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Fannie Mae and Freddie Mac: Risk-Taking and the Option to Change Strategy

Author

Listed:
  • Jason Thomas

    (The Carlyle Group)

  • Robert Order

    (George Washington University)

Abstract

We analyze causes of the surge in defaults experienced by Fannie Mae and Freddie Mac during the Great Recession. Our data are consistent with the following: The two faced a trade-off between subsidized risk-taking (due to a guarantee implied by their charters) and franchise value (due to the scarcity of their charters). Around 2005 there was a change in the relative benefits of the two due to increased competition from “private label” securities. Along with declines in house prices, the increase in defaults is best explained by exercising an option to change strategy, before regulators fully caught on, toward newer, riskier loan types, after the decline in franchise value.

Suggested Citation

  • Jason Thomas & Robert Order, 2020. "Fannie Mae and Freddie Mac: Risk-Taking and the Option to Change Strategy," The Journal of Real Estate Finance and Economics, Springer, vol. 60(3), pages 270-307, April.
    • Handle: RePEc:kap:jrefec:v:60:y:2020:i:3:d:10.1007_s11146-018-9679-7
    DOI: 10.1007/s11146-018-9679-7
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    References listed on IDEAS

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