Keywords: Fannie Mae, Freddie Mac, GSEs, mortgages, subsidies, housing, mortgage rates, securitization
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 government's ambiguous relationship with Fannie Mae and Freddie
Mac imparts a substantial implicit subsidy to GSE shareholders, (2) the implicit
government subsidy accounts for much of the GSEs' market value, and (3) 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.
Full paper (121 KB PDF)
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Last update: January 13, 2005