Authors: Wayne Passmore and Alexander H. von Hafften
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Economic Policy Review
GSE Guarantees, Financial Stability, and Home Equity Accumulation
Volume 24, Number 3
December 2018
December 2018
JEL classification: G01, G21, G23, G28, H81, R30
Before 2008, the government’s “implicit guarantee” of the securities issued by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac led to practices by these institutions that threatened financial stability. In 2008, the Federal Housing Finance Agency placed these GSEs into conservatorship. Conservatorship was intended to be temporary but has now reached its tenth year, and policymakers continue to weigh options for reform. In this article, the authors assess both implicit and explicit government guarantees for the GSEs. They argue that adopting a legislatively defined “explicit guarantee,” as advocated by some, may be problematic for a variety of reasons, including the difficulty of pricing such a guarantee and the potential high cost for mortgage holders or the government. In addition to the creation of an explicit guarantee, they recommend that steps be taken to limit systemic risk in housing markets. To that end, they advocate the wider adoption of mortgages—such as the “Fixed-COFI” mortgage—that build homeowner equity faster than the thirty-year fixed-rate mortgage favored by the GSEs. With such mortgages, homeowners are better able to weather economic downturns.
Author Disclosure Statement(s)
Wayne Passmore
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
Alexander H. von Hafften
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
Alexander H. von Hafften
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
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