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GSE Funding Advantages and Mortgagor Benefits: Answers from Asset Pricing

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We take an asset pricing approach to model the funding advantage of Government Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac. In order to replicate some stylized facts, we extend a referenced model to incorporate defaultability of mortgage agencies. The model implies that the direct effect from having a government guarantee results in a funding advantage of 21 bp. This indicates that the funding advantage of 40 bps estimated in the literature may be a bad proxy for the dollar value of the liability to the government. For a GSE, which explicitly takes a guarantee into account, the funding advantage is passed through to mortgagors. If not, as much as 75% of the funding advantage is retained by the GSE. We relate this to empirical findings in the earlier literature. Finally, we discuss and illustrate how a government guarantee in itself can induce a stabilized mortgage market.

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  • Willemann, Søren, 2005. "GSE Funding Advantages and Mortgagor Benefits: Answers from Asset Pricing," Finance Research Group Working Papers F-2005-04, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  • Handle: RePEc:hhb:aarbfi:2005-04
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    1. 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 215-242, Sept.-Dec.
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    6. Dennis R. Capozza & Dick Kazarian & Thomas A. Thomson, 1998. "The Conditional Probability of Mortgage Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(3), pages 259-289, September.
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    8. 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.
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