Reducing government subsidies to housing giants Fannie Mae and Freddie Mac could shrink the federal deficit by more than $8 billion in a decade, according to a recent report by the Congressional Budget Office (CBO).
The first option is to increase the guarantee fees that Fannie and Freddie charge mortgage lenders. The companies, also known as government-sponsored enterprises (GSEs), purchase mortgage loans and then package them into securities to sell to investors. Fees protect against losses if the homeowner defaults and cover other costs.
Although guarantee fees have been raised in recent years, senators pressed Federal Housing Finance Agency (FHFA) Director Mel Watt to accelerate the increases at a recent hearing. Increases could help spur private investment in a mortgage market that is still dominated by Fannie and Freddie.
Fewer mortgage investments by the GSEs, in combination with higher fees, would “help facilitate increased participation by the private sector in the mortgage markets,” the Financial Stability Oversight Council (FSOC) said in its annual report last year.
Republican critics of Fannie and Freddie are likely to be stymied in their efforts in the next two years to reduce the companies’ role in the mortgage market.
The CBO also said Fannie and Freddie could cut the deficit by coupling higher fees with lower limits on the size of mortgages they buy. Combining the two approaches could save $8.3 billion by 2024.
However, the FHFA announced on Monday that mortgage loan limits would stay the same in 2015 for most of the country. The limits will increase in 46 counties.
Other options outlined by the CBO for reducing the deficit over the next decade included eliminating the deduction for state and local taxes ($1.09 trillion), limiting medical malpractice costs ($68 billion), and shrinking the federal workforce ($49 billion).
The federal budget deficit is projected to be about $514 billion this year, and to rise in the coming years.