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Working Paper
Fiscal Implications of the Federal Reserve's Balance Sheet Normalization
The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, more broadly, on the government's overall fiscal position. We find that reducing longer-run reserve balances from $2.3 trillion (roughly the current amount) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 ...
Working Paper
The Failure of supervisory stress testing: Fannie Mae, Freddie Mac, and OFHEO
In the aftermath of the global financial crisis, policymakers in the United States and elsewhere have adopted stress testing as a central tool for supervising large, complex, financial institutions and promoting financial stability. Although supervisory stress testing may confer substantial benefits, such tests are vulnerable to model risk. This paper studies the risk-based capital stress test conducted by the Office of Federal Housing Enterprise Oversight (OFHEO) for Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that are central to the U.S. housing finance ...
Working Paper
Villains or Scapegoats? The Role of Subprime Borrowers in Driving the U.S. Housing Boom
An expansion in mortgage credit to subprime borrowers is widely believed to have been a principal driver of the 2002–2006 U.S. house price boom. By contrast, this paper documents a robust, negative correlation between the growth in the share of purchase mortgages to subprime borrowers and house price appreciation at the county-level during this time. Using two different instrumental variables approaches, we also establish causal evidence that house price appreciation lowered the share of purchase loans to subprime borrowers. Further analysis using micro-level credit bureau data shows that ...
Journal Article
Introduction to Special Issue: The Appropriate Role of Government in U.S. Mortgage Markets
The U.S. mortgage finance system was one of the focal points of the 2007-08 financial crisis, yet legislative decisions about the appropriate role of the federal government in the system remain unsettled. Policy deliberations have focused on Fannie Mae and Freddie Mac?the two enormous government-sponsored enterprises that were placed into federal conservatorship in September 2008. The two GSEs have long been the centerpieces of a mortgage finance system that relies on capital market financing of U.S. residential mortgages. This volume contains eight articles that touch on several key ...
Report
Fiscal implications of the Federal Reserve's balance sheet normalization
The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, more broadly, on the government's overall fiscal position. We find that reducing longer-run reserve balances from $2.3 trillion (roughly the current amount) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 ...
Working Paper
The 2008 federal intervention to stabilize Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are government-sponsored enterprises that play a central role in U.S. residential mortgage markets. In recent years, policymakers became increasingly concerned about the size and risk-taking incentives of these two institutions. In September 2008, the federal government intervened to stabilize Fannie Mae and Freddie Mac in an effort to ensure the reliability of residential mortgage finance in the wake of the subprime mortgage crisis. This paper describes the sources of financial distress at Fannie Mae and Freddie Mac, outlines the measures taken by the federal ...
Ability to Repay a Mortgage: Assessing the Relationship Between Default, Debt-to-Income
The Consumer Financial Protection Bureau has announced that it intends to change the definition of a “qualified mortgage.” Specifically, the CFPB proposes to reconsider the use of a borrower's debt-to-income ratio as a measure of the ability to repay a loan.
Working Paper
Resolving large financial intermediaries: banks versus housing enterprises
This paper examines the policy issues with respect to resolving the possible failure of housing enterprises Fannie Mae or Freddie Mac. The authors compare and contrast these issues with those raised in the context of large bank failures and also identify important differences in the extant supervisory authorities. Based on these discussions, they offer a number of policy suggestions designed to minimize the cost of resolution and protect taxpayers from loss should a large bank or housing enterprise fail.
Working Paper
Unconventional Monetary Policy and Risk-Taking: Evidence from Agency Mortgage REITs
We study how the Federal Reserve's quantitative easing (QE) influenced the behavior of Agency mortgage real estate investment trusts (REITs)?a set of institutions identified by the Financial Stability Oversight Council as posing systemic risk. We document that Agency mortgage REITs: [i] equity prices reacted to QE announcements and in a manner consistent with their business prospects; [ii] grew markedly during QE2 and receded during QE3 in relation to the Federal Reserve's Agency MBS purchase activity; and [iii] increased their leverage during QE3. Our findings are consistent with ...