The GSE implicit subsidy and value of government ambiguity

Wayne Passmore

No 2003-64, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: The housing-related government-sponsored enterprises Fannie Mae and Freddie Mac (the \"GSEs\") have an ambiguous relationship with the federal government. Most purchasers of the GSEs' debt securities believe that this debt is implicitly backed by the U.S. government despite the lack of a legal basis for such a belief. In this paper, I estimate how much GSE shareholders gain from this ambiguous government relationship. I find that (1) the federal government's implicit subsidy of Fannie Mae and Freddie Mac has resulted in a funding advantage for the GSEs over private sector institutions, (2) the actions of GSEs result in slightly lower mortgage rates for some homeowners, (3) the government's ambiguous relationship with Fannie Mae and Freddie Mac imparts a substantial implicit subsidy to GSE shareholders, (4) the implicit government subsidy accounts for much of the GSEs' market value, (5) the GSEs would hold far fewer of their mortgage-backed securities in portfolio and their capital-to-asset ratios would be higher if they were purely private, and (6) the GSEs' implicit subsidy does not appear to have substantially increased homeownership or homebuilding.

Keywords: Federal National Mortgage Association; Federal Home Loan Mortgage Corporation; Federal home loan banks; Government-sponsored enterprises (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (13)

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Related works:
Working Paper: The GSE implicit subsidy and the value of government ambiguity (2005)
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