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Financing housing through government-sponsored enterprises

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Author Info

  • W. Scott Frame
  • Larry Wall

Abstract

Three government-sponsored enterprises (GSEs)-Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System-were created to improve the availability of home mortgage financing by supplementing local funding. But today's more evolved financial markets enable retail lenders to tap national markets. Thus, the main contribution of the three housing GSEs has become providing homebuyers an interest rate subsidy that is made possible by the GSEs' special relationship with the federal government. ; This article examines the economic issues arising from the provision of such subsidies via the housing GSEs. The authors first review the benefits and costs of subsidizing housing finance and then provide background information about the housing GSEs and their relationship to the federal government. The GSEs' importance to the financial markets, coupled with their special relationship with the government, raises concerns about the potential for moral hazard and the problems that would arise if a housing GSE became financially distressed or insolvent. ; The discussion then focuses on two public policy debates that have been sparked by this special relationship. The first is whether the housing GSEs are efficient mechanisms for subsidizing housing. The second relates to the housing GSEs' safety and soundness and questions whether implicit guarantees of their liabilities are the best way to subsidize them.

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Bibliographic Info

Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (2002)
Issue (Month): Q1 ()
Pages: 29-43

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Handle: RePEc:fip:fedaer:y:2002:i:q1:p:29-43:n:v.87no.1

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Keywords: Government-sponsored enterprises ; Federal Home Loan Mortgage Corporation ; Federal National Mortgage Association ; Federal home loan banks;

References

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  1. Richard Scott Carnell, 2001. "Federal Deposit Insurance versus federal sponsorship of Fannie Mae and Freddie Mac: the structure of subsidy," Proceedings 738, Federal Reserve Bank of Chicago.
  2. Ambrose, Brent W & Warga, Arthur, 2002. "Measuring Potential GSE Funding Advantages," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 129-50, Sept.-Dec.
  3. Richard Baker, 2001. "The financial safety net: five free-market principles for policymaking," Proceedings 735, Federal Reserve Bank of Chicago.
  4. Rebecca S. Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 1-14.
  5. Mark D. Flood, 1992. "The great deposit insurance debate," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-77.
  6. Harold A. Black & M. Cary Collins & Breck L. Robinson & Robert L. Schweitzer, 1997. "Changes In Market Perception Of Riskiness: The Case Of Too-Big-To-Fail," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(3), pages 389-406, 09.
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Citations

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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. Dirk Krueger & Karsten Jeske, 2005. "Housing and the Macroeconomy: The Role of Implicit Guarantees for Government Sponsored Enterprises," 2005 Meeting Papers 242, Society for Economic Dynamics.
  3. Karsten Jeske & Dirk Krueger & Kurt Mitman, 2011. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," PIER Working Paper Archive 11-034, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Dwight Jaffee, 2003. "The Interest Rate Risk of Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer, vol. 24(1), pages 5-29, August.
  5. W. Scott Frame & Lawrence J. White, 2004. "Emerging competition and risk-taking incentives at Fannie Mae and Freddie Mac," Proceedings 922, Federal Reserve Bank of Chicago.
  6. W. Scott Frame & Larry Wall, 2002. "Fannie Mae's and Freddie Mac's voluntary initiatives: Lessons from banking," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 45-59.
  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. Ron Feldman, 2002. "Mortgage rates, homeownership rates, and government-sponsored enterprises," Annual Report, Federal Reserve Bank of Minneapolis, pages 4-23.
  9. Dwight M. Jaffee, 2006. "Controlling the Interest Rate Risk of Fannie Mae and Freddie Mac," NFI Policy Briefs 2006-PB-04, Indiana State University, Scott College of Business, Networks Financial Institute.
  10. William Greene, 2007. "Discrete Choice Modeling," Working Papers 07-7, New York University, Leonard N. Stern School of Business, Department of Economics.
  11. Frank A. Schmid, 2005. "Stock return and interest rate risk at Fannie Mae and Freddie Mac," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 35-48.
  12. W. Scott Frame, 2003. "Federal Home Loan Bank mortgage purchases: Implications for mortgage markets," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 17-31.
  13. Frank A. Schmid, 2003. "Conjectural guarantees loom large: evidence from the stock returns of Fannie Mae and Freddie Mac," Working Papers 2003-031, Federal Reserve Bank of St. Louis.
  14. W. Scott Frame, 2009. "The 2008 federal intervention to stabilize Fannie Mae and Freddie Mac," Working Paper 2009-13, Federal Reserve Bank of Atlanta.

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