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5 ralph nader how fannie and freddie influence the

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Unformatted text preview: 5 Ralph Nader, How Fannie and Freddie Influence the political process, Chapter 6 of Peter Wallison, ed., 2001, Serving Two Masters, Yet Out of Control: Fannie Mae and Freddie Mac , AEI Press. 6 This description is taken from Bethany McLean, “The Fall of Fannie Mae,” Fortune , January 24, 2005. 7 It should be noted, however, that because house prices increased over the 1995-2006 period, the collateral underlying this credit numerator increased in value, therefore decreasing the overall credit risk. However, as chapter 2 below shows, the risk profile of these mortgages was also increasing over this period, thus mitigating this house price effect. 8 Using an alternative approach based on options pricing, economists Debbie Lucas and Bob McDonald report a somewhat smaller value of $28 billion, though a recent update by the authors in show that this value can increase with more realistic modeling. Of some interest, they show a value-at-risk at the 5% level for Fannie Mae (Freddie Mac) of $165 billion ($112 billion), eerily close to their losses in the current crisis if one is to believe the CBO estimates. ( Lucas, Deborah and McDonald, Robert, “An options-based approach to evaluating the risk of Fannie Mae and Freddie Mac,” Journal of Monetary Economics , 2006, vol. 53(1) 1, pp. 155-176, and “Valuing Government Guarantees: Fannie and Freddie Revisited,” 2009, forthcoming in NBER book, Measuring and Managing Federal Financial Risk , edited by Deborah Lucas.) 9 Speech at the Conference on Housing, Mortgage Finance, and the Macroeconomy, Federal Reserve Bank of Atlanta, Atlanta, Georgia, dedicated to the theme of Government-sponsored enterprises : http://www.federalreserve.gov/boarddocs/speeches/2005/20050519/ 10 Within these mission goals, there were also so-called subgoals that stipulate the fraction of the goal that must be achieved through new home purchases, as opposed to through mortgage refinancing. 145 11 Housing and Community Development Act of 1992, Title XIII, “Government Sponsored Enterprises”, Sec. 1354 “Review of Underwriting Guidelines.” 12 See Ambrose, Brent W. , Temkin, Kenneth , The Urban Institute and Thomas G. Thibodeau, 2002, “An Analysis of the Effects of the GSE Affordable Goals on Lo- and Moderate-Income Families ,” U.S. Department of Housing and Urban Development, Office of Policy Development and Research. 13 As mentioned above, the GSEs generally required loans with LTVs>80% to have private mortgage insurance. An important point, however, is that while private mortgage insurance helps insulate some of the GSE losses from a defaulted mortgage, the high LTVs also make default more likely. As is well documented, mortgage defaults usually create dead-weight losses that are associated with spillover effects in the neighborhood, disinvestment in the property, etc… 14 See a detailed analysis by Ed Pinto, available at: http://www.aei.org/docLib/Pinto-High-LTV- Subprime-Alt-A.pdf ....
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5 Ralph Nader How Fannie and Freddie Influence the...

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