Comment on “Are the government-sponsored enterprises (GSEs) justified?”

Abstract

The article here extended reflects on the excessively narrow debate over the government-sponsored enterprises (GSEs)' cost-benefit transfer balance which had been raging for a quarter-century before the 2007–2009 financial crisis. That crisis has cast a new light on the actual costs of GSE operations and exposed the unsustainability of some of their benefits for homeownership. After injecting afew new findings into the traditional debate, this comment adds some of what has transpired in recent years and what may be inferred from it so far. Doing so brings additional analysis to bear on the article's conclusion that “the GSEs might not be justified” and “Maybe it is time for them to exit” although most politicians in the past have been disinclined to show them the door.

Keywords:

• Fannie Mae
• Freddie Mac
• GSE
• federal housing policy
• home mortgage finance

Notes

¹The determinants of such decisions and acts have been analyzed by Mian, Sufi, and Trebbi (2010) specifically for housing and home mortgage finance.

²Adjustments are required because Ginnie Mae purchases only mortgages guaranteed by FHA or VA, because the risk weighting of its obligations is 0 and not 20 percent as for the GSEs and because of other differentiating factors. Among them are the relative suitability of their obligations for General Collateral Finance Repos based on government securities, and for their proposed treatment as “high-quality assets” for meeting liquidity requirements planned under Basel III. However, it is interesting that early in 2011 Freddie Mac announced (i) on February 2 that it priced its new 0.75 percent two-year USD Reference Notes security to yield 0.864 percent, or 21.5 basis points more than two-year US Treasury Notes, and (ii) on January 5 a similar 1.375 percent three-year instrument to yield 27 basis points more than three-year Treasury Notes. These spreads over Treasuries are half as large as those reported by Fabozzi (2002, 116) 10 years earlier on average for the 12 months ending 13 July 2001 which were 38.5 for two-year and 61.0 for three-year Reference Notes, respectively. Hence, once the scramble for liquidity abated, the spread of GSE balloon medium-term notes (MTNs) over Treasuries may have become so small as to give full credit to the government guarantee now backing them.

³Being a government agency backed by full faith and credit, Ginnie Mae (GNMA) does not appear in the GSE article, but it should do so also because – as UST & HUD (2011, 19) have pointed out – it would not be desirable to wind down Fannie and Freddie only to leave FHA, and hence Ginnie, free to pursue a greatly expanded business.