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Financing housing through government-sponsored enterprises

  • W. Scott Frame
  • Larry Wall

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.

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Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (2002)
Issue (Month): Q1 ()
Pages: 29-43

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Handle: RePEc:fip:fedaer:y:2002:i:q1:p:29-43:n:v.87no.1
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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. Harold A. Black & M. Cary Collins & Breck L. Robinson & Robert L. Schweitzer, 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, 09.
  3. 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 129-50, Sept.-Dec.
  4. Rebecca S. 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.
  5. Richard Baker, 2001. "The financial safety net: five free-market principles for policymaking," Proceedings 735, Federal Reserve Bank of Chicago.
  6. Richard Scott 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.
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