EconPapers    
Economics at your fingertips  
 

Phasing out the GSEs

Vadim Elenev (), Tim Landvoigt and Stijn Van Nieuwerburgh

Journal of Monetary Economics, 2016, vol. 81, issue C, 111-132

Abstract: We develop a new model of the mortgage market that emphasizes the role of the financial sector and the government. Risk tolerant savers act as intermediaries between risk averse depositors and impatient borrowers. Both borrowers and intermediaries can default. The government provides both mortgage guarantees and deposit insurance. Underpriced government mortgage guarantees lead to more and riskier mortgage originations and higher financial sector leverage. Mortgage crises occasionally turn into financial crises and government bailouts due to the fragility of the intermediaries’ balance sheets. Foreclosure crises beget fiscal uncertainty, further disrupting the optimal allocation of risk in the economy. 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 and less fiscal uncertainty, consumption smoothing improves and foreclosure rates fall. 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.

Keywords: Financial intermediation; Housing policy; Government bailouts (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (4) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304393216300332
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Phasing Out the GSEs (2015) Downloads
Working Paper: Phasing out the GSEs (2015) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:eee:moneco:v:81:y:2016:i:c:p:111-132

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Series data maintained by Dana Niculescu ().

 
Page updated 2017-09-15
Handle: RePEc:eee:moneco:v:81:y:2016:i:c:p:111-132