Journal of Real Estate Finance and Economics, 25:2/3, 121±127, 2002
# 2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
Government Sponsored Agencies: Do the Bene®ts
Outweigh the Costs?
ANTHONY B. SANDERS
John W. Galbreath Chair in Real Estate Finance, Professor of Finance, The Ohio State University
The government sponsored agencies (GSEs), Federal National Mortgage Association
(Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) provide
several important functions in the U.S. mortgage market. These important functions
include the purchase of conforming loans from ®nancial institutions which provides
liquidity and the lowering of mortgage rates on conforming loans. However, the GSEs
bene®t from an alleged ``implied guarantee'' that the Federal government will not allow
Fannie Mae or Freddie Mac to default on its obligations. This implied guarantee results
from the unique status of the GSE in that the GSEs have government charters, are exempt
from SEC registration requirements, and are exempt from State and Local Taxes. The
GSEs also have a line of credit to the Federal government and GSE securities are exempt
from certain limitations that apply to bank holdings of other corporate debt.
The implied guarantee is most important in setting the GSEs apart from their private
sector competitors. If this implied guarantee has value, then the GSEs operate on a tilted
playing ®eld. Ambrose and Warga (2002) and Nothaft et al. (2002) measure the size of the
implied guarantee by examining the spread on corporate bonds issued by ®nancial
institutions compared to bonds issued by the GSEs.
However, it is important to weigh costs against the bene®ts generated by the GSEs. The
bene®ts generated by the GSEs are that they provide liquidity to ®nancial institutions by
purchasing conforming loans from them. Of course, this particular activity can be
performed by other ®nancial institutions as well. One of the important questions is whether
the GSEs actually serve to lower mortgage rates relative to other ®nancial institutions.
This question in addressed by McKenzie (2002), Naranjo and Toevs (2002) and Passmore
et al. (2002) who examine the spread between the conforming loans of Fannie Mae and
Freddie Mac and jumbo loans. On a related issue, Painter and Redfearn (2002) examine
whether homeownership rates can be increased further by lowering interest rates; hence,
they examine whether the GSEs are helping to improve the homeownership rate in this