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

Dirk Krueger, Karsten Jeske and Kurt Mitman

No 8624, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Default risk; Government-sponsored enterprises; Housing; Mortgage market (search for similar items in EconPapers)
JEL-codes: E21 G11 R21 (search for similar items in EconPapers)
Date: 2011-10
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
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Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises (2012)
Working Paper: Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises (2011)
Working Paper: Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises (2011)
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