Controlling the Interest Rate Risk of Fannie Mae and Freddie Mac

Networks Financial Institute Policy Brief, No. 2006-PB-04, April 2006

41 Pages Posted: 10 Aug 2006

See all articles by Dwight M. Jaffee

Dwight M. Jaffee

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

Abstract

It is now widely recognized that the interest rate risks embedded in the Fannie Mae and Freddie Mac (F&F) retained mortgage portfolios create a serious threat to the US financial system. This paper evaluates proposals to control the interest rate risk embedded in these portfolios. The analysis focuses on the current proposal to limit the size of the F&F retained portfolios, but also considers alternative means to control this interest rate risk. The analysis takes into account (1) what fund sources would replace F&F as mortgage investors, (2) where will the interest rate risk reside 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 several solutions, including size limitations on the F&F retained portfolios, each of which would reduce or eliminate the F&F interest rate risk that currently threatens the US financial system.

Keywords: government sponsored enterprises, interest rate risk, government sponsored enterprises regulation

Suggested Citation

Jaffee, Dwight M., Controlling the Interest Rate Risk of Fannie Mae and Freddie Mac. Networks Financial Institute Policy Brief, No. 2006-PB-04, April 2006, Available at SSRN: https://ssrn.com/abstract=923568

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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