The Gse Implicit Subsidy and the Value of Government Ambiguity

29 Pages Posted: 1 Feb 2005

See all articles by S. Wayne Passmore

S. Wayne Passmore

Board of Governors of the Federal Reserve System

Date Written: January 2005

Abstract

The housing-related government-sponsored enterprises Fannie Mae and Freddie Mac (the GSEs) have an ambiguous relationship with the federal government. Most purchasers of the GSEs' debt securities believe that this debt is implicitly backed by the U.S. government despite the lack of a legal basis for such a belief. In this paper, I estimate how much GSE shareholders gain from this ambiguous government relationship. I find that (1) the government's ambiguous relationship with Fannie Mae and Freddie Mac imparts a substantial implicit subsidy to GSE shareholders, (2) the implicit government subsidy accounts for much of the GSEs' market value, and (3) the GSEs would hold far fewer of their mortgage-backed securities in portfolio and their capital-to-asset ratios would be higher if they were purely private.

Keywords: Fannie Mae, Freddie Mac, GSEs, mortgages, subsidies, housing, mortgage rates, securitization

JEL Classification: G18, G21

Suggested Citation

Passmore, Stuart Wayne, The Gse Implicit Subsidy and the Value of Government Ambiguity (January 2005). Available at SSRN: https://ssrn.com/abstract=658246 or http://dx.doi.org/10.2139/ssrn.658246

Stuart Wayne Passmore (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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