NCPA - National Center for Policy Analysis

Fannie Mae And Freddie Mac Claims To Lowering Mortgage Costs Questioned

November 16, 2000

A new study from the Federal Reserve questions claims by quasi-government lenders Fannie Mae and Freddie Mac that they help lower to cost of buying a new home.

"Somewhat surprisingly, we find very plausible conditions under which securitization fails to lower the mortgage rate," write Fed economist Wayne Passmore, the University of Miami's Andrea Heuson and Roger Sparks of Mills College in California.

  • The lenders' implicit ties to the government help them borrow on Wall Street more cheaply than traditional banks -- an advantage that rival lenders say is unfair.
  • Supporters of Fannie Mae and Freddie Mac have long asserted that the institutions' role of buying bundled packages of mortgage loans -- thereby improving liquidity in mortgage markets -- helps keep rates lower.
  • But the Fed economists say there is no guarantee that the mere securitization of a loan cuts costs.
  • Moreover, the analysts suggest that any benefit from the secondary-mortgage-purchasing process is dictated by the originators of the loans -- in this case, banks -- and is beyond the control of Fannie Mae and Freddie Mac.

Both lenders bought about 74 percent of the $1.13 trillion in conforming single-family mortgages originated last year, according to the Office of Federal Housing Enterprise Oversight.

Source: Jerry Guidera, "Fannie and Freddie May Not Trim Cost of Home Financing," Wall Street Journal, November 16, 2000.


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