A Microeconomic Analysis of Fannie Mae and Freddie Mac
Posted: 29 Sep 2000
The most important public-policy issues raised by government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac (F&F), revolve around their charters and the perception of government support that goes those charters. The perception of government support gives GSEs "embedded options" (conjectured guarantees and conjectures about conjectured guarantees) that are not available to most other businesses. The options should be structured so that the benefits of GSEs exceed their costs. The author concludes that it is difficult to draw conclusions about the effects of F&F because of the ambiguity of the welfare economics, the shakiness of available data, and the paucity of relevant empirical work. But, he argues, it is difficult to believe two contradictory things about F&F, namely, that F&F convey distortionary subsidies to the mortgage markets, making mortgage rates too low, and that F&F also stifle competition, making mortgage rates too high.
JEL Classification: R38
Suggested Citation: Suggested Citation