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Emerging competition and risk-taking incentives at Fannie Mae and Freddie Mac

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Author Info
W. Scott Frame
Lawrence J. White
Abstract

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

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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2004-4.

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Date of creation: 2004
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Handle: RePEc:fip:fedawp:2004-4

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. McKenzie, Joseph A, 2002. "A Reconsideration of the Jumbo/Non-jumbo Mortgage Rate Differential," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 197-213, Sept.-Dec. [Downloadable!] (restricted)
  2. Lawrence White, 2003. "Focusing on Fannie and Freddie: The Dilemmas of Reforming Housing Finance," Journal of Financial Services Research, Springer, vol. 23(1), pages 43-58, February. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Patric H. Hendershott & James D. Shilling, 1989. "The Impact of the Agencies on Conventional Fixed-Rate Mortgage Yields," NBER Working Papers 2646, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. 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. [Downloadable!]
  6. W. Scott Frame & Larry Wall, 2002. "Financing housing through government-sponsored enterprises," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 29-43. [Downloadable!]
  7. John C. Weicher, 1994. "The new structure of the housing finance system," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 47-65. [Downloadable!]
  8. Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
  10. Lori L. Taylor, 1998. "Does the United States still overinvest in housing?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 10-18. [Downloadable!]
  11. Edwin S. Mills, 1987. "Dividing up the investment pie: have we overinvested in housing?," Business Review, Federal Reserve Bank of Philadelphia, issue Mar, pages 13-23. [Downloadable!]
  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. [Downloadable!]
  13. Stephen F. LeRoy, 1990. "Mutual deposit insurance," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Jun 8. [Downloadable!]
  14. Edward J. Kane & Chester Foster, 1986. "Valuing conjectural government guarantees of FNMA liabilities," Proceedings, Federal Reserve Bank of Chicago, pages 347-368.
  15. Hendershott, Patric H & Shilling, James D, 1989. "The Impact of the Agencies on Conventional Fixed-Rate Mortgage Yields," The Journal of Real Estate Finance and Economics, Springer, vol. 2(2), pages 101-15, June.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Diana Hancock & Andreas Lehnert & Wayne Passmore & Shane M. Sherlund, 2005. "An analysis of the potential competitive impacts of Basel II capital standards on U.S. mortgage rates and mortgage securitization," Basel II White Paper 4, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  2. Diana Hancock & Andreas Lehnert & Wayne Passmore & Shane M. Sherlund, 2006. "The competitive effects of risk-based bank capital regulation: an example from U.S. mortgage markets," Finance and Economics Discussion Series 2006-46, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. 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. [Downloadable!]
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