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Distributional Implications of Government Guarantees in Mortgage Markets

Listed author(s):
  • Gete, Pedro
  • Zecchetto, Franco

We analyze the removal of the credit-risk guarantees provided by the government sponsored enterprises (GSEs) in a model with agents heterogeneous in income and house price risk. We find that wealth inequality increases, driven by higher mortgage spreads and housing rents. Housing holdings become more concentrated. Foreclosures fall. The removal benefits high-income households, while hurting low- and mid-income households (renters and highly leveraged mortgagors with conforming loans). GSE reform requires compensating transfers, sufficiently high elasticity of rental supply, or linking GSE reform with the elimination of the mortgage interest deduction.

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File URL: https://mpra.ub.uni-muenchen.de/80643/1/MPRA_paper_80643.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 80643.

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Date of creation: Apr 2017
Handle: RePEc:pra:mprapa:80643
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