Emerging Competition and Risk-Taking Incentives at Fannie Mae and Freddie Mac

30 Pages Posted: 13 Oct 2008

See all articles by Lawrence J. White

Lawrence J. White

New York University (NYU) - Leonard N. Stern School of Business, Department of Economics

W. Scott Frame

Federal Reserve Bank of Dallas

Multiple version iconThere are 3 versions of this paper

Date Written: 2004

Abstract

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). We 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.

Keywords: Government-sponsored enterprises, mortgages, securitization, risk-based capital, moral hazard, charter value

Suggested Citation

White, Lawrence J. and Frame, W. Scott, Emerging Competition and Risk-Taking Incentives at Fannie Mae and Freddie Mac (2004). NYU Working Paper No. EC-04-02. Available at SSRN: https://ssrn.com/abstract=1282546

Lawrence J. White (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business, Department of Economics ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

W. Scott Frame

Federal Reserve Bank of Dallas ( email )

2200 N Pearl Street
Dallas, TX 75201
United States
214-922-6984 (Phone)

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