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

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  • Karsten Jeske

    ()
    (Mellon Capital Management Corporation, San Francisco, CA)

  • Dirk Krueger

    ()
    (Department of Economics, University of Pennsylvania)

  • Kurt Mitman

    ()
    (Department of Economics, University of Pennsylvania)

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 Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 11-034.

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Length: 45 pages
Date of creation: 12 Oct 2011
Date of revision:
Handle: RePEc:pen:papers:11-034

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Keywords: Housing; Mortgage Market; Default Risk; Government-Sponsored Enterprises;

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References

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  1. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2002. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP), Centro de Altisimos Estudios Rios Perez (CAERP) 2, Centro de Altisimos Estudios Rios Perez (CAERP).
  2. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 17(5-6), pages 953-969.
  3. Haliassos, Michalis & Michaelides, Alexander, 2001. "Portfolio Choice and Liquidity Constraints," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2822, C.E.P.R. Discussion Papers.
  4. Jesus Fernandez-Villaverde & Dirk Krueger, 2004. "Consumption and Saving over the Life Cycle: How Important are Consumer Durables?," 2004 Meeting Papers, Society for Economic Dynamics 357b, Society for Economic Dynamics.
  5. W. Scott Frame & Larry Wall, 2002. "Financing housing through government-sponsored enterprises," Economic Review, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Atlanta, issue Q1, pages 29-43.
  6. Satyajit Chatterjee & Burcu Eyigungor, 2009. "Foreclosures and house price dynamics: a quantitative analysis of the mortgage crisis and the foreclosure prevention policy," Working Papers 09-22, Federal Reserve Bank of Philadelphia.
  7. Atif Mian & Amir Sufi & Francesco Trebbi, 2011. "Foreclosures, House Prices, and the Real Economy," NBER Working Papers 16685, National Bureau of Economic Research, Inc.
  8. 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.
  9. Martin Gervais, 1998. "Housing Taxation and Capital Accumulation," UWO Department of Economics Working Papers, University of Western Ontario, Department of Economics 9807, University of Western Ontario, Department of Economics.
  10. Igor Livshits & James MacGee & Mich�le Tertilt, 2007. "Consumer Bankruptcy: A Fresh Start," American Economic Review, American Economic Association, American Economic Association, vol. 97(1), pages 402-418, March.
  11. 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, Federal Reserve Bank of Atlanta, issue Q1, pages 45-59.
  12. Anthony Pennington-Cross, 2004. "The value of foreclosed property," Working Papers, Federal Reserve Bank of St. Louis 2004-022, Federal Reserve Bank of St. Louis.
  13. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 371-96, March.
  14. Giglio, Stefano & Pathak, Parag & Campbell, John Y., 2011. "Forced Sales and House Prices," Scholarly Articles 9887623, Harvard University Department of Economics.
  15. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2345, C.E.P.R. Discussion Papers.
  16. Kristopher S. Gerardi & Harvey S. Rosen & Paul S. Willen, 2010. "The Impact of Deregulation and Financial Innovation on Consumers: The Case of the Mortgage Market," Journal of Finance, American Finance Association, American Finance Association, vol. 65(1), pages 333-360, 02.
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Cited by:
  1. Leonardo Martinez & Juan Carlos Hatchondo & Juan M. Sanchez, 2012. "Mortgage Defaults," IMF Working Papers 12/26, International Monetary Fund.
  2. Nikolai Roussanov & Michael Michaux & Hui Chen, 2011. "Houses as ATMs? Mortgage Refinancing and Macroeconomic Uncertainty," 2011 Meeting Papers 1369, Society for Economic Dynamics.
  3. Jonathan Halket, 2009. "Home Ownership, Savings and Mobility Over The Life Cycle," 2009 Meeting Papers, Society for Economic Dynamics 295, Society for Economic Dynamics.
  4. Patrick Bajari & Phoebe Chan & Dirk Krueger & Daniel Miller, 2013. "A Dynamic Model Of Housing Demand: Estimation And Policy Implications," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 409-442, 05.
  5. Giglio, Stefano & Maggiori, Matteo & Stroebel, Johannes, 2014. "Very long-run discount rates," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 182, Federal Reserve Bank of Dallas.
  6. Kartik B. Athreya & Xuan S. Tam & Eric R. Young, 2011. "Loan guarantees for consumer credit markets," Working Paper, Federal Reserve Bank of Richmond 11-06, Federal Reserve Bank of Richmond.
  7. Dean Corbae & Erwan Quintin, 2013. "Leverage and the Foreclosure Crisis," NBER Working Papers 19323, National Bureau of Economic Research, Inc.
  8. Børsum, Øystein, 2010. "Contagious Mortgage Default," Memorandum, Oslo University, Department of Economics 10/2010, Oslo University, Department of Economics.
  9. 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.
  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. James Kahn & Omer Acikgoz, 2013. "Mortgage Guarantees and House Price Inflation: A Quantitative Analysis," 2013 Meeting Papers, Society for Economic Dynamics 1075, Society for Economic Dynamics.
  12. Grey Gordon & Pablo Guerrón-Quintana, 2013. "Dynamics of investment, debt, and default," Working Papers 13-18, Federal Reserve Bank of Philadelphia.

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