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Charter Value, Risk‐Taking Incentives, and Emerging Competition for Fannie Mae and Freddie Mac

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  • W. SCOTT FRAME
  • LAWRENCE J. WHITE

Abstract

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.

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  • W. Scott Frame & Lawrence J. White, 2007. "Charter Value, Risk‐Taking Incentives, and Emerging Competition for Fannie Mae and Freddie Mac," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 83-103, February.
    • Handle: RePEc:wly:jmoncb:v:39:y:2007:i:1:p:83-103
    DOI: 10.1111/j.0022-2879.2007.00004.x
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    Cited by:

    1. Dufour, Alfonso & Stancu, Andrei & Varotto, Simone, 2017. "The equity-like behaviour of sovereign bonds," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 25-46.
    2. Allen N. Berger & Leora F. Klapper & Rima Turk-Ariss, 2017. "Bank competition and financial stability," Chapters, in: Jacob A. Bikker & Laura Spierdijk (ed.), Handbook of Competition in Banking and Finance, chapter 10, pages 185-204, Edward Elgar Publishing.
    3. 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.
    4. Martha Poon, 2009. "From New Deal institutions to capital markets: commercial consumer risk scores and the making of subprime mortgage finance," Working Papers halshs-00359712, HAL.
    5. Jason Thomas & Robert Order, 2020. "Fannie Mae and Freddie Mac: Risk-Taking and the Option to Change Strategy," The Journal of Real Estate Finance and Economics, Springer, vol. 60(3), pages 270-307, April.
    6. Lawrence J. White & W. Scott Frame, 2009. "The Federal Home Loan Bank System: Current Issues in Perspective," Working Papers 09-18, New York University, Leonard N. Stern School of Business, Department of Economics.
    7. Paul Calem & James Follain, 2007. "Regulatory Capital Arbitrage and the Potential Competitive Impact of Basel II in the Market for Residential Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 35(2), pages 197-219, August.
    8. James D. Hamilton, 2007. "Housing and the monetary transmission mechanism: commentary," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 415-422.
    9. Martha Poon, 2009. "From New Deal institutions to capital markets: commercial consumer risk scores and the making of subprime mortgage finance," Post-Print halshs-00359712, HAL.
    10. Poon, Martha, 2009. "From new deal institutions to capital markets: Commercial consumer risk scores and the making of subprime mortgage finance," Accounting, Organizations and Society, Elsevier, vol. 34(5), pages 654-674, July.
    11. Valentina Salotti & Natalya A. Schenck & John H. Thornton Jr., 2016. "The Impact Of Real Estate Lending On Thrifts' Franchise Values During The 2007–2009 Crisis: A Comparison With Commercial Banks," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 39(1), pages 35-62, March.
    12. Xudong An & Lawrence R. Cordell & Nicholas Smith, 2023. "CMBS Market Evolution and Emerging Risks," Working Papers 23-27, Federal Reserve Bank of Philadelphia.

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