The Government Sponsored Enterprises: Recovering from a Failed Experiment
UC Berkeley Institute of Business and Economic Research Working Paper No. W09-001
16 Pages Posted: 30 Sep 2009
Date Written: February 1, 2009
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 Classification: G21, E65, E44
Suggested Citation: Suggested Citation