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GSEs, mortgage rates, and secondary market activities

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  • Andreas Lehnert
  • Wayne Passmore
  • Shane M. Sherlund

Abstract

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that purchase mortgages and issue mortgage-backed securities (MBS). In addition, the GSEs are active participants in the primary and secondary mortgage markets on behalf of their own portfolios of MBS. Because these portfolios have grown quite large, portfolio purchases as well as MBS issuance are likely to be important forces in the mortgage market. This paper examines the statistical evidence of a connection between GSE actions and the interest rates paid by mortgage borrowers. We find that both portfolio purchases and MBS issuance have negligible effects on mortgage rate spreads and that purchases are not any more effective than securitization at reducing mortgage interest rate spreads. We also examine the 1998 liquidity crisis and find that GSE portfolio purchases did little to affect interest rates paid by borrowers. These results are robust to alternative assumptions about causality and to model specification.

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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 2005-07.

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Date of creation: 2005
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Handle: RePEc:fip:fedgfe:2005-07

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Keywords: Government-sponsored enterprises ; Secondary markets;

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References

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Citations

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Cited by:
  1. Diana Hancock & Wayne Passmore, 2012. "The Federal Reserve's portfolio and its effects on mortgage markets," Finance and Economics Discussion Series 2012-22, Board of Governors of the Federal Reserve System (U.S.).
  2. John M. Quigley, 2006. "Federal credit and insurance programs: housing," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 281-310.
  3. Richard K. Green & Susan M. Wachter, 2005. "The American Mortgage in Historical and International Context," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 93-114, Fall.
  4. Dwight Jaffee & John M. Quigley, 2012. "The Future of the Government Sponsored Enterprises: The Role for Government in the U.S. Mortgage Market," NBER Chapters, in: Housing and the Financial Crisis National Bureau of Economic Research, Inc.
  5. Deng, Yongheng & Gabriel, Stuart A. & Sanders, Anthony B., 2011. "CDO market implosion and the pricing of subprime mortgage-backed securities," Journal of Housing Economics, Elsevier, vol. 20(2), pages 68-80, June.
  6. 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.
  7. Patrick Honohan, 2008. "Bank Failures: The Limitations of Risk Modelling," The Institute for International Integration Studies Discussion Paper Series iiisdp263, IIIS.
  8. Andreas Lehnert & Wayne Passmore & Shane M. Sherlund, 2006. "GSEs, mortgage rates, and secondary market activities," Finance and Economics Discussion Series 2006-30, Board of Governors of the Federal Reserve System (U.S.).
  9. Tatom, John A., 2008. "New actions on the housing and financial crises—do no harm?," MPRA Paper 9823, University Library of Munich, Germany.
  10. IANCU, Aurel, 2013. "Extending Financialisation and Increasing Fragility of the Financial System," Working Papers of National Institute of Economic Research 130307, National Institute of Economic Research.
  11. Alex Kaufman, 2012. "The influence of Fannie and Freddie on mortgage loan terms," Finance and Economics Discussion Series 2012-33, Board of Governors of the Federal Reserve System (U.S.).

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