What to do? (Bloomberg)

The government’s top number-crunchers can’t agree if Fannie Mae and Freddie Mac will be a financial drain on the federal coffers in the future.

The Office of Management and Budget, a unit of the White House, estimates that the two mortgage giants will return $181.5 billion in profits to the U.S. Treasury during the next decade if they remain under the government’s control.

The Congressional Budget Office, which reports to Congress, projects that the firms will be money-losers for the government – with net costs of about $19 billion from 2015 through 2024.

It’s not that the offices are doing the same math and coming up with different results.  It’s that they’re choosing to do different math.  They can’t agree on whether Fannie and Freddie are part of the government, which affects the way they account for the companies’ impact on the federal budget.

OMB treats Fannie and Freddie as third-party entities that operate outside the government, and therefore the money they send to the Treasury counts as receipts to Uncle Sam. The firms have sent more than $200 billion in dividends to the Treasury since the government took control of them in 2008 --  exceeding the $188 billion that they received in federal bailout money.

By contrast, CBO views the companies as part of the government as long as they remain in conservatorship.  It does not count the money that Fannie and Freddie send to Treasury as a receipt, but rather as an intra-governmental transfer of funds.

Deborah Lucas, former CBO assistant deputy, said the CBO method makes more sense when trying to assess the budgetary impact of both companies.

But first, it’s important to understand what Fannie and Freddie do.  They buy mortgages from lenders, package them into securities and sell them to investors.  For a fee, they also insure mortgages and pay investors should the loans go bad.  That guarantee plays a key role in CBO’s thinking.

The CBO looks into the future, assessing if the fees Fannie and Freddie pocket to guarantee the mortgages will be more than the costs of covering loans that default. It concluded they would not for the next decade.

The OMB  tracks the guarantees and default rates of the past to project how Fannie and Freddie will perform going forward.  Lucas, speaking to a group gathered at the Bipartisan Policy Center, said the method is “deficient.”

“The cash flows that appear to be profits in the popular narrative are really a result of legacy guarantees made years or decades in the past,” said Lucas, now a distinguished professor of finance at MIT. They are not relevant when it comes to setting future policies that will affect the federal budget, she said.

But Michael Bopp, a former OMB assistant director who also spoke at the event, said the CBO method has its own serious drawback in that it relies too heavily on judgments that are not always transparent or consistent from one program to the next.

The implications of the CBO's method matter as Congress considers a major overhaul of the mortgage finance system.

Sens. Tim Johnson (D-S.D.) and Mike Crapo (R-Idaho) – the leaders of the Senate Banking Committee -- have proposed legislation that would wind down Fannie and Freddie, replace them with a new entity, and shift more of the risks of mortgage lending to the private sector.

The banking committee plans to vote on the measure on April 29. If the measure passes, the CBO would “score” it, basically estimating the legislation’s price tag. The score would no doubt influence the bill’s fate.

“The CBO clearly thinks Fannie and Freddie lose money,” said Bopp, now a partner at Gibson, Dunn & Crutcher.  “The question becomes: Will the new entity created under Johnson-Crapo cost more than Fannie and Freddie or not?”