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Emerging competition and risk-taking incentives at Fannie Mae and Freddie Mac

Listed author(s):
  • W. Scott Frame
  • Lawrence J. White

This paper examines two major forces that may soon increase competition in the U.S. secondary conforming mortgage market: (1) the expansion of Federal Home Loan Bank mortgage purchase programs and (2) the adoption of revised risk-based capital requirements for large U.S. banks (Basel II). The authors argue that this competition is likely to reduce the growth and relative importance of Fannie Mae and Freddie Mac and hence their franchise values and effective capital. Such developments could, in turn, lead to more risky behaviors by these two GSEs. It is this last consequence that warrants greater regulatory awareness.

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Paper provided by Federal Reserve Bank of Chicago in its series Proceedings with number 922.

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Length: 488-506
Date of creation: 2004
Publication status: Published in Conference on Bank Structure and Competition (2004 : 40th) ; How do banks compete? strategy, regulation, and technology
Handle: RePEc:fip:fedhpr:922
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  1. W. Scott Frame & Lawrence J. White, 2004. "Regulating housing GSEs: thoughts on institutional structure and authorities," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 87-102.
  2. Edward J. Kane & Chester Foster, 1986. "Valuing conjectural government guarantees of FNMA liabilities," Proceedings 117, Federal Reserve Bank of Chicago.
  3. Stephen F. LeRoy, 1990. "Mutual deposit insurance," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun8.
  4. McKenzie, Joseph A, 2002. "A Reconsideration of the Jumbo/Non-jumbo Mortgage Rate Differential," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 197-213, Sept.-Dec.
  5. Hendershott, Patric H & Shilling, James D, 1989. "The Impact of the Agencies on Conventional Fixed-Rate Mortgage Yields," The Journal of Real Estate Finance and Economics, Springer, vol. 2(2), pages 101-115, June.
  6. Lawrence White, 2003. "Focusing on Fannie and Freddie: The Dilemmas of Reforming Housing Finance," Journal of Financial Services Research, Springer;Western Finance Association, vol. 23(1), pages 43-58, February.
  7. W. Scott Frame, 2003. "Federal Home Loan Bank mortgage purchases: Implications for mortgage markets," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 17-31.
  8. John L. Goodman & Wayne Passmore, 1992. "Market power and the pricing of mortgage securitization," Finance and Economics Discussion Series 187, Board of Governors of the Federal Reserve System (U.S.).
  9. W. Scott Frame & Larry D. Wall, 2002. "Financing housing through government-sponsored enterprises," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 29-43.
  10. John C. Weicher, 1994. "The new structure of the housing finance system," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 47-65.
  11. Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January.
  12. 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.
  13. Ambrose, Brent W & Warga, Arthur, 2002. "Measuring Potential GSE Funding Advantages," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 129-150, Sept.-Dec.
  14. Rebecca Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 1-14.
  15. Edwin S. Mills, 1987. "Dividing up the investment pie: have we overinvested in housing?," Business Review, Federal Reserve Bank of Philadelphia, issue Mar, pages 13-23.
  16. Lori L. Taylor, 1998. "Does the United States still overinvest in housing?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 10-18.
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