Fed Economists Say GSEs Don't Aid Market Much
Blackwell, Rob, American Banker
Federal Reserve Board economists released a trio of papers Thursday arguing that Fannie Mae and Freddie Mac do little to improve the mortgage market for consumers.
The papers, from Wayne Passmore, Andreas Lehnert, and Shane M. Sherlund, concluded that the government-sponsored enterprises' mortgage-backed securities have "essentially no long- or short-run effects" on interest rates.
Two of the papers were updates from Mr. Passmore on studies that said Fannie and Freddie gain $122 billion to $182 billion from the perception among investors that they are backed by the government. He asserted that the GSEs keep roughly 44% to 89% of their "implicit government subsidy" and that their funding advantages lower interest rates by just 7 basis points.
Most of the new figures in the third paper were focused on mortgage-backed securities. At the end of 2003 about $3.3 trillion of GSE-issued MBS were outstanding, with roughly $1.3 trillion of that in the GSEs' portfolios, the paper said.
The paper attempted to debunk previous research and GSE executives' claims that MBS issuances and portfolio purchases help lower interest rates and make homes more affordable. The authors analyzed 1994 to 2003 data for statistical or economic evidence to support claims that lower interest rates resulted from MBS.
"Our main finding is that GSE actions (whether portfolio purchases or gross MBS issuance) have negligible effects on primary or secondary mortgage spreads," the authors said.
For example, the paper said, if the GSEs unexpectedly increased their portfolio purchases by $10 billion (or 12.7% of their 2003 average), the secondary market spread would drop by three-tenths of a basis point, and the primary market spread would drop a tenth of a basis point over the long run.
The paper also questioned the GSEs' arguments that their purchases provide stability in volatile times. It said that the assertion was not true during a 1998 liquidity crisis that was caused partly by the unraveling of the Long-Term Capital Management hedge fund.
"There was nothing special about the GSEs' actions during this period of financial market stress," the Fed paper said. …