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The GSE Implicit Subsidy and the Value of Government Ambiguity

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  • Wayne Passmore
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    Abstract

    The housing-related government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have an ambiguous relationship with the federal government. Most purchasers of the GSEs' debt securities believe that this debt is implicitly backed by the U.S. government despite the lack of a legal basis for such a belief. In this article, I estimate how much GSE shareholders gain from this ambiguous government relationship. I find that (i) the government's ambiguous relationship with Fannie Mae and Freddie Mac imparts a substantial implicit subsidy to GSE shareholders, (ii) the implicit government subsidy accounts for much of the GSEs' market value and (iii) the GSEs would hold far fewer of their mortgage-backed securities in portfolio and their capital-to-asset ratios would be higher if they were purely private. Copyright 2005 by the American Real Estate and Urban Economics Association

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    Bibliographic Info

    Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

    Volume (Year): 33 (2005)
    Issue (Month): 3 (09)
    Pages: 465-486

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    Handle: RePEc:bla:reesec:v:33:y:2005:i:3:p:465-486

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    Cited by:
    1. Robert Eisenbeis & W. Frame & Larry Wall, 2007. "An Analysis of the Systemic Risks Posed by Fannie Mae and Freddie Mac and An Evaluation of the Policy Options for Reducing Those Risks," Journal of Financial Services Research, Springer, vol. 31(2), pages 75-99, June.
    2. Jaffee, Dwight M. & Quigley, John M., 2007. "Housing Subsidies and Homeowners: What Role for Government-Sponsored Enterprises?," Berkeley Program on Housing and Urban Policy, Working Paper Series qt6g8986r5, Berkeley Program on Housing and Urban Policy.
    3. Lucas, Deborah & McDonald, Robert L., 2006. "An options-based approach to evaluating the risk of Fannie Mae and Freddie Mac," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 155-176, January.
    4. TINA M. Mukta Kulkarni & Mark L. Lengnick-Hall, . "Obstacles To Success In The Workplace For People With Disabilities: A Review And Research Agenda," Working Papers 0031, College of Business, University of Texas at San Antonio.
    5. W. Scott Frame, 2009. "The 2008 federal intervention to stabilize Fannie Mae and Freddie Mac," Working Paper 2009-13, Federal Reserve Bank of Atlanta.
    6. Michael Davies & Jacob Gyntelberg & Eric Chan, 2007. "Housing finance agencies in Asia," BIS Working Papers 241, Bank for International Settlements.
    7. Jeske, Karsten & Krueger, Dirk & Mitman, Kurt, 2013. "Housing, mortgage bailout guarantees and the macro economy," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 917-935.
    8. Eric Chan & Michael Davies & Jacob Gyntelberg, 2006. "The role of government-supported housing finance agencies in Asia," BIS Quarterly Review, Bank for International Settlements, December.
    9. Jaffee, Dwight M. & Quigley, John M., 2009. "The Government Sponsored Enterprises: Recovering From a Failed Experiment," Berkeley Program on Housing and Urban Policy, Working Paper Series qt8v17v5vz, Berkeley Program on Housing and Urban Policy.
    10. Man Cho, 2009. "Managing Mortgage Credit Risk: What Went Wrong With the Subprime and Alt-A Markets?," International Real Estate Review, Asian Real Estate Society, vol. 12(3), pages 295-324.
    11. Quigley, John M., 2006. "Federal Credit and Insurance Programs: Housing," Berkeley Program on Housing and Urban Policy, Working Paper Series qt41d5k3bd, Berkeley Program on Housing and Urban Policy.
    12. William Poole, 2007. "The GSEs: where do we stand?," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-152.

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