A Microeconomic Analysis of Fannie Mae and Freddie Mac

The most important public-policy issues raised by government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac (Famp;F), revolve around their charters and the perception of government support that goes those charters. The perception of government support gives GSEs quot;embedded optionsquot; (conjectured guarantees and conjectures about conjectured guarantees) that are not available to most other businesses. The options should be structured so that the benefits of GSEs exceed their costs. The author concludes that it is difficult to draw conclusions about the effects of Famp;F because of the ambiguity of the welfare economics, the shakiness of available data, and the paucity of relevant empirical work. But, he argues, it is difficult to believe two contradictory things about Famp;F, namely, that Famp;F convey distortionary subsidies to the mortgage markets, making mortgage rates too low, and that Famp;F also stifle competition, making mortgage rates too high