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concludes with recommendations for changes in oversight and regulation, including some that require legislation to put into effect.

Joseph Stiglitz, Jonathan Orszag, and Peter Orszag, “Implications of the New Fannie Mae and Freddie Mac Risk-based Capital Standard” (2002). Professor Stiglitz and his co- authors calculate that the probability that condi- tions as extreme as those implied by the GSEs’ stress test is so low as to be barely measurable. Thus, they conclude that the GSEs’ probabilities of failure are extremely low if they meet the OFHEO capital standards.

Jumbo-Conforming Spread

Brent Ambrose, Michael LaCour-Little, and Anthony Sanders, “The Effect of Conforming Loan Status on Mortgage Yield Spreads: A Loan Level Analysis” (2004). This study uses data from a major mortgage lender to compare rates on conforming and jumbo loans. The data includes credit scores as well as other factors typically used to control for differences in risk. The authors include models taking into account the endogeneity of conforming loan status. Among the many results is an estimated jumbo- conforming spread of about 28 basis points.

Mark J. Flannery and G. Brandon Lochart, “New Estimates of the Jumbo-Conforming Spread” (2005). Professors Flannery and Lochart explore the sensitivity of estimates of the jumbo- conforming spread to alternative specifications. Extending McKenzie’s research the authors pay particular attention to the role of loan size. They critique the analysis of Passmore, Sherlund, and Burgess (2005) (PSB) and explore a number of other issues, including the pricing of small

Revisiting the Net Benefits of Freddie Mac and Fannie Mae

jumbos late in the year and the effect of a change in bank regulation that decreased banks’ costs of securitizing jumbo loans. Using data from 1997 to 2003 (the interval used by PSB), they find that the jumbo-conforming differential is between 23-29 basis points using a conventional specification.

Douglas A. McManus and Buchi Ramagopal, “Interpretation and Misinterpretation of the Jumbo-Conforming Spread” (2005).The au- thors, both economists at Freddie Mac, discuss problems that make estimation of the jumbo- conforming spread complex. They note that all U.S. financial institutions receive subsidies from the federal government, a fact that few estimates take into account. They also discuss data issues that compromise the validity of the estimates. In particular, they point out the filtering of the data (done by most researchers to prevent outliers from distorting the results) probably leads to lower estimates than would be observed if the data were sufficiently accurate to make the filtering unnecessary. McManus and Ramagopal also criticize the specification of loan size by Passmore, Sherlund, and Burgess (2003).

Joseph A. McKenzie, “A Reconsideration of the Jumbo/Non-Jumbo Mortgage Rate Differential” (2002). Dr. McKenzie, of the Federal Housing Finance Board, presents a history of the research on the jumbo-conforming spread, with a compact summary of key features of previous studies in his Table 1. In his own analysis, the author assesses the sensitivity of the estimated spread to alternative ways of specifying characteristics such as loan size and LTV. He also investigates the rates on loans originated late in the year for amounts only slightly above the conforming limit and finds that lenders’ pricing appears to anticipate the pending increase

Appendix: Recent Literature

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