GSE guarantees, financial stability, and home equity accumulation

Wayne Passmore and Alexander H. von Hafften

Economic Policy Review, 2018, issue 24-3, 27 pages

Abstract: Before 2008, the government?s ?implicit guarantee? of the securities issued by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac led to practices by these institutions that threatened financial stability. In 2008, the Federal Housing Finance Agency placed these GSEs into conservatorship. Conservatorship was intended to be temporary but has now reached its tenth year, and policymakers continue to weigh options for reform. In this article, the authors assess both implicit and explicit government guarantees for the GSEs. They argue that adopting a legislatively defined ?explicit guarantee,? as advocated by some, may be problematic for a variety of reasons, including the difficulty of pricing such a guarantee and the potential high cost for mortgage holders or the government. In addition to the creation of an explicit guarantee, they recommend that steps be taken to limit systemic risk in housing markets. To that end, they advocate the wider adoption of mortgages?such as the ?Fixed-COFI? mortgage?that build homeowner equity faster than the thirty-year fixed-rate mortgage favored by the GSEs. With such mortgages, homeowners are better able to weather economic downturns.

Keywords: cost of funds; government-sponsored enterprises; financial stability; guarantee; mortgage; government (search for similar items in EconPapers)
JEL-codes: G01 G21 G23 G28 H81 R30 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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