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An analysis of the systemic risks posed by Fannie Mae and Freddie Mac and an evaluation of the policy options for reducing those risks

  • Robert A. Eisenbeis
  • W. Scott Frame
  • Larry D. Wall

Fannie Mae and Freddie Mac are government-sponsored enterprises that are central players in U.S. secondary mortgage markets. Over the past decade, these institutions have amassed enormous mortgage- and non-mortgage-oriented investment portfolios that pose significant interest-rate risks to the companies and a systemic risk to the financial system. This paper describes the nature of these risks and systemic concerns and then evaluates several policy options for reducing the institutions’ investment portfolios. We conclude that limits on portfolio size (assets or liabilities) would be the most desirable approach to mitigating the systemic risk posed by Fannie Mae and Freddie Mac.

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Paper provided by Federal Reserve Bank of Atlanta in its series FRB Atlanta Working Paper with number 2006-02.

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Date of creation: 2006
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Handle: RePEc:fip:fedawp:2006-02
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  1. 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.).
  2. Roberto Perli & Brian P. Sack, 2003. "Does mortgage hedging amplify movements in long-term interest rates?," Finance and Economics Discussion Series 2003-49, Board of Governors of the Federal Reserve System (U.S.).
  3. Lucas, Deborah & McDonald, Robert L., 2006. "An options-based approach to evaluating the risk of Fannie Mae and Freddie Mac," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 155-176, January.
  4. 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, issue Q1, pages 45-59.
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  6. Wayne Passmore, 2005. "The GSE Implicit Subsidy and the Value of Government Ambiguity," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(3), pages 465-486, 09.
  7. Richard K. Green & Susan M. Wachter, 2005. "The American Mortgage in Historical and International Context," Working Paper 9094, USC Lusk Center for Real Estate.
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  9. Andreas Lehnert & Wayne Passmore & Shane Sherlund, 2008. "GSEs, Mortgage Rates, and Secondary Market Activities," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 343-363, April.
  10. Robert A. Eisenbeis & Larry D. Wall, 1998. "Financial regulatory structure and the resolution of conflicting goals," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
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  12. Passmore, Wayne & Sparks, Roger & Ingpen, Jamie, 2002. "GSEs, Mortgage Rates, and the Long-Run Effects of Mortgage Securitization," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 215-42, Sept.-Dec.
  13. Flannery, Mark J., 1991. "Pricing deposit insurance when the insurer measures bank risk with error," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 975-998, September.
  14. Richard Roll, 2003. "Benefits to Homeowners from Mortgage Portfolios Retained by Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer;Western Finance Association, vol. 23(1), pages 29-42, February.
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  17. Edward J. Kane & Chester Foster, 1986. "Valuing conjectural government guarantees of FNMA liabilities," Proceedings 117, Federal Reserve Bank of Chicago.
  18. Robert A. Eisenbeis & W. Scott Frame & Larry D. Wall, 2004. "Resolving large financial intermediaries: banks versus housing enterprises," FRB Atlanta Working Paper 2004-23, Federal Reserve Bank of Atlanta.
  19. 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.
  20. 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, 02.
  21. Brent W. Ambrose & Michael LaCour-Little & Anthony B. Sanders, 2004. "The Effect of Conforming Loan Status on Mortgage Yield Spreads: A Loan Level Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(4), pages 541-569, December.
  22. Jonathan McCarthy & Richard Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-17.
  23. Nothaft, Frank E & Pearce, James E & Stevanovic, Stevan, 2002. "Debt Spreads between GSEs and Other Corporations," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 151-72, Sept.-Dec.
  24. Wayne Passmore, 2005. "The GSE implicit subsidy and the value of government ambiguity," Finance and Economics Discussion Series 2005-05, Board of Governors of the Federal Reserve System (U.S.).
  25. Marco Del Negro & Christopher Otrok, 2005. "Monetary policy and the house price boom across U.S. states," FRB Atlanta Working Paper 2005-24, Federal Reserve Bank of Atlanta.
  26. Lehnert, Andreas & Passmore, Wayne, 2006. "Comment on: "An options-based approach to evaluating the risk of Fannie Mae and Freddie Mac"," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 177-182, January.
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