Emerging Competition and Risk-Taking Incentives at Fannie Mae and Freddie Mac

Frame, W. Scott; White, Lawrence J.

doi:10.2139/ssrn.519042

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Emerging Competition and Risk-Taking Incentives at Fannie Mae and Freddie Mac

FRB of Atlanta Working Paper No. 2004-4

29 Pages Posted: 22 Mar 2004

See all articles by W. Scott Frame

Lawrence J. White

Stern School of Business, New York University; New York University (NYU) - Leonard N. Stern School of Business, Department of Economics

There are 3 versions of this paper

Date Written: February 2004

Abstract

This paper examines two major forces that may soon increase competition in the U.S. secondary conforming mortgage market: (1) the expansion of Federal Home Loan Bank mortgage purchase programs and (2) the adoption of revised risk-based capital requirements for large U.S. banks (Basel II). The authors argue that this competition is likely to reduce the growth and relative importance of Fannie Mae and Freddie Mac and hence their franchise values and effective capital. Such developments could, in turn, lead to more risky behaviors by these two GSEs. It is this last consequence that warrants greater regulatory awareness.

Keywords: Government-sponsored enterprises, mortgages, securitization, risk-based capital, moral hazard, charter value

JEL Classification: G21, G28

Suggested Citation: Suggested Citation

Frame, W. Scott and White, Lawrence J. and White, Lawrence J., Emerging Competition and Risk-Taking Incentives at Fannie Mae and Freddie Mac (February 2004). FRB of Atlanta Working Paper No. 2004-4, Available at SSRN: https://ssrn.com/abstract=519042 or http://dx.doi.org/10.2139/ssrn.519042