Emerging Competition and Risk-Taking Incentives at Fannie Mae and Freddie Mac
W. Scott Frame
Federal Reserve Bank of Atlanta
Lawrence J. White
New York University (NYU) - Leonard N. Stern School of Business, Department of Economics
FRB of Atlanta Working Paper No. 2004-4
This paper examines two major forces that may soon increase competition in the U.S. secondary conforming mortgage market: (1) the expansion of Federal Home Loan Bank mortgage purchase programs and (2) the adoption of revised risk-based capital requirements for large U.S. banks (Basel II). The authors argue that this competition is likely to reduce the growth and relative importance of Fannie Mae and Freddie Mac and hence their franchise values and effective capital. Such developments could, in turn, lead to more risky behaviors by these two GSEs. It is this last consequence that warrants greater regulatory awareness.
Number of Pages in PDF File: 29
Keywords: Government-sponsored enterprises, mortgages, securitization, risk-based capital, moral hazard, charter value
JEL Classification: G21, G28
Date posted: March 22, 2004
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