Phasing Out the GSEs

Vadim Elenev, Tim Landvoigt and Stijn Van Nieuwerburgh

No 21626, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a new model of the mortgage market where both borrowers and lenders can default. Risk tolerant savers act as intermediaries between risk averse depositors and impatient borrowers. The government plays a crucial role by providing both mortgage guarantees and deposit insurance. Underpriced government mortgage guarantees lead to more and riskier mortgage originations as well as to high financial sector leverage. Mortgage crises occasionally turn into financial crises and government bailouts due to the fragility of the intermediaries' balance sheets. Increasing the price of the mortgage guarantee "crowds in" the private sector, reduces financial fragility, leads to fewer but safer mortgages, lowers house prices, and raises mortgage and risk-free interest rates. Due to a more robust financial sector, consumption smoothing improves and aggregate welfare increases. While borrowers are nearly indifferent to a world with or without mortgage guarantees, savers are substantially better off. While aggregate welfare increases, so does wealth inequality.

JEL-codes: E0 E21 E62 G00 G12 G18 G21 G28 (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-ban, nep-mac and nep-ure
Note: AP CF EFG ME
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Citations: View citations in EconPapers (17)

Published as Elenev, Vadim & Landvoigt, Tim & Van Nieuwerburgh, Stijn, 2016. "Phasing out the GSEs," Journal of Monetary Economics, Elsevier, vol. 81(C), pages 111-132.

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Journal Article: Phasing out the GSEs (2016)
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