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The GSE implicit subsidy and the value of government ambiguity

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  • Wayne Passmore
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    Abstract

    The housing-related government-sponsored enterprises Fannie Mae and Freddie Mac (the "GSEs") have an ambiguous relationship with the federal government. Most purchasers of the GSEs' debt securities believe that this debt is implicitly backed by the U.S. government despite the lack of a legal basis for such a belief. In this paper, I estimate how much GSE shareholders gain from this ambiguous government relationship. I find that (1) the government's ambiguous relationship with Fannie Mae and Freddie Mac imparts a substantial implicit subsidy to GSE shareholders, (2) the implicit government subsidy accounts for much of the GSEs' market value, and (3) the GSEs would hold far fewer of their mortgage-backed securities in portfolio and their capital-to-asset ratios would be higher if they were purely private.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2005-05.

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    Date of creation: 2005
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    Handle: RePEc:fip:fedgfe:2005-05

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    Keywords: Government-sponsored enterprises ; Mortgages;

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    1. Edward Kane, 1999. "Housing Finance GSEs: Who Gets the Subsidy?," Journal of Financial Services Research, Springer, vol. 15(3), pages 197-209, May.
    2. Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
    3. William Poole, 2003. "Housing in the macroeconomy," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-8.
    4. James E. Pearce & James C. Miller, III, 2001. "Freddie Mac and Fannie Mae: their funding advantage and benefits to consumers," Proceedings 737, Federal Reserve Bank of Chicago.
    5. Ambrose, Brent W. & Thibodeau, Thomas G., 2004. "Have the GSE affordable housing goals increased the supply of mortgage credit?," Regional Science and Urban Economics, Elsevier, vol. 34(3), pages 263-273, May.
    6. Steven A. Sharpe, 2002. "Reexamining Stock Valuation and Inflation: The Implications Of Analysts' Earnings Forecasts," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 632-648, November.
    7. Brent Ambrose & Michael LaCour-Little & Anthony Sanders, 2005. "Does Regulatory Capital Arbitrage, Reputation, or Asymmetric Information Drive Securitization?," Journal of Financial Services Research, Springer, vol. 28(1), pages 113-133, October.
    8. James F. Gatti & Ronald W. Spahr, 1997. "The Value of Federal Sponsorship: The Case of Freddie Mac," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(3), pages 453-485.
    9. Passmore, Wayne & Sparks, Roger & Ingpen, Jamie, 2002. "GSEs, Mortgage Rates, and the Long-Run Effects of Mortgage Securitization," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 215-42, Sept.-Dec.
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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. Man Cho, 2009. "Managing Mortgage Credit Risk: What Went Wrong With the Subprime and Alt-A Markets?," International Real Estate Review, Asian Real Estate Society, vol. 12(3), pages 295-324.
    3. 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.
    4. John M. Quigley, 2006. "Federal credit and insurance programs: housing," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 281-310.
    5. Jaffee, Dwight M. & Quigley, John M., 2007. "Housing Subsidies and Homeowners: What Role for Government-Sponsored Enterprises?," Berkeley Program on Housing and Urban Policy, Working Paper Series qt6g8986r5, Berkeley Program on Housing and Urban Policy.
    6. William Poole, 2007. "The GSEs: where do we stand?," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-152.
    7. Jaffee, Dwight M. & Quigley, John M., 2009. "The Government Sponsored Enterprises: Recovering From a Failed Experiment," Berkeley Program on Housing and Urban Policy, Working Paper Series qt8v17v5vz, Berkeley Program on Housing and Urban Policy.
    8. Michael Davies & Jacob Gyntelberg & Eric Chan, 2007. "Housing finance agencies in Asia," BIS Working Papers 241, Bank for International Settlements.
    9. Eric Chan & Michael Davies & Jacob Gyntelberg, 2006. "The role of government-supported housing finance agencies in Asia," BIS Quarterly Review, Bank for International Settlements, December.
    10. W. Scott Frame, 2009. "The 2008 federal intervention to stabilize Fannie Mae and Freddie Mac," Working Paper 2009-13, Federal Reserve Bank of Atlanta.
    11. 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.
    12. TINA M. Mukta Kulkarni & Mark L. Lengnick-Hall, . "Obstacles To Success In The Workplace For People With Disabilities: A Review And Research Agenda," Working Papers 0031, College of Business, University of Texas at San Antonio.

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