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The Government Sponsored Enterprises: Recovering from a Failed Experiment
Dwight M. Jaffee University of California, Berkeley - Finance Group; National Bureau of Economic Research (NBER) John M. Quigley University of California, Berkeley - Department of Economics; University of California, Berkeley - Real Estate Group February 1, 2009 UC Berkeley Institute of Business and Economic Research Working Paper No. W09-001 Abstract: The Federal takeover of Fannie Mae and Freddie Mac last September spells the end of an experiment in the public-private hybrid known as the Government Sponsored Enterprises (GSE). This paper documents the subsidies provided to the enterprises and the public and private benefits generated. The public benefits included somewhat reduced interest rates for borrowers receiving conforming mortgages. The public subsidies allowed the firms to use the implicit guarantee of their debts to borrow at attractive rates to invest in mortgage portfolios and also to provide a fee-based service in issuing mortgage-backed securities. We suggest reforming the functions provided by the GSEs. In particular we advocate spinning off the portfolio investment activities into a fully private firm. We also advocate conducting the services necessary to issue mortgage-backed securities within a government-owned corporation responsible directly to federal authorities. These reforms would curb excess risk taking in the secondary mortgage market and would provide the liquidity necessary to support the primary mortgage market.
Keywords: Fannie Mae, Freddie Mac, Systemic Risk JEL Classifications: G21, E65, E44 Working Paper SeriesDate posted: September 30, 2009 ; Last revised: October 07, 2009Suggested CitationContact Information
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