Federal Reserve Board Report Quantifies The GSE Implicit Subsidy and Value of Government Ambiguity

December 22, 2003

A working paper released by the Federal Reserve Board finds that the housing-related government-sponsored enterprises Fannie Mae and Freddie Mac (the "GSEs") have an ambiguous relationship with the federal government. Most purchasers of the GSEs' debt securities believe that this debt is implicitly backed by the U.S. government despite the lack of a legal basis for such a belief. In this paper, the author, Wayne Passmore, estimates how much GSE shareholders gain from this ambiguous government relationship. The findings include:

  1. the federal government's implicit subsidy of Fannie Mae and Freddie Mac has resulted in a funding advantage for the GSEs over private sector institutions,
  2. the actions of GSEs result in slightly lower mortgage rates for some homeowners,
  3. the government's ambiguous relationship with Fannie Mae and Freddie Mac imparts a substantial implicit subsidy to GSE shareholders,
  4. the implicit government subsidy accounts for much of the GSEs' market value,
  5. the GSEs would hold far fewer of their mortgage-backed securities in portfolio and their capital-to-asset ratios would be higher if they were purely private, and
  6. the GSEs' implicit subsidy does not appear to have substantially increased homeownership or homebuilding.

Source: Federal Reserve Board

Contact ALTA at 202-296-3671 or communications@alta.org.

North American Title Insurance Company (NATIC) is a seasoned title insurance underwriter, helping title agents to achieve their individual business goals for more than 50 years. Today, the company conducts real estate settlement services in 39 states and the District of Columbia through a network of experienced, independent agents.