Will Fannie, Freddie, and the DoD Be Left Untouched by Debt Ceiling Compromise?


Housing Wire's Jon Prior reported that as of Friday, none of the bills that were being considered in the House or the Senate contained cuts to wheezing mortgage behemoths Fannie Mae or Freddie Mac. While the deal Pres. Obama worked out with Sens. Mitch McConnell and Harry Reid over the weekend could tell a different story, both group's reticence to raise taxes suggests Fannie and Freddie will be spared a haircut: 

Buried in the flurry of negotiations were potential ramifications for Fannie and Freddie, the two mortgage giants that have cost the U.S. government roughly $164 billion in bailouts since the housing downturn.

According to the Congressional Budget Office, the original Boehner plan and subsequent Reid proposals would have saved the government $30 billion via reductions to Fannie and Freddie operations. This, sources within the House told HousingWire, would have meant raising the guarantee fees — the fees Fannie and Freddie charge for guaranteeing a pool of mortgages — up 5 basis points.

Sources said this contributed more than $26 billion to government "cuts," but it was eventually considered a "tax revenue" and was removed from not only Boehner's proposal but Reid's as well.

It was unclear Friday whether the Reid bill had any language pertaining to Fannie and Freddie within it, but an aide for one senator said the situation was "extremely fluid." But on Monday, as details surfaced of the new compromise between Republican and Democratic leaders, sources in congress told HousingWire all language pertaining to Fannie and Freddie have been eliminated.

Cuts to defense spending also seem to be up in the air. The deal that congressional leaders are trying to sell to their respective holdouts creates a bipartisan deficit reduction commission. If that commission fails to reach some sort of agreement by Thanksgiving, automatic cuts will occur to defense spending.

Reactions to that:

– Jennifer Rubin has been assured by House hawks that there will be no cuts to defense: "The emerging framework creates a 'firewall' that separates all security spending (security spending is not just DoD but also foreign aid and Homeland Security, for example) from non-security spending. This structure allows our members, led by House Armed Services Chairman Rogers and McKeon, to work with both parties to do the right thing and ensure that any cuts do not harm defense. While Democrats may continue to insist and try to cut defense, Republicans will fight on behalf of our Armed Forces and make sure our troops get the resources they need." 

– David Frum seems to disagree: "I wish my defense hawk friends at the American Enterprise Institute and the Weekly Standard had discerned before it was too late that a budget framework that calls for: (1) no additional revenues and (2) big cuts in discretionary spending, is not a hospitable climate for a robust defense budget." Frum also chides defense hawks for supporting the Tea Party: "The pro-defense conservatives who cheered and cheered as Tea Party Republicans were awarded veto power over GOP decision-making have completely outfoxed themselves."

– At the Washington Examiner, Phil Klein reports on the tension between the GOP's anti-tax and pro-defense wings: 

Norquist urged Republicans to hold the line on taxes, but he has also argued that the conservative movement should get behind cuts to the defense budget. And the current deal includes defense cuts, but not tax increases. What's more, it creates a joint Congressional committee to find additional savings, and if the committee cannot find enough, it triggers further defense cuts – but not any tax increases.

President Obama said during his brief remarks tonight that he would continue to push for a "balanced approach" (i.e. higher taxes). No doubt, Democrats on the Congressional committee will be insisting on raising taxes as part of deficit reduction, and Republicans will be torn in both directions. Either they agree to tax increases, or they trigger automatic defense cuts on top of the cuts that they already agreed to.

No doubt, we'll start to see more and more opposition from conservative defense hawks to slashing the military budget, while the Norquist crowd will continue to push Republicans to accept more defense cuts to avoid any increase in taxes.

This is likely to be the opening of significant debate among conservatives that will likely continue for decades to come, given the increasing pressure posed by entitlements.