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Revisiting the Net Benefits of Freddie Mac and Fannie Mae

Conclusions

Substantial research on the effects of the GSEs has been conducted since our first evaluation in 2001. Much of this work supports our con- clusions in that earlier piece: the GSEs bestow substantial benefits on homeowners while pos- ing manageable risks to the financial system and minimal cost to taxpayers. What is new since our earlier work is public focus on the GSEs’

retained portfolios The GSEs bestow substantial

of MBS and whole mortgages. Some in industry and in government argue t h a t , p r i m a r i l benefits on homeowners while posing manageable risks to the financial system y a n d m i n i m a l c o s t t o t a x p a y e r s . because of their size, the GSEs portfolios pose substantial systemic risk and thus should be capped, reduced, or even eliminated.

This report refutes the predicates for such a policy view. Drawing on recent research, we conclude that the systemic risk posed by the GSEs, while not trivial, is well within bounds. In fact, we find that the risks of failure associ- ated with the GSEs is less than the risk of failure associated with other large financial institutions that likewise have federal or state charters and likewise could be characterized as receiving “subsidy.” Nevertheless, we caution that sustain- ing such a low level of risk requires maintaining transparency as well as focused and effective regulation.

Our review of the consequences of GSE activi- ties, covering a large body of studies, finds that the GSEs lower mortgage rates generally, not just those in markets where they operate; that they

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Conclusions

dampen fluctuations in residential investment, thereby providing more stability to the overall economy; and that they contribute to social goals by promoting homeownership: improvements in the housing stock, greater civic pride and responsibility, greater educational attainment by children, and, in general, a more wholesome home environment. Despite the critics’ arguments to the contrary, many of the studies we discuss find that the retained portfolios make important contributions to these benefits.

In updating our earlier analysis of the costs and benefits associated with the GSEs, we assess their funding advantage to be between 10 and 20 basis points for short-term debt, between 15 and 40 basis points for long-term debt, and between 10 and 30 basis points for MBS. Upon applying these spreads to outstanding balances of each type of security, our estimate of the annual funding advantage ranges between $4.7 billion and $13.1 billion.

Turning to the benefits, we conclude that interest rates on conforming, fixed-rate mortgages are 24 to 30 basis points below the rate on fixed-rate jumbos. We also incorporate smaller estimates for the effects of the GSEs on conforming ARMs and jumbo loans and for the effects of depositories on all mortgage rates. Overall then, we estimate annual savings to homeowners ranging from $16.2 billion to $26.9 billion.

Thus, we conclude the benefits enabled by the GSEs exceed the savings from their funding advantage. The lower end of our estimates of savings to homeowners ($16.2 billion) exceeds

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