Revisiting the Net Benefits of Freddie Mac and Fannie Mae
have access to federally insured deposits—ac- cess as pointed out earlier that many economists regard as a funding advantage similar to that conferred on the GSEs by their federal charters.
Added to that advantage is the option of mem- bership in the FHLB System. The FHLB System can raise funds in capital markets on terms comparable to those of the GSEs, and they can use those funds to make loans to depositories collateralized by mortgages. As a result, as noted earlier, the GSEs must reduce interest rates by some minimum amount even to compete with the terms offered by depositories.
Although we have a relatively clear picture of the support provided by Freddie Mac and Fannie Mae to the conforming loan market, our infor- mation is less clear on the support provided by depositories and the FHLB System. In our 2001 study, we assumed a reduction of five basis points and added that to the other spreads de- tailed in column (2) of Exhibit 5. Since then, two other studies have weighed in with widely dispa- rate estimates.58
While we are pleased to see that this topic is receiving attention from the research community, we believe it is premature to increase our esti- mate of this effect at this time. We do, however, believe we should express this effect as a range, just as we have the other spreads in our calcula- tion. Thus, the estimates in column (4) of Exhibit 5 reflect a range of three to seven basis points.
In total, then, our updated estimates put the annual savings to borrowers using fixed-rate conforming loans at $17.2-23.6 billion, and the annual savings to all borrowers at $18.8-26.9 billion. As a result, we conclude that the bottom of the range of borrowers’ benefits exceeds the top of the range of GSE benefits by more than $5 billion in 2005.
CBO’s 2001 study estimates the FHLB System’s effect to be three basis points, and the authors add that to their 22 basis-point estimate of the jumbo-conforming spread in assessing the effects of the GSEs on conforming fixed-rate mortgages. In a more recent study, Sanders (2005) attempts to approximate the cost of funding a fixed-rate mortgage without any form of government support. Hypothesizing an REIT structure and adding rough estimates of the various costs, he arrives at an adjustment of 43 basis points that he states must be added to the conventionally measured jumbo-conforming spread.
Estimating the Direct Benefits of Freddie Mac and Fannie Mae