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Emerging Competition and Risk-Taking Incentives at Fannie Mae and Freddie Mac

  • Lawrence J. White
  • W. Scott Frame

This paper examines two major forces that may soon increase competition in the U.S. secondary conforming mortgage market: (1) the expansion of Federal Home Loan Bank mortgage purchase programs and (2) the adoption of revised risk-based capital requirements for large U.S. banks (Basel II). The authors argue that this competition is likely to reduce the growth and relative importance of Fannie Mae and Freddie Mac and hence their franchise values and effective capital. Such developments could, in turn, lead to more risky behaviors by these two GSEs. It is this last consequence that warrants greater regulatory awareness.

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File URL: http://www.stern.nyu.edu/eco/wkpapers/workingpapers04/04-02White.pdf
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Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 04-02.

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Date of creation: 2004
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Handle: RePEc:ste:nystbu:04-02
Contact details of provider: Postal: New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126
Phone: (212) 998-0860
Fax: (212) 995-4218
Web page: http://w4.stern.nyu.edu/economics/

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  1. Lawrence J. White & W. Scott Frame, 2004. "Regulating Housing GSEs: Thoughts on Institutional Structure and Authorities," Working Papers 04-01, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Edward J. Kane & Chester Foster, 1986. "Valuing conjectural government guarantees of FNMA liabilities," Proceedings 117, Federal Reserve Bank of Chicago.
  3. Ambrose, Brent W & Warga, Arthur, 2002. "Measuring Potential GSE Funding Advantages," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 129-50, Sept.-Dec.
  4. W. Scott Frame, 2003. "Federal Home Loan Bank mortgage purchases: Implications for mortgage markets," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 17-31.
  5. Richard Roll, 2003. "Benefits to Homeowners from Mortgage Portfolios Retained by Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer, vol. 23(1), pages 29-42, February.
  6. Patric H. Hendershott & James D. Shilling, 1988. "The Impact of the Agencies on Conventional Fixed-Rate Mortgage Yields," NBER Working Papers 2646, National Bureau of Economic Research, Inc.
  7. Lori L. Taylor, 1998. "Does the United States still overinvest in housing?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 10-18.
  8. Edwin S. Mills, 1987. "Dividing up the investment pie: have we overinvested in housing?," Business Review, Federal Reserve Bank of Philadelphia, issue Mar, pages 13-23.
  9. Rebecca S. Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 1-14.
  10. Lawrence White, 2003. "Focusing on Fannie and Freddie: The Dilemmas of Reforming Housing Finance," Journal of Financial Services Research, Springer, vol. 23(1), pages 43-58, February.
  11. Stephen F. LeRoy, 1990. "Mutual deposit insurance," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun8.
  12. McKenzie, Joseph A, 2002. "A Reconsideration of the Jumbo/Non-jumbo Mortgage Rate Differential," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 197-213, Sept.-Dec.
  13. Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January.
  14. W. Scott Frame & Larry Wall, 2002. "Financing housing through government-sponsored enterprises," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 29-43.
  15. John C. Weicher, 1994. "The new structure of the housing finance system," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 47-65.
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