Keywords: Mortgage finance, government-sponsored enterprises, financial stability
Abstract: Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that
purchase mortgages and issue mortgage-backed securities (MBS). In addition, the
GSEs are active participants in the primary and secondary mortgage markets on
behalf of their own portfolios of MBS. Because these portfolios have grown quite
large, portfolio purchases as well as MBS issuance are likely to be important
forces in the mortgage market. This paper examines the statistical evidence of
a connection between GSE actions and the interest rates paid by mortgage borrowers.
We find that both portfolio purchases and MBS issuance have negligible
effects on mortgage rate spreads and that purchases are not any more effective
than securitization at reducing mortgage interest rate spreads. We also examine
the 1998 liquidity crisis and find that GSE portfolio purchases did little to affect
interest rates paid by borrowers. These results are robust to alternative assumptions
about causality and to model specification.
Full paper (175 KB PDF)
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Last update: January 12, 2005