GSE Guarantees, Financial Stability, and Home Equity Accumulation

17 Pages Posted: 10 Dec 2018

See all articles by S. Wayne Passmore

S. Wayne Passmore

Board of Governors of the Federal Reserve - Household and Real Estate Finance Section

Alexander von Hafften

Board of Governors of the Federal Reserve System

Date Written: December 2018

Abstract

Before 2008, the government’s “implicit guarantee” of the securities issued by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac led to practices by these institutions that threatened financial stability. In 2008, the Federal Housing Finance Agency placed these GSEs into conservatorship. Conservatorship was intended to be temporary but has now reached its tenth year, and policymakers continue to weigh options for reform. In this article, the authors assess both implicit and explicit government guarantees for the GSEs. They argue that adopting a legislatively defined “explicit guarantee,” as advocated by some, may be problematic for a variety of reasons, including the difficulty of pricing such a guarantee and the potential high cost for mortgage holders or the government. In addition to the creation of an explicit guarantee, they recommend that steps be taken to limit systemic risk in housing markets. To that end, they advocate the wider adoption of mortgages—such as the “Fixed-COFI” mortgage—that build homeowner equity faster than the thirty-year fixed-rate mortgage favored by the GSEs. With such mortgages, homeowners are better able to weather economic downturns.

Keywords: mortgage, government, government-sponsored enterprise, guarantee, cost of funds, financial stability

JEL Classification: G01, G21, G23, G28, H81, R30

Suggested Citation

Passmore, Stuart Wayne and von Hafften, Alexander, GSE Guarantees, Financial Stability, and Home Equity Accumulation (December 2018). Economic Policy Review, Vol. 24, No. 3, 2018. Available at SSRN: https://ssrn.com/abstract=3298883 or http://dx.doi.org/10.2139/ssrn.3298883

Stuart Wayne Passmore (Contact Author)

Board of Governors of the Federal Reserve - Household and Real Estate Finance Section ( email )

Washington, DC 20551
United States
202-452-6432 (Phone)
202-452-3819 (Fax)

Alexander Von Hafften

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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