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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. 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.
    2. 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.
    3. 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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    Cited by:

    1. 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..

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