CONGRESSIONAL BUDGET OFFICE REPORT ON FEDERAL SUBSIDIES FOR HOUSING GSES WEDNESDAY, MAY 23, 2001 U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED ENTERPRISES, 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 today. Some months back, I too thought to criticize the CBO out of frustration and impatience due to the delayed release of this report. For the record, I actually wrote that letter last July asking for an update of the 1996 subsidy. I have since learned the delay was due to the extraordinarily studied approach the CBO adopted precisely for the reasons of avoiding the criticisms that were issued in 1996. That is, to get the numbers right and clear away doubt about the methodology used to reach its conclusions. This approach, I now understand, included consultation from accountants and economists representing respected Federal institutions. Among others, the Treasury, the Federal Reserve Board, the Federal Reserve Bank of Minneapolis, the GAO, the Congressional Research Service. CBO then raised my anticipation by subjecting it to an even further lengthy outside rigorous academic-style peer review process. I point this out for two reasons. First, I want to personally thank CBO's Director, Mr. Dan Crippen, for taking care to craft the report in this manner. Congress indeed owes a debt of gratitude for the work both you and your staff do in service to this Congress and to the American people. And just a personal note, reading what I have read, Mr. Crippen, over the past days, it is not my duty to do so, but I apologize to those professionals who have been engaged in this who have been subjected to these criticisms. In our world of elective politics, anything is almost-and usually is in Louisiana for sure-fair game. But to professionals who are engaged in the business of doing work at the direction of the Congress, you should not be subjected to similar criticisms, and I extend that apology to you. Consequently, you can expect that Members of this subcommittee should and will give your testimony the fair and open-minded consideration that you deserve. More importantly, I wish to expose the folly of a handful of people who have already publicly attacked this report, including those who more incredibly still maintain that housing GSEs receive no subsidy at all. Make no mistake. The facts are the facts. The subsidy is real. It is large. And it has far-reaching implications. Today, I intend to take our time. We will go through a lengthy process. We certainly are going to allow every Member every occasion to ask any question he may choose, but I intend to visit with you, Mr. Crippen, the clear steps by which you reached the conclusions and the processes that you engaged. Second, to look at the rebuttal statements included in the report and the elements that give credibility to those rebuttals. And finally, to return to the issue of the relationships between the analysts and the GSEs and their involvement in this matter prior to the public consideration of the report by the Committee. With that, I would like to recognize the Ranking Member, Mr. Kanjorski. [The prepared statement of Hon. Richard H. Baker can be found on page 58 in the appendix.] Mr. KANJORSKI. Thank you very much, Mr. Chairman, for the opportunity to comment before the hearing begins today to learn more about the latest study compiled by the experts at CBO on the subsidies received by the housing Government Sponsored Enterprises. As I understand, although the agency changed the methodology it used in 1996– Mr. LAFALCE. Could Mr. Kanjorski speak up a bit louder, please? Mr. KANJORSKI. Oh, sure. OK? Mr. LAFALCE. That is better, yes. Mr. KANJORSKI. As I understand, although the Agency changed the methodology it used in 1996 to calculate this subsidy, its ultimate conclusions remain approximately the same in this new report. In short, Fannie Mae and Freddie Mac pass on about twothirds of the Federal subsidies to home buyers in the form of lower mortgage prices. The CBO analysts have also determined that the size of the Federal subsidy received by Fannie Mae and Freddie Mac has nearly doubled between 1995 and 2000 to $10.6 billion. Some will doubtlessly contend today that Congress should work to control this dramatic growth. The questions we should, however, be asking ourselves focus not on what caused the magnitude of the growth and how to control it, but rather where the subsidy flows, what it buys, and how well the GSES manage their risks and operate their businesses. Additionally, I suspect that a number of my colleagues during this hearing will raise concerns about the methodology used by the CBO to calculate its latest estimates. We should examine these methodological concerns today, but in doing so we should not forget to look at the big picture. This report confirms that the GSEs are performing a function that the Congress wants them to perform. Namely, they are working to help lower the cost of home ownership at no real monetary cost to the Federal Government. In return, the stakeholders and shareholders in the GSEs receive a share of the Federal subsidy to provide a financial reward for their efforts. Moreover, just last week, the Wall Street Journal reported that the U.S. Census Bureau has found that demand for housing is actually rising at a faster pace than previously expected. We could, as a result, soon experience housing shortages in some parts of the country. The GSEs need to use their benefits to help us to attend to this looming need for affordable housing. If we did not have the GSEs to accomplish our Nation's housing objectives sufficiently, we would have to create new housing subsidy programs to address this imminent need, likely at a greater cost to our Federal Government. |