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

Karsten Jeske (), Dirk Krueger and Kurt Mitman
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Karsten Jeske: Mellon Capital Management Corporation, San Francisco, CA

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

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: Housing; Mortgage Market; Default Risk; Government-Sponsored Enterprises (search for similar items in EconPapers)
JEL-codes: E21 G11 R21 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2011-10-12
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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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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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:11-034

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