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Phasing Out the GSEs

69 Pages Posted: 2 Apr 2015 Last revised: 18 Mar 2016

Vadim Elenev

Johns Hopkins University

Tim Landvoigt

University of Pennsylvania - The Wharton School

Stijn Van Nieuwerburgh

New York University Stern School of Business, Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: February 25, 2016

Abstract

We develop a new model of the mortgage market where both borrowers and lenders can default. Risk tolerant savers act as intermediaries between risk averse depositors and impatient borrowers. The government plays a crucial role by providing both mortgage guarantees and deposit insurance. Underpriced government mortgage guarantees lead to more and riskier mortgage originations as well as to high financial sector leverage. Mortgage crises occasionally turn into financial crises and government bailouts due to the fragility of the intermediaries' balance sheets. Increasing the price of the mortgage guarantee ``crowds in" the private sector, reduces financial fragility, leads to fewer but safer mortgages, lowers house prices, and raises mortgage and risk-free interest rates. Due to a more robust financial sector, consumption smoothing improves and aggregate welfare increases. While borrowers are nearly indifferent to a world with or without mortgage guarantees, savers are substantially better off. While aggregate welfare increases, so does wealth inequality.

Keywords: financial intermediation, housing policy, government bailouts

JEL Classification: G12, G15, F31

Suggested Citation

Elenev, Vadim and Landvoigt, Tim and Van Nieuwerburgh, Stijn, Phasing Out the GSEs (February 25, 2016). Journal of Monetary Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2588144 or http://dx.doi.org/10.2139/ssrn.2588144

Vadim Elenev

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

Tim Landvoigt

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Stijn Van Nieuwerburgh (Contact Author)

New York University Stern School of Business, Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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