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An Analysis of the Systemic Risks Posed by Fannie Mae and Freddie Mac and An Evaluation of the Policy Options for Reducing Those Risks

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Author Info

  • Robert Eisenbeis

    ()

  • W. Frame

    ()

  • Larry Wall

    ()

Abstract

Fannie Mae and Freddie Mac are government-sponsored enterprises that are central players in U.S. secondary mortgage markets. Over the past decade, these institutions have amassed enormous mortgage- and non-mortgage-oriented investment portfolios that pose significant interest-rate risks to the companies and a systemic risk to the financial system. This paper describes the nature of these risks and systemic concerns and then evaluates several policy options for reducing the institutions’ investment portfolios. We conclude that limits on portfolio size (assets or liabilities) would be the most desirable approach to mitigating the systemic risk posed by Fannie Mae and Freddie Mac.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by Springer in its journal Journal of Financial Services Research.

Volume (Year): 31 (2007)
Issue (Month): 2 (June)
Pages: 75-99

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Handle: RePEc:kap:jfsres:v:31:y:2007:i:2:p:75-99

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Web page: http://www.springerlink.com/link.asp?id=102934

Related research

Keywords: Government-sponsored enterprises; systemic risk; portfolio limits; G21; G28;

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References

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  1. Robert Eisenbeis & Larry Wall, 1998. "Financial regulatory structure and the resolution of conflicting goals," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  2. Richard K. Green & Susan M. Wachter, 2005. "The American Mortgage in Historical and International Context," Working Paper 9094, USC Lusk Center for Real Estate.
  3. Edward J. Kane & Chester Foster, 1986. "Valuing conjectural government guarantees of FNMA liabilities," Proceedings 117, Federal Reserve Bank of Chicago.
  4. John Kambhu & Patricia C. Mosser, 2001. "The effect of interest rate options hedging on term-structure dynamics," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 51-70.
  5. Lehnert, Andreas & Passmore, Wayne, 2006. "Comment on: "An options-based approach to evaluating the risk of Fannie Mae and Freddie Mac"," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 177-182, January.
  6. Richard Roll, 2003. "Benefits to Homeowners from Mortgage Portfolios Retained by Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer, vol. 23(1), pages 29-42, February.
  7. W. Scott Frame & Lawrence J. White, 2007. "Charter Value, Risk-Taking Incentives, and Emerging Competition for Fannie Mae and Freddie Mac," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 83-103, 02.
  8. Andreas Lehnert & Wayne Passmore & Shane Sherlund, 2008. "GSEs, Mortgage Rates, and Secondary Market Activities," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 343-363, April.
  9. 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.
  10. W. Scott Frame & Larry Wall, 2002. "Financing housing through government-sponsored enterprises," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 29-43.
  11. 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.
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  13. W. Scott Frame & Lawrence J. White, 2004. "Regulating housing GSEs: thoughts on institutional structure and authorities," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 87 - 102.
  14. 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.
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  16. Roberto Perli & Brian Sack, 2003. "Does mortgage hedging amplify movements in long-term interest rates?," Finance and Economics Discussion Series 2003-49, Board of Governors of the Federal Reserve System (U.S.).
  17. 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.
  18. Jonathan McCarthy & Richard W. Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-17.
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Citations

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Cited by:
  1. W. Scott Frame, 2009. "The 2008 federal intervention to stabilize Fannie Mae and Freddie Mac," Working Paper 2009-13, Federal Reserve Bank of Atlanta.
  2. W. Scott Frame & Diana Hancock & Wayne Passmore, 2012. "Federal Home Loan Bank Advances and Commercial Bank Portfolio Composition," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(4), pages 661-684, 06.
  3. Kenc, Turalay & Dibooglu, Sel, 2010. "The 2007-2009 financial crisis, global imbalances and capital flows: Implications for reform," Economic Systems, Elsevier, vol. 34(1), pages 3-21, March.
  4. Patrick Honohan, 2008. "Bank Failures: The Limitations of Risk Modelling," The Institute for International Integration Studies Discussion Paper Series iiisdp263, IIIS.

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