Charter Value, Risk-Taking Incentives, and Emerging Competition for Fannie Mae and Freddie Mac
This paper examines two forces that may soon increase competition in the U.S. secondary conforming mortgage market: (1) the Federal Home Loan Bank mortgage purchase programs, and (2) the adoption of revised risk-based capital requirements for large U.S. banks (Basel II). We argue that this competition is likely to reduce the growth and relative importance of Fannie Mae and Freddie Mac and hence reduce their charter values and effective capital. Such developments could, in turn, lead to more risky behaviors by these two companies. This last consequence warrants greater supervisory awareness and legal authorities. Copyright 2007 The Ohio State University.
Volume (Year): 39 (2007)
Issue (Month): 1 (02)
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