ms. Jones. OK. And you would have wanted to consider--or 
you did not consider either. Now you can tell me what you 
wanted to say.
    Mr. Crippen. What I wanted to say is, one, such an analysis 
is very hard. But, two, there are also costs involved that we 
did not measure.
    As an example, when the GSEs last year issued somewhere in 
the neighborhood of $300 billion in new debt and MBS 
guarantees. The fact that they borrowed or were active in the 
capital markets means that the price for other people who were 
borrowing in the capital markets was probably higher.
    And it does not have to be a lot higher. As I said, just as 
an example, let's say we are paying 1 basis point----
    Ms. Jones. Well, you are not saying, even if that is the 
impact there is nothing wrong with that? Right?
    Mr. Crippen. Not necessarily. But you have to understand, 
what I am saying is, if there are big benefits----
    Ms. Jones. There is nothing illegal about it. Right?
    Mr. Crippen. No.
    Ms. Jones. And if you were clearly, if you were running, if 
I name a bank then somebody is going to accuse me of picking on 
a particular bank, but a financial institution, you would do 
what Fannie did or Freddie did because that is good business 
    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?
    Ms. Jones. Then I want to get to be Chairperson. That is 
when I will be happy.
    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.
    Mr. Crippen. We have got to make sure that is in the 
    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 
    Ms. Jones. Worth more in how you determine value, not in 
    Mr. Crippen. Absolutely, yes.
    Ms. Jones. See, that is the problem I am having.
    Mr. Crippen. But you could evaluate other policies. I mean, 
you might get the same or similar values from the GSEs if they 
did not have the same subsidy, or had no subsidy. I do not know 
the answer to that. You do not know.
    Ms. Jones. I think we are saying the same thing.
    Mr. Crippen. Yes. But you may want to take the Federal 
guarantee and do something else with it.
    Ms. Jones. Or I may want to leave it where it is.
    Mr. Crippen. You may.
    Ms. Jones. OK.
    Thanks, Mr. Chairman.
    Chairman Baker. Thank you, Ms. Jones. I am going to wrap up 
here--I know, mercifully, you are thinking. I would merely 
point out, Ms. Jones, in that exchange that my point in trying 
to provide this source of information is that Members can come 
to better understanding as to----
    Ms. Jones. Mr. Chairman, if you will just yield, I did not 
mean to infer that you were not.
    Chairman Baker. I am taking no offense.
    Ms. Jones. OK.
    Chairman Baker. I am merely saying that the purpose of this 
is to have Members get access to what we believe to be 
constructive, professional information, to make assessments 
about where benefits actually flow, and measure the value of 
those benefits to your constituents. In Fannie Mae's 2000 
Annual Report, the same figure for Fannie is 71 percent--that 
is, for the 80 percent or less LTV conforming loan portfolio. 
If you look at where the benefit appears to go, it is a fairly 
expensive mechanism by which to facilitate home ownership.
    On the other side of the coin, however, if I were to take 
every argument proffered on the side of the GSEs today, it is a 
persuasive argument to nationalize home mortgage debt. If this 
is a good thing, let's do it for everybody.
    Now we may want to means-test it, but we do not means-test 
the benefit today, because there are people who are very high 
income who may be borrowing 50 percent of the sale cost in a 
mortgage, and we are subsidizing we do not know how many of 
those individuals.
    So if one is concerned about nationalizing the home 
mortgage debt, one ought to have a concern about the current 
    I think it is incumbent to involve myself for the 
significant long term in the analysis of this set of concerns 
and hopefully come to some logical resolution that even the 
GSEs might find to be an appropriate resolution.
    To that end, there are a couple of remaining items that I 
wanted to bring to your attention, Mr. Crippen, that I thought 
deserve further analysis.
    On page 28 of your review, there is Table 8, which has an 
analysis of year-by-year retained subsidy. What caught my eye 
is that even though the aggregate subsidy declined in value 
from 1999 to 2000, the amount retained by Fannie Mae, though 
not by Freddie Mac, actually went up.
    I do not need a detailed explanation today as to why that 
occurred, but for the record I would like to get something back 
from you as to how that occurred, if you have the factual basis 
on which to make such analysis.

         [Mr. Crippen submitted the following response at a 
        later date:

         [Fannie Mae's retained subsidy increased in 2000 
        primarily because of a substantial increase in its 
        debt-financed portfolio, which more than offset the 
        effect of a reduction in new MBS guarantees.]

    Second, there was some concern expressed about my press 
release on Friday, which I have gone back and carefully read. I 
did not allege that the GSEs released the document 
inappropriately. I merely said somebody did. And that I thought 
that was unfortunate because we were trying to close up the 
final product.
    And what was difficult for members of the press to 
understand was that I had made assurances to Members on both 
sides that upon receipt of the final document we would make it 
available as soon as it was physically available, and there 
were Members without copies who were reading summaries of the 
report in national media coverage. That is unfortunate.
    I do intend to have conversations with those reported in 
the media as having access from the Wall Street community as to 
the appropriateness of their comments, given Members of 
Congress had not even seen the data. That troubled me greatly.
    I know that you extended the report as a courtesy, as a 
matter of professional practice, as you do customarily for 
other agencies, and that you had hoped that that 
confidentiality would have been maintained. And let me say 
again, we are not alleging the GSEs were the source. It could 
have come from any number of places. I simply can say without 
fear of equivocation it was not from my office, nor was it from 
your office.
    Then I was troubled by a press release I got this morning 
indicating some source saying that ``Baker himself, several 
weeks prior, mentioned a $10 billion figure,'' as if that were 
the basis for the early release. That was a guess, which was 
actually inaccurate, and I just want to assure Members who may 
read the record later that I did not, nor did any member of my 
staff, release to anyone the information contained in this 
important report.
    As to where we go from here, some Members have asked, now 
    I will have a meeting on June 14th of the subcommittee 
relating to analyst issues that had been previously announced. 
Between now and then we will determine if the scope of that 
hearing will be enlarged. But it would be my intention to 
invite the GSEs and interested parties to make further comment 
on this report at a subsequent hearing.
    I do not want anyone to think that we would take only the 
Agency's view and not afford all interested parties an 
opportunity to express publicly their concerns, if they choose 
to participate in approximately a month. We do not have a 
hearing date.
    I further am taking to heart the observations of Members 
today who said that the scope of your study, based on my 
request, was too myopic and did not consider all the values nor 
all the costs associated with the effects of the GSEs on 
mortgages and debt more broadly.
    We will take under advisement--and I will visit with Mr. 
Kanjorski and others--as to whether we may come back to you at 
a later time and request a broader examination. But my intent 
is to give you time off for good behavior.
    You have certainly paid your dues, suffered long hours to 
give us a professional product, for which you have not been 
given appropriate recognition, and I wish to thank you for your 
courtesies, the patience of your staff, and your willingness to 
stay in the saddle here for almost 4 hours in listening to 
rebuttals of your recommendations.
    I appreciate your work. I look forward to continuing our 
relationship with regard to this matter. Hopefully, at the end 
of the day, the GSEs, Senator Gramm, Senator Sarbanes, Chairman 
Oxley, and myself, hope to be able to have a professional 
discussion on these matters.
    I will again try to diffuse what I think has been an 
unfortunate 2-year history, but make clear I am not going away 
on this. I think public policy demands resolution, and we will 
stick to it until we get it done.
    Hearing adjourned. Thank you.
    [Whereupon, at 12:47 p.m., the hearing was adjourned.]

                            A P P E N D I X

                              May 23, 2001