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Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises

Author

Listed:
  • Karsten Jeske

    (Mellon Capital Management Corporation, San Francisco, CA)

  • Dirk Krueger

    (Department of Economics, University of Pennsylvania)

  • Kurt Mitman

    (Department of Economics, University of Pennsylvania)

Abstract

This paper evaluates the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (such as Fannie Mae and Freddy Mac) in the mortgage market. In order to do so we construct a model with heterogeneous, infinitely lived households and competitive housing and mortgage markets. Households have the option to default on their mortgages, with the consequence of having their homes foreclosed. We model the bailout guarantee as a government provided and tax-financed mortgage interest rate subsidy. We find that eliminating this subsidy leads to substantially lower equilibrium mortgage origination and increases aggregate welfare, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: eliminating it benefits low-income and low-asset households who did not own homes or had small mortgages, while lowering the welfare of high-income, high-asset households.

Suggested Citation

  • Karsten Jeske & Dirk Krueger & Kurt Mitman, 2011. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," PIER Working Paper Archive 11-034, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  • Handle: RePEc:pen:papers:11-034
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Aaron Hedlund, 2014. "Illiquidity and its Discontents: Trading Delays and Foreclosures in the Housing Market," Working Papers 1417, Department of Economics, University of Missouri.
    2. Stefano Giglio & Matteo Maggiori & Johannes Stroebel, 2016. "No‐Bubble Condition: Model‐Free Tests in Housing Markets," Econometrica, Econometric Society, vol. 84, pages 1047-1091, May.
    3. repec:esx:essedp:712 is not listed on IDEAS
    4. Steven Laufer, 2018. "Equity Extraction and Mortgage Default," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 1-33, April.
    5. Halket, Jonathan R & Vasudev, Santhanagopalan, 2012. "Home Ownership, Savings, and Mobility Over The Life Cycle," Economics Discussion Papers 2876, University of Essex, Department of Economics.
    6. Stefano Giglio & Matteo Maggiori & Johannes Stroebel, 2014. "Very long-run discount rates," Globalization Institute Working Papers 182, Federal Reserve Bank of Dallas.
    7. Hui Chen & Michael Michaux & Nikolai Roussanov, 2020. "Houses as ATMs: Mortgage Refinancing and Macroeconomic Uncertainty," Journal of Finance, American Finance Association, vol. 75(1), pages 323-375, February.
    8. Satyajit Chatterjee & Burcu Eyigungor, 2015. "A Quantitative Analysis of the US Housing and Mortgage Markets and the Foreclosure Crisis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 165-184, April.
    9. Kartik B. Athreya & Xuan S. Tam & Eric Young, 2014. "Loan Guarantees for Consumer Credit Markets," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 297-352.
    10. Jonathan Halket & Santhanagopalan Vasudev, 2014. "Saving Up or Settling Down: Home Ownership over the Life Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 345-366, April.
    11. Børsum, Øystein, 2010. "Contagious Mortgage Default," Memorandum 10/2010, Oslo University, Department of Economics.
    12. Dean Corbae & Erwan Quintin, 2015. "Leverage and the Foreclosure Crisis," Journal of Political Economy, University of Chicago Press, vol. 123(1), pages 1-65.
    13. Patrick Bajari & Phoebe Chan & Dirk Krueger & Daniel Miller, 2013. "A Dynamic Model Of Housing Demand: Estimation And Policy Implications," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 409-442, May.
    14. Carlos Hatchondo, Juan & Martinez, Leonardo & Sánchez, Juan M., 2015. "Mortgage defaults," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 173-190.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Paper 11-05, Federal Reserve Bank of Richmond.
      • Mr. Leonardo Martinez & Juan Carlos Hatchondo & Mr. Juan M. Sanchez, 2012. "Mortgage Defaults," IMF Working Papers 2012/026, International Monetary Fund.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Papers 2011-019, Federal Reserve Bank of St. Louis.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2015. "Mortgage Defaults," CAEPR Working Papers 2015-011, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    15. Kurt Mitman, 2016. "Macroeconomic Effects of Bankruptcy and Foreclosure Policies," American Economic Review, American Economic Association, vol. 106(8), pages 2219-2255, August.
    16. Aaron Hedlund, 2014. "The Cyclical Dynamics of Illiquid Housing, Debt, and Foreclosures," Working Papers 1416, Department of Economics, University of Missouri.
    17. Athreya, Kartik B., 2014. "Big Ideas in Macroeconomics: A Nontechnical View," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262019736, April.
    18. Grey Gordon & Pablo Guerron-Quintana, 2018. "Dynamics of Investment, Debt, and Default," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 71-95, April.
    19. James Kahn & Omer Acikgoz, 2013. "Mortgage Guarantees and House Price Inflation: A Quantitative Analysis," 2013 Meeting Papers 1075, Society for Economic Dynamics.

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    More about this item

    Keywords

    Housing; Mortgage Market; Default Risk; Government-Sponsored Enterprises;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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