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Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises

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  • Karsten Jeske
  • Dirk Krueger
  • Kurt Mitman

Abstract

This paper evaluates the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (such as Fannie Mae and Freddy Mac) in the mortgage market. In order to do so we construct a model with heterogeneous, infinitely lived households and competitive housing and mortgage markets. Households have the option to default on their mortgages, with the consequence of having their homes foreclosed. We model the bailout guarantee as a government provided and tax-financed mortgage interest rate subsidy. We find that eliminating this subsidy leads to substantially lower equilibrium mortgage origination and increases aggregate welfare, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: eliminating it benefits low-income and low-asset households who did not own homes or had small mortgages, while lowering the welfare of high-income, high-asset households.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17537.

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Date of creation: Oct 2011
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Publication status: published as Housing, Mortgage Bailout Guarantees and the Macro Economy (with K. Jeske and Kurt Mitman), Journal of Monetary Economics, Vol. 60, 917- 935.
Handle: RePEc:nbr:nberwo:17537

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  1. Igor Livshits & James MacGee & Michele Tertilt, 2005. "Consumer Bankruptcy: A Fresh Start," Discussion Papers 04-011, Stanford Institute for Economic Policy Research.
  2. W. Scott Frame & Larry Wall, 2002. "Fannie Mae's and Freddie Mac's voluntary initiatives: Lessons from banking," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 45-59.
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  6. Giglio, Stefano & Pathak, Parag & Campbell, John Y., 2011. "Forced Sales and House Prices," Scholarly Articles 9887623, Harvard University Department of Economics.
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  8. Haliassos, Michalis & Michaelides, Alexander, 2001. "Portfolio Choice and Liquidity Constraints," CEPR Discussion Papers 2822, C.E.P.R. Discussion Papers.
  9. Atif Mian & Amir Sufi & Francesco Trebbi, 2011. "Foreclosures, House Prices, and the Real Economy," NBER Working Papers 16685, National Bureau of Economic Research, Inc.
  10. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
  11. Martin Gervais, 1998. "Housing Taxation and Capital Accumulation," UWO Department of Economics Working Papers 9807, University of Western Ontario, Department of Economics.
  12. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
  13. Matt Chambers & Carlos Garriga & Don Schlagenhauf, 2009. "The Loan Structure and Housing Tenure Decisions in an Equilibrium Model of Mortgage Choice," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 444-468, July.
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  15. W. Scott Frame & Larry Wall, 2002. "Financing housing through government-sponsored enterprises," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 29-43.
  16. Anthony Pennington-Cross, 2004. "The value of foreclosed property," Working Papers 2004-022, Federal Reserve Bank of St. Louis.
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  18. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
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Cited by:
  1. Kartik B. Athreya & Xuan S. Tam & Eric R. Young, 2011. "Loan guarantees for consumer credit markets," Working Paper 11-06, Federal Reserve Bank of Richmond.
  2. Patrick Bajari & Phoebe Chan & Dirk Krueger & Daniel Miller, 2010. "A Dynamic Model of Housing Demand: Estimation and Policy Implications," NBER Working Papers 15955, National Bureau of Economic Research, Inc.
  3. James Kahn & Omer Acikgoz, 2013. "Mortgage Guarantees and House Price Inflation: A Quantitative Analysis," 2013 Meeting Papers 1075, Society for Economic Dynamics.
  4. Leonardo Martinez & Juan Carlos Hatchondo & Juan M. Sanchez, 2012. "Mortgage Defaults," IMF Working Papers 12/26, International Monetary Fund.
  5. Jonathan Halket & Santhanagopalan Vasudev, 2013. "Online Appendix to "Saving Up or Settling Down: Home Ownership over the Life Cycle," Technical Appendices 12-89, Review of Economic Dynamics.
  6. Grey Gordon & Pablo Guerrón-Quintana, 2013. "Dynamics of investment, debt, and default," Working Papers 13-18, Federal Reserve Bank of Philadelphia.
  7. Nikolai Roussanov & Michael Michaux & Hui Chen, 2011. "Houses as ATMs? Mortgage Refinancing and Macroeconomic Uncertainty," 2011 Meeting Papers 1369, Society for Economic Dynamics.
  8. Børsum, Øystein, 2010. "Contagious Mortgage Default," Memorandum 10/2010, Oslo University, Department of Economics.
  9. Jonathan Halket, 2009. "Home Ownership, Savings and Mobility Over The Life Cycle," 2009 Meeting Papers 295, Society for Economic Dynamics.
  10. Satyajit Chatterjee & Burcu Eyigungor, 2011. "A quantitative analysis of the U.S. housing and mortgage markets and the foreclosure crisis," Working Papers 11-26, Federal Reserve Bank of Philadelphia.
  11. Dean Corbae & Erwan Quintin, 2013. "Leverage and the Foreclosure Crisis," NBER Working Papers 19323, National Bureau of Economic Research, Inc.

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