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

See all articles by Dwight M. Jaffee

Dwight M. Jaffee

University of California, Berkeley - Finance Group; National Bureau of Economic Research (NBER)

John M. Quigley

University of California, Berkeley, College of Letters & Science, Department of Economics (Deceased); University of California, Berkeley, Haas School of Business, Real Estate Group (Deceased)

Date Written: February 1, 2009

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 Classification: G21, E65, E44

Suggested Citation

Jaffee, Dwight M. and Quigley, John M., The Government Sponsored Enterprises: Recovering from a Failed Experiment (February 1, 2009). UC Berkeley Institute of Business and Economic Research Working Paper No. W09-001, Available at SSRN: https://ssrn.com/abstract=1480230 or http://dx.doi.org/10.2139/ssrn.1480230

Dwight M. Jaffee

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John M. Quigley (Contact Author)

University of California, Berkeley, College of Letters & Science, Department of Economics (Deceased) ( email )

Berkeley, CA 94720-3880
United States
510-643-7411 (Phone)
510-643-7357 (Fax)

University of California, Berkeley, Haas School of Business, Real Estate Group (Deceased) ( email )

Berkeley, CA 94720-1900
United States

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