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GSEs, mortgage rates, and secondary market activities

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  • Andreas Lehnert
  • Wayne Passmore
  • Shane M. Sherlund

Abstract

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that purchase mortgages and issue mortgage-backed securities (MBS). In addition, the GSEs are active participants in the primary and secondary mortgage markets on behalf of their own portfolios of MBS. Because these portfolios have grown quite large, portfolio purchases as well as MBS issuance are likely to be important forces in the mortgage market. This paper examines the statistical evidence of a connection between GSE actions and the interest rates paid by mortgage borrowers. We find that both portfolio purchases and MBS issuance have negligible effects on mortgage rate spreads and that purchases are not any more effective than securitization at reducing mortgage interest rate spreads. We also examine the 1998 liquidity crisis and find that GSE portfolio purchases did little to affect interest rates paid by borrowers. These results are robust to alternative assumptions about causality and to model specification.

Suggested Citation

  • Andreas Lehnert & Wayne Passmore & Shane M. Sherlund, 2005. "GSEs, mortgage rates, and secondary market activities," Finance and Economics Discussion Series 2005-07, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2005-07
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    References listed on IDEAS

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    Cited by:

    1. Diana Hancock & Wayne Passmore, 2012. "The Federal Reserve's portfolio and its effects on mortgage markets," Finance and Economics Discussion Series 2012-22, Board of Governors of the Federal Reserve System (U.S.).
    2. Andrew Fieldhouse & Karel Mertens & Morten O. Ravn, 2017. "The Macroeconomic Effects of Government Asset Purchases: Evidence from Postwar US Housing Credit Policy," Discussion Papers 1707, Centre for Macroeconomics (CFM).
    3. Richard K. Green & Susan M. Wachter, 2005. "The American Mortgage in Historical and International Context," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 93-114, Fall.
    4. Guidolin, Massimo & Tam, Yu Man, 2013. "A yield spread perspective on the great financial crisis: Break-point test evidence," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 18-39.
    5. Dwight Jaffee & John M. Quigley, 2012. "The Future of the Government-Sponsored Enterprises: The Role for Government in the U.S. Mortgage Market," NBER Chapters,in: Housing and the Financial Crisis, pages 361-417 National Bureau of Economic Research, Inc.
    6. Alex Kaufman, 2014. "The Influence of Fannie and Freddie on Mortgage Loan Terms," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(2), pages 472-496, June.
    7. Deng, Yongheng & Gabriel, Stuart A. & Sanders, Anthony B., 2011. "CDO market implosion and the pricing of subprime mortgage-backed securities," Journal of Housing Economics, Elsevier, vol. 20(2), pages 68-80, June.
    8. Hancock, Diana & Passmore, Wayne, 2014. "How the Federal Reserve's Large-Scale Asset Purchases (LSAPs) Influence Mortgage-Backed Securities (MBS) Yields and U.S. Mortgage Rates," Finance and Economics Discussion Series 2014-12, Board of Governors of the Federal Reserve System (U.S.).
    9. John M. Quigley, 2006. "Federal credit and insurance programs: housing," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 281-310.
    10. Erik Hurst & Benjamin J. Keys & Amit Seru & Joseph Vavra, 2016. "Regional Redistribution through the US Mortgage Market," American Economic Review, American Economic Association, vol. 106(10), pages 2982-3028, October.
    11. 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.
    12. Jane Dokko & Brian M. Doyle & Michael T. Kiley & Jinill Kim & Shane Sherlund & Jae Sim & Skander Van Den Heuvel, 2011. "Monetary policy and the global housing bubble," Economic Policy, CEPR;CES;MSH, vol. 26(66), pages 233-283, April.
    13. IANCU, Aurel, 2013. "Extending Financialisation and Increasing Fragility of the Financial System," Working Papers of National Institute of Economic Research 130307, National Institute of Economic Research.
    14. Diana Hancock & Wayne Passmore, 2015. "How Does the Federal Reserve's Large-Scale Asset Purchases (LSAPs) Influence Mortgage-Backed Securities (MBS) Yields and U.S. Mortgage Rates?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(4), pages 855-890, November.
    15. Iancu, Aurel, 2013. "Financialisation: Structure, Extent, Consequences," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 172-192, June.
    16. Patrick Honohan, 2009. "Bank Failures: The Limitations of Risk Modeling," World Scientific Book Chapters,in: The First Credit Market Turmoil Of The 21st Century Implications for Public Policy, chapter 8, pages 103-123 World Scientific Publishing Co. Pte. Ltd..
    17. 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.
    18. Tatom, John A., 2008. "New actions on the housing and financial crises—do no harm?," MPRA Paper 9823, University Library of Munich, Germany.
    19. Alex Kaufman, 2012. "The influence of Fannie and Freddie on mortgage loan terms," Finance and Economics Discussion Series 2012-33, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    Government-sponsored enterprises ; Secondary markets;

    JEL classification:

    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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