Government Sponsored Enterprises and Resource Allocation: With Some Implications for Urban Economies

Abstract

About half of the money that finances housing in the U.S comes from three government-related “Agencies:” two government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac, and a government owned enterprise, Ginnie Mae, that buy mortgages and securitize them and sell the securities or debt backed by mortgages (or mortgage-backed securities) in the bond markets. The purpose of this paper is to analyze Fannie Mae and Freddie Mac and their role in the mortgage market and effects on resource allocation and urban economies. A central point of the paper is that the problem is essentially a “second best” one because of the presence of multiple guarantees and subsidies in the mortgage market. The two agencies may well lead to too much housing but they may also be the most efficient (relatively to banks, which also have guarantees and subsidies) way of funding mortgages.