Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises

45 Pages Posted: 14 Oct 2011

See all articles by Karsten Jeske

Karsten Jeske

Mellon Capital Management - Research

Dirk Krueger

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Kurt Mitman

Stockholm University; Centre for Economic Policy Research (CEPR)

Date Written: October 12, 2011

Abstract

This paper evaluates the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (such as Fannie Mae and Freddy Mac) in the mortgage market. In order to do so we construct a model with heterogeneous, infinitely lived households and competitive housing and mortgage markets. Households have the option to default on their mortgages, with the consequence of having their homes foreclosed. We model the bailout guarantee as a government provided and tax-financed mortgage interest rate subsidy. We find that eliminating this subsidy leads to substantially lower equilibrium mortgage origination and increases aggregate welfare, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: eliminating it benefits low-income and low-asset households who did not own homes or had small mortgages, while lowering the welfare of high-income, high-asset households.

Keywords: Housing, Mortgage Market, Default Risk, Government-Sponsored Enterprises

JEL Classification: E21,G11,R21

Suggested Citation

Jeske, Karsten and Krueger, Dirk and Mitman, Kurt, Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises (October 12, 2011). PIER Working Paper No. 11-034, Available at SSRN: https://ssrn.com/abstract=1944168 or http://dx.doi.org/10.2139/ssrn.1944168

Karsten Jeske

Mellon Capital Management - Research ( email )

595 Market Street
Suite 3000
San Francisco, CA 94105
United States
415-546-6056 (Phone)

Dirk Krueger (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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Philadelphia, PA 19104-6297
United States
215-898-6691 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~dkrueger/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Kurt Mitman

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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