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Revisiting the Net Benefits of Freddie Mac and Fannie Mae

Introduction and Summary

In the years since we published our first analysis many researchers have examined the economic impacts associated with the activities of Freddie Mac and Fannie Mae.1 Much of this recent work supports our earlier conclusions that these two housing-related government sponsored enterprises (GSEs) confer substantial benefits on homeowners while posing manageable risks to the financial system and minimal costs to taxpayers.

As several respected authorities have demon- strated, the activities of the GSEs have also brought greater stability to both the housing market and the overall economy. And, through their support of homeownership, the GSEs also contribute to important social goals such as expanding minority homeownership. This added value explains how the benefits the GSEs provide to the nation exceed the value of their funding advantage.

What is new since 2001, however, is the growing concern about the GSEs’ retained portfolios of

Freddie Mac and Fannie Mae confer substantial benefits on homeowners while posing manageable risks to the financial system and minimal costs to taxpayers.

mortgage-backed securities and whole mortgages. Indeed, certain trade asso- ciations and govern- ment agencies maintain that the

sheer size of the GSEs’ portfolios poses substantial systemic risk and that they should therefore be capped, reduced, or even eliminated.

Many critiques also argue that the GSEs merely “pass through” part of a government subsidy, siphoning off a substantial portion for their own employees and stockholders. To the contrary, in carrying out their statutory goal of increasing liquidity in the mortgage market, the GSEs create value in a number of ways—not least by standardizing loan procedures, attracting more investors to mortgages, and providing the efficiencies of scale that reduce mortgage interest rates for homebuyers.

As for the contention that the GSEs’ retained portfolios represent dangerous systemic risk, the evidence suggests that this risk—while neither unique nor trivial—is contained with strong safety and soundness regulation. In fact, the risks of failure associated with the GSEs is less than those associated with other large financial institutions that have federal or state charters and that could be characterized as receiving a “subsidy.”

In updating our estimates to reflect growth in mortgage markets and in GSE activities since 2001, we were careful to take the broader

economic implica- tions into account. As a result, we found that the ben- efits that Freddie Mac and Fannie

The activities of the GSEs have also brought greater stability to both the housing market and the overall economy.

Mae currently bestow on homeowners are even larger than previously stated.

In particular, we find that the GSEs’ funding advantage (by virtue of their nexus with the

1

See Pearce and Miller (2001).

1

n

Introduction and Summary

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