The Obama Administration will soon decide whether to move Fannie Mae (FNM) and Freddie Mac (FRE) onto the federal budget, a reversal of Bush policy that could widen the federal deficit by hundreds of billions of dollars.

After the government seized the mortgage behemoths last September, the Bush Administration opted against incorporating their operations onto the federal books.

Peter Orszag, who was head of the Congressional Budget Office, or CBO, under President Bush, publicly argued the opposite view. He said the companies were now part of a "very tight nexus" with the federal government and ought to be reflected in the budget. Now, as the director of Obama's Office of Management and Budget, he will have the chance to put his money where his mouth is.

Moving the mortgage giants onto the federal books is hardly convenient for the new administration. It will swell the deficit and make it tougher for President Barack Obama to push his domestic agenda and put the country on a more sustainable fiscal path.

Already, the issue is causing headaches. The CBO last month estimated the takeover of Fannie and Freddie would cost the government $238 billion in 2009, pushing the U.S. deficit up to $1.2 trillion for this year. That has made Obama's economic stimulus plan a tougher sell on Capitol Hill, where Republicans are balking at its roughly $825 billion price tag.

However, keeping the companies off the books could prompt criticism that the Obama White House isn't being forthright about taxpayers' exposure to their mounting losses. Already, the Treasury has pumped $13.8 billion of capital into Freddie Mac and has agreed to inject up to $200 billion into the firms to keep them solvent.

The White House Office of Management and Budget is the final arbiter on the matter. It hasn't yet made a decision, OMB spokesman Tom Gavin said, adding that the office is "looking at a range of government-sponsored enterprises and other financial industry issues."

A decision could be reached by the end of the month, when the budget office unveils a detailed overview of the 2010 federal budget. A final budget blueprint won't be released until later this spring, Gavin said.

The federal budget reflects revenues and outlays of programs and activities in which the government exerts significant control, even if it doesn't run them. For example, the cash flows of the state-administered unemployment-insurance program are included in the federal budget.

The deficit impact of moving Fannie and Freddie onto the federal budget will provide fodder for critics of big government, said James Horney, the director of federal fiscal policy at the Center on Budget and Policy Priorities, a liberal research group.

"People like me, it makes our job harder," he said. "The trade-off is that you really want a budget that reflects everything the government is doing."

The expectation in policy circles is that Orszag will move to put Fannie and Freddie on the federal budget. Three days after they were seized by the government, he said the CBO would incorporate their operations into the agency's budget projections.

"The degree of control exercised by the federal government over these entities is so strong that the best treatment is to incorporate them into the federal budget," he said at a news conference on Sept. 9.

Rep. Paul Ryan of Wisconsin, the top Republican on the House Budget Committee, said that while he doesn't know what Orszag's decision is going to be, "I know what his mind is." He cited conversations he had with Orszag about the matter last fall.

Orszag left the CBO in late November, several weeks before the agency unveiled its projections. Still, the CBO's $238 billion estimate for the cost of the mortgage giants' takeover provides a marker for how Orszag might approach the issue.

The CBO measured the net present value of the future cash flows from the firm's operations, which it said would result in a one-time $200 billion budget cost in 2009. Then, it added $38 billion for the government's cost of subsidizing Fannie's and Freddie's new business in 2009, and smaller amounts in subsequent years.

Such a calculation is fraught with uncertainty and gritty technical problems. It involves difficult assumptions about house prices, interest rates and the value of the mortgage-backed securities Fannie and Freddie own or guarantee.

In September, Orszag said it wasn't clear whether those were a collection of mortgage loans or publicly-traded securities - a determination that would have budget implications. "There is tension between various budget scoring rules," he said.

The future of the companies is also up in the air. They could remain in conservatorship for years or be spun off from the government. The idea of reconstructing Fannie and Freddie as shareholder-owned companies under the public utility model has gained currency in some circles.

Severing the companies from the government won't necessarily narrow the budget gap, Horney warned. Under the CBO's methodology, selling or liquidating Fannie's or Freddie's assets would only narrow the deficit if they were sold for more than what the government had estimated they are worth. If the estimate is the same as the sales price, there will be no impact on the budget gap.

"If the housing market improves more than we think it will, then that will show up as making the deficit look better," Horney said.

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@dowjones.com