Advanced Search
MyIDEAS: Login to save this paper or follow this series

GSE Funding Advantages and Mortgagor Benefits: Answers from Asset Pricing

Contents:

Author Info

  • Willemann, Søren

    ()
    (Department of Accounting, Aarhus School of Business)

Registered author(s):

    Abstract

    We take an asset pricing approach to model the funding advantage of Government Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac. In order to replicate some stylized facts, we extend a referenced model to incorporate defaultability of mortgage agencies. The model implies that the direct effect from having a government guarantee results in a funding advantage of 21 bp. This indicates that the funding advantage of 40 bps estimated in the literature may be a bad proxy for the dollar value of the liability to the government. For a GSE, which explicitly takes a guarantee into account, the funding advantage is passed through to mortgagors. If not, as much as 75% of the funding advantage is retained by the GSE. We relate this to empirical findings in the earlier literature. Finally, we discuss and illustrate how a government guarantee in itself can induce a stabilized mortgage market.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.hha.dk/afl/wp/fin/F_2005_04.pdf
    Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Helle Vinbaek Stenholt)
    Download Restriction: no

    Bibliographic Info

    Paper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Research Group Working Papers with number F-2005-04.

    as in new window
    Length: 27 pages
    Date of creation: 23 Sep 2005
    Date of revision:
    Handle: RePEc:hhb:aarbfi:2005-04

    Contact details of provider:
    Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
    Fax: + 45 86 15 19 43
    Web page: http://www.asb.dk/about/departments/bs.aspx
    More information through EDIRC

    Related research

    Keywords: Government sponsored enterprises; Mortgage backed bonds; Credit risk;

    References

    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.:
    as in new window
    1. Titman, Sheridan D & Torous, Walter N, 1989. " Valuing Commercial Mortgages: An Empirical Investigation of the Contingent-Claims Approach to Pricing Risky Debt," Journal of Finance, American Finance Association, vol. 44(2), pages 345-73, June.
    2. W. Scott Frame & Lawrence J. White, 2004. "Fussing and fuming over Fannie and Freddie: how much smoke, how much fire?," Working Paper, Federal Reserve Bank of Atlanta 2004-26, Federal Reserve Bank of Atlanta.
    3. Dennis R. Capozza & Dick Kazarian & Thomas A. Thomson, 1998. "The Conditional Probability of Mortgage Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(3), pages 259-289.
    4. Dwight Jaffee, 2003. "The Interest Rate Risk of Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer, vol. 24(1), pages 5-29, August.
    5. Kau, James B, et al, 1992. "A Generalized Valuation Model for Fixed-Rate Residential Mortgages," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 24(3), pages 279-99, August.
    6. Wayne Passmore, 2003. "The GSE implicit subsidy and value of government ambiguity," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-64, Board of Governors of the Federal Reserve System (U.S.).
    7. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:hhb:aarbfi:2005-04. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Helle Vinbaek Stenholt).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.