Working Paper: CEPR ID: DP8624
Authors: Karsten Jeske; Dirk Krueger; Kurt Mitman
Abstract: This paper evaluates the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (such as Fannie Mae and Freddy Mac) in the mortgage market. In order to do so we construct a model with heterogeneous, infinitely lived households and competitive housing and mortgage markets. Households have the option to default on their mortgages, with the consequence of having their homes foreclosed. We model the bailout guarantee as a government provided and tax-financed mortgage interest rate subsidy. We find that eliminating this subsidy leads to substantially lower equilibrium mortgage origination and increases aggregate welfare, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: eliminating it benefits low-income and low-asset households who did not own homes or had small mortgages, while lowering the welfare of high-income, high-asset households.
Keywords: Default Risk; Government-Sponsored Enterprises; Housing; Mortgage Market
JEL Codes: E21; G11; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| elimination of the mortgage interest rate subsidy (H20) | lower equilibrium mortgage origination (G21) |
| mortgage interest rate subsidy (G21) | higher mortgage origination (G21) |
| elimination of the mortgage interest rate subsidy (H20) | increase in aggregate welfare (D69) |
| mortgage interest rate subsidy (G21) | aggregate welfare (E10) |
| mortgage interest rate subsidy (G21) | exacerbates inequality (I24) |
| elimination of the mortgage interest rate subsidy (H20) | benefits low-income households (H53) |
| mortgage interest rate subsidy (G21) | little effect on foreclosure rates (G21) |
| mortgage interest rate subsidy (G21) | little effect on housing investment (G59) |