The Value of Federal Sponsorship: The Case of Freddie Mac

Gatti, James F.; Spahr, Ronald W.

doi:10.1111/1540-6229.00723

Cited by 12 publications

(8 citation statements)

References 11 publications

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“…A different method of estimating the value of the GSE implicit subsidy is to value the implicit credit guarantee extended by the government using actuarial or option pricing methods. Gatti and Spahr (1997) take this approach when examining Freddie Mac and conclude that federal government still bears a nontrivial portion of Freddie Mac's risk. For a discussion of different methods of GSE subsidy estimation, see Feldman (1999) and Kane (1999).…”

Section: A Discounted Earnings Model Of Gses' Implicit Subsidymentioning

confidence: 99%

The GSE Implicit Subsidy and the Value of Government Ambiguity

Passmore

2005

FEDS

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The housing-related government-sponsored enterprises Fannie Mae and Freddie Mac (the "GSEs") have an ambiguous relationship with the federal government. Most purchasers of the GSEs' debt securities believe that this debt is implicitly backed by the U.S. government despite the lack of a legal basis for such a belief. In this paper, I estimate how much GSE shareholders gain from this ambiguous government relationship. I find that (1) the government's ambiguous relationship with Fannie Mae and Freddie Mac imparts a substantial implicit subsidy to GSE shareholders, (2) the implicit government subsidy accounts for much of the GSEs' market value, and (3) the GSEs would hold far fewer of their mortgage-backed securities in portfolio and their capital-toasset ratios would be higher if they were purely private. 3. Reflecting their government sponsorship, Fannie Mae's legal name is the "Federal National Mortgage Corporation" and Freddie Mac's legal name is the "Federal Home Loan Mortgage Corporation." 4. During his recent testimonies before Congress, Secretary of the Treasury John Snow explicitly denied there was any implicit government guarantee of the GSEs (September 10, 2003, and October 16, 2003). There have been a variety of legislative proposals to reform the GSEs, although they generally do not deal with the subsidy directly (see Nott and Jickling, 2003).

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Section: A Discounted Earnings Model Of Gses' Implicit Subsidymentioning

confidence: 99%

The GSE Implicit Subsidy and the Value of Government Ambiguity

Passmore

2005

FEDS

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“…In 1954 Fannie Mae was reorganized into a government sponsored entity (GSE) that, while privatized, was supported by the state (Gotham, 2006). In 1970 another GSE, the Federal Home Loan Mortgage Corporation (Freddie Mac), was chartered (Gatti and Spahr, 1997) and these two GSEs were tasked with developing secondary mortgage markets where they could sell their mortgage assets to institutional investors to generate more funding (Gotham, 2009).…”

Section: A Historical Geography Of Securitizationmentioning

confidence: 99%

Laying the Foundations for a Crisis: Mapping the Historico‐Geographical Construction of Residential Mortgage Backed Securitization in the UK

Wainwright¹

2009

Int J Urban Regional Res

113

110

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This article will explore the geographical origins of Residential Mortgage Backed Securitization (RMBS) in the United States and map the subsequent migration of RMBS, as idea, technology and investment vehicle, to the United Kingdom and other nation-states during the 1990s. It will illustrate how RMBS was used as a medium to circulate capital and construct urban space, and seek to interpret the development of RMBS and the contemporary credit crisis in the UK through a series of historical, political and sociological lenses. It argues that, despite travelling across the globe, this financial innovation has maintained a spatial sensitivity since the idea of securitization has been embodied and (re)interpreted in specific spaces to comply with local economic, political and social institutions. It also argues that this is an important primer to understanding the 'credit crunch' of 2007 and its repercussions. The article focuses particularly on how the current significance of securitization and RMBS can be traced back to the 'Big Bang' and the wider processes of the competitive re-regulation of the City of London and the British financial system more generally during the mid-1980s. It shows the differential evolution of securitization in the UK and US, and in so doing argues that such spatial variations have left different financial institutions in the two economies exposed to different forms of credit and market risk. Copyright (c) 2009 The Author. Journal Compilation (c) 2009 Joint Editors and Blackwell Publishing Ltd.

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“…5 A different method of estimating the value of the GSE implicit subsidy is to value the implicit credit guarantee extended by the government using actuarial or option pricing methods. Gatti and Spahr (1997) take this approach when examining Freddie Mac and conclude that the federal government still bears a nontrivial portion of Freddie Mac's risk. For a discussion of different methods of GSE subsidy estimation, see Feldman (1999) and Kane (1999 The present value of the after-tax subsidy value of the GSE charter retained by the GSE shareholders is…”

Section: A Discounted Earnings Model Of Gses' Implicit Subsidymentioning

confidence: 99%

The GSE Implicit Subsidy and the Value of Government Ambiguity

Passmore¹

2005

Real Estate Econ

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The housing‐related government‐sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have an ambiguous relationship with the federal government. Most purchasers of the GSEs' debt securities believe that this debt is implicitly backed by the U.S. government despite the lack of a legal basis for such a belief. In this article, I estimate how much GSE shareholders gain from this ambiguous government relationship. I find that (i) the government's ambiguous relationship with Fannie Mae and Freddie Mac imparts a substantial implicit subsidy to GSE shareholders, (ii) the implicit government subsidy accounts for much of the GSEs' market value and (iii) the GSEs would hold far fewer of their mortgage‐backed securities in portfolio and their capital‐to‐asset ratios would be higher if they were purely private.

show abstract

The Value of Federal Sponsorship: The Case of Freddie Mac

Cited by 12 publications

References 11 publications

The GSE Implicit Subsidy and the Value of Government Ambiguity

The GSE Implicit Subsidy and the Value of Government Ambiguity

Laying the Foundations for a Crisis: Mapping the Historico‐Geographical Construction of Residential Mortgage Backed Securitization in the UK

The GSE Implicit Subsidy and the Value of Government Ambiguity

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