On Limiting the Retained Mortage Portfolios of Fannie Mae and Freddie Mac

Wharton Financial Institution Center Working Paper No. 05-38

28 Pages Posted: 3 Nov 2005

See all articles by Dwight M. Jaffee

Dwight M. Jaffee

University of California, Berkeley - Finance Group; National Bureau of Economic Research (NBER)

Date Written: June 2005

Abstract

This paper evaluates a current policy proposal to limit the size of the retained mortgage portfolios held by Fannie Mae and Freddie Mac (hereafter F&F). The proposal is a response to the growing concerns that the interest rate risks contained in the F&F portfolios create a serious threat to the US financial system. The analysis begins with a review of data on how F&F operate and on the role they play within the US mortgage market. Special attention is paid to the manner in which the firms hedge their interest rate risk. Key questions regarding the policy proposal include (1) what fund sources will replace F&F as mortgage investors, how will the interest rate risk be covered after it is removed from the F&F portfolios, and (3) what is the likely impact of the change on US mortgage interest rates. The conclusion is to endorse legislation.

Suggested Citation

Jaffee, Dwight M., On Limiting the Retained Mortage Portfolios of Fannie Mae and Freddie Mac (June 2005). Wharton Financial Institution Center Working Paper No. 05-38, Available at SSRN: https://ssrn.com/abstract=830947 or http://dx.doi.org/10.2139/ssrn.830947

Dwight M. Jaffee (Contact Author)

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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