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Charter Value, Risk-Taking Incentives, and Emerging Competition for Fannie Mae and Freddie Mac

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  • W. SCOTT FRAME
  • LAWRENCE J. WHITE

Abstract

This paper examines two forces that may soon increase competition in the U.S. secondary conforming mortgage market: (1) the Federal Home Loan Bank mortgage purchase programs, and (2) the adoption of revised risk-based capital requirements for large U.S. banks (Basel II). We argue that this competition is likely to reduce the growth and relative importance of Fannie Mae and Freddie Mac and hence reduce their charter values and effective capital. Such developments could, in turn, lead to more risky behaviors by these two companies. This last consequence warrants greater supervisory awareness and legal authorities. Copyright 2007 The Ohio State University.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.0022-2879.2007.00004.x
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 39 (2007)
Issue (Month): 1 (02)
Pages: 83-103

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Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:1:p:83-103

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Poon, Martha, 2009. "From new deal institutions to capital markets: Commercial consumer risk scores and the making of subprime mortgage finance," Accounting, Organizations and Society, Elsevier, vol. 34(5), pages 654-674, July.
  2. Allen Berger & Leora Klapper & Rima Turk-Ariss, 2009. "Bank Competition and Financial Stability," Journal of Financial Services Research, Springer, vol. 35(2), pages 99-118, April.
  3. Robert A. Eisenbeis & W. Scott Frame & Larry D. Wall, 2006. "An analysis of the systemic risks posed by Fannie Mae and Freddie Mac and an evaluation of the policy options for reducing those risks," Working Paper 2006-02, Federal Reserve Bank of Atlanta.
  4. James D. Hamilton, 2007. "Housing and the monetary transmission mechanism: commentary," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 415-422.
  5. Lawrence J. White & W. Scott Frame, 2009. "The Federal Home Loan Bank System: Current Issues in Perspective," Working Papers 09-18, New York University, Leonard N. Stern School of Business, Department of Economics.
  6. Martha Poon, 2009. "From New Deal institutions to capital markets: commercial consumer risk scores and the making of subprime mortgage finance," Post-Print halshs-00359712, HAL.

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