Federal Home Loan Research Articles

Fannie Mae and Freddie Mac: A Bibliography

This is an unannotated bibliography of writings about Fannie Mae and Freddie Mac as well as some material that covers other government sponsored enterprises such as the Federal Home Loan Bank System. While it is comprehensive, it is not exhaustive, with a focus on work published through 2011 by government agencies, economists, legal and policy scholars, private sector analysts and think tanks. It does not include Congressional testimony and shorter works. This bibliography will be posted on Wikipedia so that others can make additions to it. The text of this page and the attached downloadable document are available for modification and reuse under the terms of the Creative Commons Attribution-Sharealike 3.0 Unported License and the GNU Free Documentation License (unversioned, with no invariant sections, front-cover texts, or back-cover texts).

Federal Home Loan Bank Advances and Commercial Bank Portfolio Composition

Federal Home Loan Bank (FHLB) advances are a source of government‐sponsored liquidity intended to encourage housing finance, although “community financial institutions” may use such funds more generally. Because money is fungible, it is an empirical question as to how advances are actually employed. Using panel‐vector autoregression techniques, we estimate dynamic responses of U.S. commercial bank portfolios to: FHLB advance shocks, bank lending shocks, and macroeconomic shocks. We find that FHLB advances: (i) are used as a general source of liquidity by U.S. commercial banks of all sizes and (ii) dampen the sensitivity of mortgage lending to macroeconomic shocks at small banks.

The Federal Home Loan Bank Board, Redlining, and the National Proliferation of Racial Lending Discrimination, 1921–1950

By utilizing the annual reports of the Federal Home Loan Bank Board (FHLBB) and its monthly journal, the Federal Home Loan Bank Review, this essay argues that the incorporation of the Home Owners’ Loan Corporation’s appraisal scheme had several detrimental consequences. By mandating their appraisal analysis as a prerequisite for membership into the federal banking system, the FHLBB established unified national lending standards designed to evaluate neighborhood demographics as a factor far exceeding the condition of the appraised property itself. With the inclusion of these “scientific appraisal standards” into their uniform lending policies, FHLBB officials rated entire residential communities as hazardous bank investments whenever they were inhabited by undesirable occupants. Ultimately, the standardized lending policies of the FHLBB systematically disadvantaged low-income and minority city-dwelling residents from obtaining mortgage financing, and by midcentury they exacerbated the disproportionately substandard urban housing conditions endured by nonwhites in the United States.

How Do Global Banks Scramble for Liquidity? Evidence from the Asset-Backed Commercial Paper Freeze of 2007

In the August of 2007, banks faced a freeze in funding liquidity from the asset-backed commercial paper (ABCP) market. We investigate how banks scrambled for liquidity in response to this freeze and its implications for the real economy. Commercial banks in the United States raised deposits and took advances from Federal Home Loan Banks (FHLBs). In contrast, foreign banks – with limited access to the deposit market and FHLB advances – lent less in the overnight interbank market and borrowed more from the Federal Reserve’s Term Auction Facility (TAF) auctions. Relative to banks in the United States, relative to before the ABCP freeze and relative to their non-US dollar lending (difference-in-differences), foreign banks with ABCP exposure charged higher interest rates on syndicated loan packages denominated in dollars. The results point to an important funding risk in global banking, manifesting as currency shortages for banks engaged in maturity transformation in foreign countries.

Bank Deregulation And The Portfolios Of Savings And Loan Associations

Carron (1982) has described the precarious condition of the thrift industry, which has been a subject of concern for over a decade. Unlike commercial banks, S&Ls have not been able to insulate themselves from interest rate risk, nor have they significantly altered the composition of their balance sheets. In contrast to the rapid growth of the industry up until the 1960s, the industry growth weakened by the turn of the decade. Abrupt swings in savings deposits became synchronized with the cyclical behavior of the national economy. Marked fluctuations in industry funds over time forced S&Ls to draw heavily upon non-deposit sources, particularly borrowings from the Federal Home Loan Banks, and other expensive deposits.

Financial asset demand is elastic: Evidence from new issues of Federal Home Loan Bank debt

We estimate the slope of the demand curve for newly auctioned FHLB discount notes and investigate the impacts of arbitrage risk and heterogeneity of investor beliefs on demand elasticity. Our unique dataset of roughly 2900 observations of two price-quantity pairs—the first from a pre-auction dealer survey, the second from actual auction results—provides the quantity shift necessary to identify demand. In contrast to previous findings of downward-sloping demand curves for equities, we show that demand for newly issued FHLB notes is nearly perfectly elastic during normal market conditions. We find, however, that frictions like arbitrage risk and, to a lesser extent, heterogeneity of investor beliefs negatively affect elasticity and explain the nearly 50% drop in elasticity observed during the recent financial crisis.

Blessing Or Curse? Community Banks’ Use Of Federal Home Loan Bank Advances

Banks enjoyed record profitability during the nineties, as the economy grew and loan demand followed. Deposit growth did not keep pace so many banks sought alternative funding, including Federal Home Loan Bank advances which have potential risk-increasing incentives. The results show that advance-using banks operate with much higher levels of loans to assets, much lower levels of capital, and extend commitments for future lending at a greater rate than banks that do not use advances. A logistic regression finds high loans, and low deposits and equity (all as a percent of assets) are key predictors of FHLB advance use. Also, for the banks examined, there is a concentration of advance users among the banks with the lowest capital and highest levels of non-performing loans. These results offer insight for future research as well as focus for supervisory scrutiny of FHLB advance-using banks.

The Federal Home Loan Banks and Commercial Bank Risk Taking: An Overstated Moral Hazard?

Recent attention has been focused on how Federal Home Loan Bank lending to commercial banks may create a new significant risk exposure to the Federal Deposit Insurance Corporation. This concern is prompted by the potential moral hazard created by the FHLBank policy of lending at one rate, its government sponsored enterprise status, and its preferential rights as a secured creditor in receiverships, often referred to as the super-lien. We argue, however, that this moral hazard is overstated because the Federal Home Loan Banks have an incentive to carefully monitor their borrowers based on their rights as a secured lender under the Uniform Commercial Code - that are not mitigated by the super lien. Consequently, the FHLBanks carefully underwrite advances and make adjustments to pricing based on risk - often through collateral valuation that effectively prices credit risk for FHLBank borrowers. We provide empirical evidence to support the claim that ex-ante and ex-post members are no riskier than non-members.

The Federal Home Loan Bank System: The Lender of Next‐to‐Last Resort?

The Federal Home Loan Bank (FHLB) System is a large cooperatively owned government‐sponsored liquidity facility that lends predominately to U.S. depository institutions. This paper documents the significant role played by the FHLB System at the outset of the recent financial crisis and provides evidence on the uses of FHLB funding by member banks and thrifts during that time. We then compare lending activity by the FHLB System and the Federal Reserve during 2007 and 2008, discuss the types of institutions seeking government‐sponsored liquidity at various times, and identify the trade‐offs faced by borrowers eligible to tap liquidity from both facilities.

U.S. v. Japanese Regulatory Responses to the Financial Institution Crises of the 1980s: The Seductive Appeal of the Cover Up

Economists have dominated U.S. scholarship about the S&L debacle and they have universally viewed the regulatory response as horrific. This paper argues that the conventional economic wisdom is badly flawed. The U.S. regulatory response to the debacle was disastrous – when economists shaped it in the critical years (1982-1983) that produced the debacle and would have produced catastrophic losses had the policies been maintained. The Reagan administration wanted the policies maintained and even expanded. The administration’s goal was to block its own appointee Federal Home Loan Bank Board Chairman Edwin Gray from “reregulating” and “resupervising” the industry. Chairman Gray, and a great deal of luck, combined to block that administration effort. Mr. Gray’s policies proved extraordinarily successful. They explain why the S&L debacle was contained at a far lower cost that did not harm the overall U.S. economy and resolved far more expeditiously than was the still unresolved Japanese banking crisis of the 1980s that has impaired the Japanese economy for 15 years. This paper explains why the interaction of institutional factors that allowed for far greater regulatory independence in the U.S. and an extraordinary regulator leader allowed the U.S. to avoid a Japanese-style catastrophe.

The Likely Impact of the U.S. Recession on Negotiations with North Korea

IntroductionThe last six-party talk in Beijing ended on December 11, 2008, when negotiators were unable to reach an agreement on the issue of verification over the accuracy of the nuclear inventory given by North Korea in June 2008. The sticking point was North Korea's refusal to let international inspectors take samples from soil and waste at its nuclear facilities, which the United States had maintained was critical to reach an agreement. Complicating the issue, however, is the rapidly declining U.S. economy, as indicated by the real gross domestic product (GDP) that fell rapidly beginning in the fourth quarter of 2008. This paper reviews the state of the U.S. economy, measuring how serious the economic recession is, and then speculates on how the state of the U.S. economy may affect the future of negotiations with North Korea. The paper concludes with some suggestions on the direction North Korea and the United States might consider taking in the middle of the U.S. economic recession.History of the Credit Crunch of 2008Although there is no consensus on its exact duration, the beginning of the is believed to be in the early 1980s. The good times of the Great Moderation are characterized by significant reduction in fluctuations and improvements in aggregate output, employment, and inflation. for the Great Moderation include (a) improved monetary policy, (b) financial innovation, (c) increased global integration, (d) better inventory controls, and (e) good luck in the form of smaller exogenous shocks. As Federal Reserve Chair Ben S. Bernanke opined during his discussion of the Great Moderation at the 2004 meetings of the Eastern Economic Association, Explanations of complicated phenomena are rarely clear cut and simple, and each ... probably contains elements of truth.1 It may be premature to give credit to any or all of these explanations. It is yet to be known whether the latest Great Moderation is in a temporary halt or is over until the next Great Moderation appears on the horizon many years from now. The end of the Great Moderation did not begin with subprime mortgages. The end started long before the Great Moderation even began.Securitizing mortgages in the United States has a long history. 1968, the Government National Mortgage Association (Ginny Mae) was allowed to securitize FHA/VA mortgages backed by the U.S. government for resale in a secondary market. 1970, the Federal Home Loan Mortgage Corporation (Freddie Mac) started selling government-backed mortgage-backed securities (MBS). One writer noted, In 1981, the Federal National Mortgage Association (Fannie Mae) began issuing MBS, and soon after 'private-label' securitized products emerged for prime loans without the backing of the government.2 1982, the Alternative Mortgage Transaction Parity Act allowed variable-rate mortgages as an alternative to fixed-rate mortgages. 1986, the Tax Reform Act ended tax deduction for interest on loans with the exception of mortgage loans. All these changes played a role in leading to the 2008 credit crunch. It is important to note that these changes, standing alone, are nothing wrong. But they were abused during the early years leading to the 2008 credit crunch.During the Great Moderation of the 1990s and the early part of the 2000s, the rate of inflation was low and the economy grew steadily. During the same period, countries in Asia and the Middle East started to save an enormous amount of money. From 1996 to 2007, industrialized countries went from a current account surplus of $14 billion to a current account deficit of almost $500 billion. At the same time, noted a White House report, developing countries went from a current account deficit of $82 billion to a surplus of $760 billion.3 The influx of this capital lowered interest rates. These new wealthy were not satisfied with low interest earnings, and they searched for high-yielding assets. …

Not All Housing GSEs Are Alike: An Analysis of the Federal Home Loan Bank System and the Foreclosure Crisis

While the financial crisis of 2008 ultimately affected the range of U.S. financial institutions, it began with practices in home ownership finance. The Federal Home Loan Bank (FHLBank) System was the first instrumentality created by the U.S. government, in 1932, to sustain affordable home ownership finance. In this article, the authors ask what role, if any, the FHLBanks played in the subprime lending and securitization practices that precipitated the current crisis. The authors analyze publicly available FHLBank financial data in terms of a framework focused on the System's assets: advances; mortgage loans acquired from members; and investments, particularly in mortgage‐backed‐securities. They conclude that the FHLBanks did not contribute significantly to problematic practices. Nonetheless, they recommend consideration of three reforms to the FHLBanks to ensure a return to effective regulation and responsible, affordable home ownership finance.

The Sociology and Geography of Mortgage Markets: Reflections on the Financial Crisis

The article presents a symposium discussion assessing the role the sociological and geographical aspects of the mortgage market played in the 2008 financial crisis. Combinations of interrelated causes of the global financial crisis include deregulation and re-regulation, financialization and globalization, and bubbles and wrong incentives. The various ways the mortgage market is shaped and reshaped by both mortgage lenders and state institutions is examined. It is stressed that mortgage loan securitization is largely an invention of government and government erected institutions such as Fannie Mae and Freddie Mac.

The Federal Home Loan Bank System: The Lender of Next-to-Last Resort?

The Federal Home Loan Bank (FHLB) System is a large, complex, and understudied government-sponsored liquidity facility that currently has more than $1 trillion in secured loans outstanding, mostly to commercial banks and thrifts. In this paper, we document the significant role played by the FHLB System at the onset of the ongoing financial crises and then provide evidence on the uses of these funds by the System's bank and thrift members. Next, we identify the trade-offs faced by member-borrowers when choosing between accessing the FHLB System or the Federal Reserve's Discount Window during the crisis period. We conclude by describing the fragmented U.S. lender-of-last-resort framework and finding that additional clarity about the respective roles of the various liquidity facilities would be helpful.

From Wall Street to High Street: Going for a Free Lunch?

Opinions are now divided on whether the the Federal National Mortgage Association (or ‘Fannie’) and the Federal Home Loan Mortgage Corporation (or ‘Freddie’) should remain in their present form, putting a lot of taxpayers’money at risk. The bailing–out role now played by the Federal Reserve has been sternly criticised and it has been questioned whether this should be allowed to go on and on in the foreseeable future, transforming US capitalism into social capitalism. The event has also affected the UK capital market, with serious erosion of market capitalisation. But, is the UK home market an innocent bystander in the whole scheme of things? That is is the subject of this article.

Rescuing Failure or Failing to Rescue: Which is the Better Consequence?

This article looks at the origins and future of the US Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, previously believed to be probably as safe as US treasuries given both their previous ties with the State, and how their activities have come to haunt the US economy; the UK capital market, with serious erosion of market capitalisation; and the global financial system.

Government-Sponsored Entities

The U.S. Government9s influence is large in many areas and the financial sector is no exception. This article provides a brief overview of two Government Sponsored Entities (GSEs) that dominate the market for mortgages in the United States: The Federal National Mortgage Association, better known as Fannie Mae (or just Fannie), and the Federal Home Loan Mortgage Corporation, or Freddie Mac (Freddie). Fannie and Freddie are among the largest issuers of any stripe—government or private— and among the most highly visible. To carry out their stated mission to support the housing market, they issue debt to buy mortgages, which they hold in their own portfolios, and they buy mortgages from originators to bundle for sale as mortgage-backed securities (MBS). Together they securitize about half of all mortgages in the United States. <b>TOPICS:</b>MBS and residential mortgage loans, legal and regulatory issues for structured finance

Federal Home Loan Bank Advances and Commercial Bank Portfolio Composition

This paper considers the role of Federal Home Loan Bank (FHLB) advances in stabilizing their commercial bank members' residential mortgage lending activities. Our theoretical model shows that using mortgage-related membership criteria or requiring mortgage-related collateral does not ensure that FHLB advances will be put to use for stabilizing members' financing of housing. Using panel vector autoregression (VAR) techniques, we estimate recent dynamic responses of U.S. bank portfolios to FHLB advance shocks, bank lending shocks, and macroeconomic shocks. Our empirical findings suggest that FHLB advances are just as likely to fund other types of bank credit as to fund single-family mortgages.

Do Federal Home Loan Bank membership and advances increase bank risk-taking?

Since the early 1990s, commercial banks have turned to Federal Home Loan Bank (FHLBank) advances to plug the gap between loan and deposit growth. Is this trend worrisome? On the one hand, advances implicitly encourage risk by insulating borrowers from market discipline. On the other, advances give borrowers greater flexibility to managing interest rate and liquidity risk. And access to FHLBank funding encourages members to reshape their balance sheets in ways that could lower credit risk. Using quarterly financial and supervisory data for banks from 1992 to 2005, we assess the effect of FHLBank membership and advances on risk. The evidence suggests liquidity and leverage risks rose modestly, but interest-rate risk declined somewhat. Credit risk and overall failure risk were largely unaffected. Although the evidence suggest FHLBank membership and advances have had, at best, only a modest impact on bank risk, we caution that our sample period constitutes one observation and that moral hazard could be pronounced if leverage ratios revert to historical norms.

Charter Value, Risk‐Taking Incentives, and Emerging Competition for Fannie Mae and Freddie Mac

This paper examines two forces that may soon increase competition in the U.S. secondary conforming mortgage market: (1) the Federal Home Loan Bank mortgage purchase programs, and (2) the adoption of revised risk‐based capital requirements for large U.S. banks (Basel II). We argue that this competition is likely to reduce the growth and relative importance of Fannie Mae and Freddie Mac and hence reduce their charter values and effective capital. Such developments could, in turn, lead to more risky behaviors by these two companies. This last consequence warrants greater supervisory awareness and legal authorities.