Revisiting the Net Benefits of Freddie Mac and Fannie Mae
(2) GSE Reduction
Partial Benefits to Homeowners
GSE Reduction + Effect of Depositories & FHLB System
Adjusted Benefits to Homeowners
Exhibit 5 GSE Direct Annual Benefits to Homeowners
The first three columns of Exhibit 5 show the range of savings to homeowners resulting from the lower interest rates generated by the GSEs alone. In the first row, the savings to borrowers with fixed-rate conforming loans are quantified by applying the range for the jumbo-conforming spread (24-30 basis points) to the outstanding balances of conforming, fixed-rate mortgages (not just the mortgages purchased by or securi- tized by Freddie Mac and Fannie Mae), or about $6.4 trillion as of year-end 2005. Our estimate of the resulting annual benefit to homeowners within this category of loans is thus $15.3-19.1 billion—well above the $4.7-13.1 billion estimated reduction in interest expense on GSE securities.
When we include benefits to borrowers with conforming ARMs (four to six basis points applied
to $1.1 trillion), another $0.4-0.9 billion is added to the range of consumer benefits.57 Taking the GSE effect on jumbo loans into account (three to seven basis points applied to $1.3 trillion; we assume that jumbo loans comprise 15 percent of conventional mortgage debt outstanding), the range increases by an additional $0.4-0.9 billion. The annual interest savings to homeowners from GSE activities alone thus totals between $16.2 and 20.7 billion.
The final component of benefits to consider is the effect of the depositories and the FHLB System on jumbo loans. The issue here is that the resi- dential mortgage market is covered by multiple layers of federal support. Depositories are the principal alternative investors in mortgage-related assets to Freddie Mac and Fannie Mae, and they
According to Loan Performance data, adjustable-rate mortgages represent 14.2 percent of prime conforming single-family mortgage debt outstanding as of year-end 2005. We assume that the percentage of ARMs in the Mortgage Debt Outstanding (MDO) data from the Federal Reserve Flow of Funds (September 19, 2006 release) is 15 percent because these data also include second lien and subprime mortgages, which have a higher proportion of ARMs. Second and subprime loans represent approximately 15 percent of MDO.
Estimating the Direct Benefits of Freddie Mac and Fannie Mae