The Agenda

Daniel Indiviglio and Christopher Papagianis on Fannie and Freddie and the Debt-Ceiling

Daniel Indiviglio has a post on why the debt-ceiling debate matters for Fannie and Freddie:


If the debt ceiling isn’t raised, then the Treasury will be put to the test on August 15th. That’s when$25.6 billion in Treasury interest payments comes due. In order to avoid default, the Treasury will have to defer, delay, or dismiss other obligations at that time.

But the week prior, it will likely also learn that Fannie and/or Freddie need several billion dollars as well. Does this spell disaster?

According to a Treasury source, in this scenario, the U.S. government will still have some time to play with until the second quarter Fannie/Freddie cash infusion actually has to occur. Fannie/Freddie isn’t paid until the end of the month after they request additional funds, explained the Treasury source. In this case, that would mean that the Treasury has until the end of September to worry about where it will find these additional billions of dollars.

That makes this potential problem a little less severe. The Treasury, rating agencies, and many commentators believe that the government will resolve this debt ceiling issue prior to the August 2nd deadline. But even if it isn’t resolved by then, Washington will have nearly two more months to raise the limit before Fannie and Freddie will make Treasury’s job even more difficult.

But there is a longer-term problem as well, which my Economics 21 colleague Christopher Papagianis raised in Investor’s Business Daily late last month:


Rather than rely on budget gimmicks moving forward, policymakers should attach an increase in the debt limit to a clear and inalterable timetable to resolve Fannie Mae and Freddie Mac — the largest of all off-budget enterprises in this country and probably the world.

The first argument for linking Fannie and Freddie to the U.S. debt limit debate is that their combined balance sheets now exceed $5 trillion. All these assets are financed by the issuance of debt securities that are now effectively guaranteed by taxpayers, but do not appear in the official budget for the government.

How would the government fund losses that arise when the value of Fannie and Freddie’s mortgages falls below the face value of the debt issued to finance them? By issuing more Treasury debt, which is subject to the debt limit established by Congress.

An increase in the debt limit that contains no reforms for Fannie and Freddie is effectively a blank check for continuing the policy of massively subsidizing housing finance, one that has already cost taxpayers more than $153 billion.

I wish that congressional conservatives would pay closer attention to the danger to taxpayers posed by leaving Fannie and Freddie unreformed.


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