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Controlling the Interest Rate Risk of Fannie Mae and Freddie Mac

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  • Dwight M. Jaffee

Abstract

It is now widely recognized that the interest rate risks embedded in the Fannie Mae and Freddie Mac (F&F) retained mortgage portfolios create a serious threat to the US financial system. This paper evaluates proposals to control the interest rate risk embedded in these portfolios. The analysis focuses on the current proposal to limit the size of the F&F retained portfolios, but also considers alternative means to control this interest rate risk. The analysis takes into account (1) what fund sources would replace F&F as mortgage investors, (2) where will the interest rate risk reside after it is removed from the F&F portfolios, and (3) what is the likely impact of the change on US mortgage interest rates. The conclusion is to endorse several solutions, including size limitations on the F&F retained portfolios, each of which would reduce or eliminate the F&F interest rate risk that currently threatens the US financial system.

Suggested Citation

  • Dwight M. Jaffee, 2006. "Controlling the Interest Rate Risk of Fannie Mae and Freddie Mac," NFI Policy Briefs 2006-PB-04, Indiana State University, Scott College of Business, Networks Financial Institute.
    • Handle: RePEc:nfi:nfipbs:2006-pb-04
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    File URL: http://www.indstate.edu/business/sites/business.indstate.edu/files/Docs/2006-PB-04_Jaffee.pdf
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    References listed on IDEAS

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    1. Wayne Passmore, 2003. "The GSE implicit subsidy and value of government ambiguity," Finance and Economics Discussion Series 2003-64, Board of Governors of the Federal Reserve System (U.S.).
    2. Naranjo, Andy & Toevs, Alden, 2002. "The Effects of Purchases of Mortgages and Securitization By Government Sponsored Enterprises on Mortgage Yield Spreads and Volatility," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 173-195, Sept.-Dec.
    3. 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, vol. 87(Q1), pages 45-59.
    4. W. Scott Frame & Larry D. Wall, 2002. "Financing housing through government-sponsored enterprises," Economic Review, Federal Reserve Bank of Atlanta, vol. 87(Q1), pages 29-43.
    5. 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.
    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, September.
    7. Alan Greenspan, 2005. "Regulatory reform of the government-sponsored enterprises: testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, April 6, 2005," Speech 63, Board of Governors of the Federal Reserve System (U.S.).
    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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    Cited by:

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