Revisiting the Net Benefits of Freddie Mac and Fannie Mae
Appendix: Recent Literature
Benefits of the Retained Portfolio
Stuart A. Gabriel, “Opening Doors to Homeownership: Challenges to Federal Policy” (2001). The author concludes that retained portfolio activities undertaken by Freddie Mac and Fannie Mae improve the pricing and liquidity of secondary markets.
Gloria Gonzalez-Rivera, “Linkages between Secondary and Primary Markets for Mort- gages: the Role of the Retained Portfolio Investments of the Government Sponsored Enterprises” (2001). The author presents a time-series statistical analysis of the relationship between portfolio purchases and mortgage interest rates. She concludes that portfolio activities reduce mortgage rates.
David M. Harrison, Wayne R. Archer, David C. Ling and Marc T. Smith, “Mitigat- ing Externalities in Mortgage Markets: The Role of Government Sponsored Enterprises” (2002). The authors find that purchases of mort- gages by Freddie Mac and Fannie Mae are higher in areas with historically low transaction volume, and this increases the number of home sales and the availability of mortgages in these areas. While the paper does not directly address the role of the portfolios, the authors conclude that since Freddie Mac’s retained portfolio contains a large volume of such loans, it is likely that a sizable portion of the effect they find is due to the GSEs’ retained portfolios.
Andreas Lehnert, Wayne Passmore, and Shane M. Sherlund, “GSEs, Mortgage Rates and Secondary Mortgage Activities” (2005). The three members of the staff of the Federal Reserve Board of Governors analyze most of the same issues as Naranjo and Toevs and reach the opposite conclusions. They find that purchases and issuance have little to no effect and that purchases are not more effective than securitiza- tion in reducing mortgage interest rate spreads. The authors also conclude that GSE activity had no affect on mortgage rates during the 1998 liquidity crisis.
Douglas A. McManus and Buchi Ramagopal, “The Value of Liquidity Services in the Mort- gage Market” (2006). The authors argue that Freddie Mac and Fannie Mae affect the conform- ing loan market by providing a take-out bid for conforming MBS. The authors model the take-out bid as an embedded option where the investor has an option to put the security back to Freddie Mac and Fannie Mae at a strike price related to the level of the option-adjusted spread. The effect of the embedded option raises the price of MBS and reduces the variability of the MBS option- adjusted spread.
Andy Naranjo and Alden Toevs, “The Effects of Purchases of Mortgages and Securitiza- tion by Government Sponsored Enterprises on Mortgage Yield Spreads and Volatility” (2002). In a study for Fannie Mae, Dr. Toevs and Professor Naranjo use Fannie Mae purchase data and GSE securitization data to investigate the relationship between GSE activity and mortgage
Appendix: Recent Literature