The Government Sponsored Enterprises: Recovering From a Failed Experiment
The Federal takeover of Fannie Mae and Freddie Mac last September spells the end of an experiment in the public-private hybrid known as the Government Sponsored Enterprises (GSE). This paper documents the subsidies provided to the enterprises and the public and private benefits generated. The public benefits included somewhat reduced interest rates for borrowers receiving conforming mortgages. The public subsidies allowed the firms to use the implicit guarantee of their debts to borrow at attractive rates to invest in mortgage portfolios and also to provide a fee-based service in issuing mortgage-backed securities. We suggest reforming the functions provided by the GSEs. In particular we advocate spinning off the portfolio investment activities into a fully private firm. We also advocate conducting the services necessary to issue mortgage-backed securities within a government-owned corporation responsible directly to federal authorities. These reforms would curb excess risk taking in the secondary mortgage market and would provide the liquidity necessary to support the primary mortgage market.
|Date of creation:||01 Feb 2009|
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"Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?,"
04-27, New York University, Leonard N. Stern School of Business, Department of Economics.
- W. Scott Frame & Lawrence J. White, 2005. "Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 159-184, Spring.
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- Jaffee, Dwight M. & Quigley, John M., 2008. "Mortgage Guarantee Programs and the Subprime Crisis," Berkeley Program on Housing and Urban Policy, Working Paper Series qt15d5h9s2, Berkeley Program on Housing and Urban Policy.
- Wayne Passmore & Shane M. Sherlund & Gillian Burgess, 2005.
"The Effect of Housing Government-Sponsored Enterprises on Mortgage Rates,"
Real Estate Economics,
American Real Estate and Urban Economics Association, vol. 33(3), pages 427-463, 09.
- Wayne Passmore & Shane M. Sherlund & Gillian Burgess, 2005. "The effect of housing government-sponsored enterprises on mortgage rates," Finance and Economics Discussion Series 2005-06, Board of Governors of the Federal Reserve System (U.S.).
- Jaffee, Dwight M. & Quigley, John M., 2007. "Housing Subsidies and Homeowners: What Role for Government-Sponsored Enterprises?," Berkeley Program on Housing and Urban Policy, Working Paper Series qt6g8986r5, Berkeley Program on Housing and Urban Policy.
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