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The GSE implicit subsidy and the value of government ambiguity

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Author Info
Wayne Passmore
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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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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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. 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, 06. [Downloadable!] (restricted)
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  2. William Poole, 2003. "Housing in the economy," Speech, Federal Reserve Bank of St. Louis. [Downloadable!]
  3. James E. Pearce & James C. Miller, III, 2001. "Freddie Mac and Fannie Mae: their funding advantage and benefits to consumers," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 101-117.
  4. 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. [Downloadable!] (restricted)
  5. William Poole, 2003. "Housing in the macroeconomy," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-8. [Downloadable!]
  6. Alden L. Toevs, 2001. "A critique of the CBO's sponsorship benefit analysis," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 150-164.
  7. 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. [Downloadable!] (restricted)
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  1. 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. [Downloadable!]
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  2. Su Zhou & Mohsen Bahmani-Oskooee & Aali M. Kutan, . "Purchasing Power Parity Before And After The Adoption Of The Euro," Working Papers 0031, College of Business, University of Texas at San Antonio. [Downloadable!]
  3. William Poole, 2007. "The GSEs: where do we stand?," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-152. [Downloadable!]
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  4. John M. Quigley, 2006. "Federal credit and insurance programs: housing," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 281-310. [Downloadable!]
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  5. Michael Davies & Jacob Gyntelberg & Eric Chan, 2007. "Housing finance agencies in Asia," BIS Working Papers 241, Bank for International Settlements. [Downloadable!]
  6. W. Scott Frame, 2009. "The 2008 federal intervention to stabilize Fannie Mae and Freddie Mac," Working Paper 2009-13, Federal Reserve Bank of Atlanta. [Downloadable!]
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