The Congressional Budget Office (CBO) released a report yesterday on the economic outlook for the fiscal years 2009 through 2019 in connection with the testimony of acting Director Robert A. Sunshine before the Senate Banking Committee. Although the report focused on a wide range of topics, the economic outlook contained certain projections with respect to the operations of Fannie Mae and Freddie Mac (the GSEs) as they are being operated in conservatorship. In a portion of that report, the “CBO estimates that the value of the GSE’s mortgage loans and guaranteed assets falls short of their liabilities by about $200 billion (on a present-value basis)….” The GSEs and Treasury have not yet responded to this estimate. When the GSEs were placed into conservatorship, Treasury entered into preferred stock purchase agreements with both GSEs whereby Treasury agreed to purchase up to $100 billion in preferred stock from each GSE upon a determination by the FHFA that the GSEs’ liabilities exceed their assets. The purchase agreements, which are indefinite in duration, were intended to ensure that each GSE maintained a positive net worth. Assuming the CBO’s estimates are correct, it would appear that the estimated $200 billion net worth hole would encompass the entire $200 billion provided for in the purchase agreements.

Separately, Treasury Secretary Paulson addressed the status of the GSEs yesterday in a speech at the Economic Club of Washington. Mr. Paulson’s comments detailed his thought on the debate as to the long-term status of the GSEs and whether nationalization or privatization of the entities would be preferable. Notably, he suggested that a “public utility-like mortgage credit guarantor could be the best way to resolve the inherent conflict” between the opposing schools of thought. Under this model, private sector entities would be put in place to purchase and securitize mortgages with a credit guarantee backed by the federal government but would not hold investment portfolios. A rate setting commission would then establish a targeted rate of return, “thereby addressing the inherent conflicts between private ownership and public purpose that are unresolved in the current GSE structure.”