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Financing housing through government-sponsored enterprises

Author

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  • W. Scott Frame
  • Larry D. Wall

Abstract

Three government-sponsored enterprises (GSEs)-Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System-were created to improve the availability of home mortgage financing by supplementing local funding. But today's more evolved financial markets enable retail lenders to tap national markets. Thus, the main contribution of the three housing GSEs has become providing homebuyers an interest rate subsidy that is made possible by the GSEs' special relationship with the federal government. ; This article examines the economic issues arising from the provision of such subsidies via the housing GSEs. The authors first review the benefits and costs of subsidizing housing finance and then provide background information about the housing GSEs and their relationship to the federal government. The GSEs' importance to the financial markets, coupled with their special relationship with the government, raises concerns about the potential for moral hazard and the problems that would arise if a housing GSE became financially distressed or insolvent. ; The discussion then focuses on two public policy debates that have been sparked by this special relationship. The first is whether the housing GSEs are efficient mechanisms for subsidizing housing. The second relates to the housing GSEs' safety and soundness and questions whether implicit guarantees of their liabilities are the best way to subsidize them.

Suggested Citation

  • W. Scott Frame & Larry D. Wall, 2002. "Financing housing through government-sponsored enterprises," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 29-43.
  • Handle: RePEc:fip:fedaer:y:2002:i:q1:p:29-43:n:v.87no.1
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    File URL: http://www.frbatlanta.org/filelegacydocs/frame_wall.pdf
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    References listed on IDEAS

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    1. Mark D. Flood, 1992. "The great deposit insurance debate," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-77.
    2. Black, Harold A & et al, 1997. "Changes in Market Perception of Riskiness: The Case of Too-Big-to-Fail," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(3), pages 389-406, Fall.
    3. Richard S. Carnell, 2001. "Federal Deposit Insurance versus federal sponsorship of Fannie Mae and Freddie Mac: the structure of subsidy," Proceedings 738, Federal Reserve Bank of Chicago.
    4. Richard Baker, 2001. "The financial safety net: five free-market principles for policymaking," Proceedings 735, Federal Reserve Bank of Chicago.
    5. Ambrose, Brent W & Warga, Arthur, 2002. "Measuring Potential GSE Funding Advantages," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 129-150, Sept.-Dec.
    6. Rebecca Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 1-14.
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    Citations

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    Cited by:

    1. W. Scott Frame & Lawrence J. White, 2004. "Emerging competition and risk-taking incentives at Fannie Mae and Freddie Mac," Proceedings 922, Federal Reserve Bank of Chicago.
    2. Dirk Krueger & Karsten Jeske, 2004. "Housing and the Macroeconomy: The Role of Implicit Guarantees for Government Sponsored Enterprises," 2004 Meeting Papers 100, Society for Economic Dynamics.
    3. Jeske, Karsten & Krueger, Dirk & Mitman, Kurt, 2011. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," CEPR Discussion Papers 8624, C.E.P.R. Discussion Papers.
    4. Ron J. Feldman, 2002. "Mortgage rates, homeownership rates, and government-sponsored enterprises," Annual Report, Federal Reserve Bank of Minneapolis, pages 4-23.
    5. Dwight M. Jaffee, 2006. "Controlling the Interest Rate Risk of Fannie Mae and Freddie Mac," NFI Policy Briefs 2006-PB-04, Indiana State University, Scott College of Business, Networks Financial Institute.
    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;Western Finance Association, vol. 31(2), pages 75-99, June.
    7. Frank A. Schmid, 2005. "Stock return and interest rate risk at Fannie Mae and Freddie Mac," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 35-48.
    8. Jeske, Karsten & Krueger, Dirk & Mitman, Kurt, 2013. "Housing, mortgage bailout guarantees and the macro economy," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 917-935.
    9. Ferguson, Niall & Schularick, Moritz, 2006. "The Empire Effect: The Determinants of Country Risk in the First Age of Globalization, 1880 1913," The Journal of Economic History, Cambridge University Press, vol. 66(02), pages 283-312, June.
    10. W. Scott Frame & Larry D. Wall, 2002. "Fannie Mae's and Freddie Mac's voluntary initiatives: Lessons from banking," Economic Review, Federal Reserve Bank of Atlanta, pages 45-59.
    11. W. Scott Frame, 2003. "Federal Home Loan Bank mortgage purchases: Implications for mortgage markets," Economic Review, Federal Reserve Bank of Atlanta, pages 17-31.
    12. Frank A. Schmid, 2003. "Conjectural guarantees loom large: evidence from the stock returns of Fannie Mae and Freddie Mac," Working Papers 2003-031, Federal Reserve Bank of St. Louis.
    13. Lawrence J. White & W. Scott Frame, 2004. "Emerging Competition and Risk-Taking Incentives at Fannie Mae and Freddie Mac," Working Papers 04-02, New York University, Leonard N. Stern School of Business, Department of Economics.
    14. Nicholas Economides, 2007. "“Net Neutrality,” Non-Discrimination and Digital Distribution of Content Through the Internet," Working Papers 07-03, NET Institute.
    15. W. Scott Frame, 2009. "The 2008 federal intervention to stabilize Fannie Mae and Freddie Mac," FRB Atlanta Working Paper 2009-13, Federal Reserve Bank of Atlanta.
    16. Dwight Jaffee, 2003. "The Interest Rate Risk of Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer;Western Finance Association, vol. 24(1), pages 5-29, August.

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