Keywords: Government-sponsored enterprises, GSEs, Fannie Mae, Freddie Mac, mortgages, implicit subsidy
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.
Full paper (799 KB PDF)
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Last update: December 19, 2003