The value of federal sponsorship: The case of Freddie Mac

Abstract

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 attempts to limit the risk borne by the taxpayer due to federal sponsorship of the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association by: (1) controlling their range of activities; (2) requiring a level of capital sufficient to absorb substantial losses; and (3) providing a mechanism for closure if capital is insufficient. This article estimates the impact of the capital standards on the value to the FHLMC of federal sponsorship. Although FHLMC's level of capital exceeds requirements, the federal government still bears a nontrivial portion of the FHLMC's risk.

Publication Title

Real Estate Economics

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