Working Paper: NBER ID: w17537
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: housing; mortgage market; default risk; government-sponsored enterprises
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 government-provided mortgage interest rate subsidy (H29) | Lower equilibrium mortgage origination (G21) |
| Elimination of government-provided mortgage interest rate subsidy (H29) | Increase in aggregate welfare (D69) |
| Elimination of government-provided mortgage interest rate subsidy (H29) | Little effect on foreclosure rates (G21) |
| Elimination of government-provided mortgage interest rate subsidy (H29) | Little effect on housing investment (G59) |
| Government-provided mortgage interest rate subsidy (H81) | Benefits wealthier households (G51) |
| Government-provided mortgage interest rate subsidy (H81) | Lowers welfare of high-income households (H31) |