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Revisiting the Net Benefits of Freddie Mac and Fannie Mae

the role of the GSEs’ portfolios directly, it is likely that a sizable portion of this effect is due to the fact that the retained portfolios have tended to purchase more low-balance loans.

N. Edward Coulson, Seok-Joon Hwang, and Susumu Imai, “The Benefits of Owner- Occupation in Neighborhoods” (2003). The researchers find that residents of neighborhoods with a large proportion of homeowners receive positive external benefits from that ownership. The authors estimate that willingness to pay for neighborhoods with a high concentration of owner-occupied housing to be $5,000 annually, justifying subsidies to homeownership.

Donald R. Haurin, Toby L. Parcel, and R. Jean Haurin, “Does Homeownership Affect Child Outcomes?” (2002). These researchers investigate the role of homeownership on the cognitive and behavioral outcomes of children by employing national panel data. Controlling for a variety of social, economic, and demographic characteristics, the authors find that children residing in owner-occupied housing (vs. rental housing) score nine percentage points higher in math achievement, seven percentage points higher in reading achievement, and three percent- age points lower in negative behavior.

Roberto G. Quercia, George W. McCarthy, and Susan M. Wachter, “The Impacts of Af- fordable Lending Efforts on Homeownership Rates” (2003). Professors Quercia, McCarthy, and Wachter develop a methodology to analyze the effect of affordable lending activities, such as flexible underwriting standards and lower required downpayments, on homeownership rates by geographic region and targeted population. Using the American Housing Survey, they show that financially innovative products from the GSEs—



Appendix: Recent Literature

many of which are financed by the retained port- folio —have been responsible for increasing the homeownership rate for minorities by as much as five percent.

Quantifying Benefits from Federal Sponsorship

Brent W. Ambrose and Andrew Warga, “An Update on Measuring GSE Funding Advantages” (2000). In a study commissioned by CBO, the authors estimate the spread be- tween yields on debt securities issued by GSEs and other financial firms. The CBO used esti- mates from this study in its 2001 and 2004 studies of federal sponsorship.

Michael Fratantoni and Peter Niculescu, “Subsidies in a Context of Efficient Markets, A New Framework for Evaluating the Role of Fannie Mae” (2005). The authors argue that the “goods” model of characterizing subsidies to the GSEs is misapplied and that its subsequent implications of extra-normal profit and unbounded portfolio growth do not hold. They maintain that because financial markets are efficient, Fannie Mae cannot profit from an “implicit” subsidy in its funding through the retained portfolio since MBS yields would decline by the same amount as debt yields. Profits earned by Freddie Mac and Fannie Mae from their portfolios are tied directly to each GSE’s ability to manage prepayment risk and are not the result of subsidy.

Frank Nothaft, James Pearce, and Stevan Stephanovic, “Debt Spreads between GSEs and Other Corporations” (2002). This study, supported by Freddie Mac, estimates the GSE funding advantage. The paper contains a com- prehensive summary of previous research and

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