Journal of Real Estate Finance and Economics, 25:2/3, 129±150, 2002
# 2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
Measuring Potential GSE Funding Advantages
BRENT W. AMBROSE*
Gatton College of Business and Economics, University of Kentucky
Bauer College of Business, University of Houston
As the size of government sponsored enterprises (GSE) has grown, attention has focused on the relationship
between the federal government and the GSEs, with particular attention focused on estimating the impact of this
relationship on GSE debt costs. Quantifying the GSEs' cost advantage is a controversial exercise with several
competing methodologies providing divergent values. Thus, this paper reviews the methods that have been
utilized in previous studies and recommends an alternative approach that overcomes many of the criticisms of
previous work. By using offering yields on GSE debt, we ®nd that the three housing GSEs enjoyed an average
advantage of between 25 and 29 basis points over ``AA'' banking sector bonds, between 43 and 47 basis points
over ``A'' rated bonds, and between 76 and 80 basis points over ``BBB'' rated banking issues. We ®nd that our
results are robust to both the basic approach taken as well as to model speci®cation.
Key Words: government sponsored enterprises, yield spreads
Government sponsored enterprises (GSEs) are congressionally chartered institutions with
speci®c missions. For example, the largest GSEs, the Federal Home Loan Bank (FHLB),
the Federal National Mortgage Association (Fannie Mae or FNMA), and the Federal Home
Loan Mortgage Corporation (Freddie Mac or FHLMC) focus on supplying credit to the
housing markets. In recent years, the size of Fannie Mae and Freddie Mac has increased
signi®cantly. For example, as of December 2000, Fannie Mae's total assets stood at $675
billion while Freddie Mac had assets totaling $459 billion.
As the size of these corporations has grown, attention has focused on the relationship
between the federal government and the GSEs. For example, Congressional hearings have
recently focused on the extent to which these corporations have a funding advantage
deriving from this relationship relative to other fully private corporations and whether the
GSEs pass the bene®ts from this funding advantage to consumers.
the GSEs' cost advantage is controversial with several competing methodologies
providing divergent values. Thus, the purpose of this paper is to review the methods
* Author for correspondence: Brent W. Ambrose, Gatton College of Business and Economics, University of
Kentucky, Lexington, KY 40506-0034, (859) 257-7726.