Financing Housing through Government-Sponsored Enterprises
W. Scott Frame and Larry D. Wall
Economic Review, Vol. 87, No. 1, 2002
Three government-sponsored enterprises (GSEs)—Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System—were created to improve the availability of home mortgage financing by supplementing local funding. But today's more evolved financial markets enable retail lenders to tap national markets. Thus, the main contribution of the three housing GSEs has become providing homebuyers an interest rate subsidy that is made possible by the GSEs' special relationship with the federal government.
This article examines the economic issues arising from the provision of such subsidies via the housing GSEs. The authors first review the benefits and costs of subsidizing housing finance and then provide background information about the housing GSEs and their relationship to the federal government. The GSEs' importance to the financial markets, coupled with their special relationship with the government, raises concerns about the potential for moral hazard and the problems that would arise if a housing GSE became financially distressed or insolvent.
The discussion then focuses on two public policy debates that have been sparked by this special relationship. The first is whether the housing GSEs are efficient mechanisms for subsidizing housing. The second relates to the housing GSEs' safety and soundness and questions whether implicit guarantees of their liabilities are the best way to subsidize them.