Each depositor insured to at least $250,000 per insured bank

Vol. 8 No. 2 - Article II - Released Date June 1995 - Footnotes

Government-Sponsored Enterprises: Their Role as Conduits of Credit and as Competitors of Banking Institutions
by Panos Konstas

Panos, Konstas is a senior economist in the FDIC's Division of Research and Statistics. James Freund made a significant contribution with his comments and as the review coordinator for the paper. Valuable comments also were made by Richard Brown, George French, Alice Weicher and Detta Voesar; Steven Guggenmos provided statistical and research support.

Footnote 1
This definition has been adopted from a work by Moe and Stanton (1989)
.

Footnote 2
In addition to these seven entities, the Budget of the United States Government lists four other enterprises as GSEs: the Financing Corporation, the Resolution Funding Corporation, the farm credit system's Financial Assistance Corporation, and the College Construction Loan Insurance Association (Connie Lee). All four entities, however, fail to meet the definition of a GSE as established above. The first three are federal corporations created to raise funds for resolving failing thrifts and farm credit institutions. Connie Lee, which is partly owned by the Department of Education, is not authorized to borrow from the Treasury and, thus, its obligations do not enjoy an implicit federal guarantee.

Footnote 3
According to generally accepted accounting principles utilized by private corporations, the mortgages in the pools of loans supporting mortgage-backed securities are considered to be owned by the holders of these securities. Consequently, on the books of Fannie Mae and Freddie Mac, the mortgages in the pools are not considered to be assets and the mortgage-backed securities outstanding are not considered to be liabilities. However, the budget treatment of the U.S. Government classifies these mortgages and mortgage-backed securities as assets and liabilities, respectively, of Fannie Mae and Freddie Mac.

Footnote 4
As a result of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, Fannie Mae and Freddie Mac are subject to supervision by a newly created regulator within HUD, called the Office of Federal Housing Enterprise Oversight (OFHEO). OFHEO's primary responsibility is to ensure that these two GSEs are adequately capitalized and operating in a safe-and-sound manner. This includes the responsibility to implement and maintain risk-based capital requirements for the two GSEs.

Footnote 5
The FHLBs, however, pay an implicit federal tax on their income through their contributions to the Resolution Funding Corporation and through subsidies for the Community Investment and Affordable Housing programs.

Footnote 6
GAO/GGD 90-97, p. 81.

Footnote 7
GAO (1991), CBO (1990), and Treasury (1990).

Footnote 8
The Director of OFHEO may adjust such percentages to reflect differences in the credit risk of such obligations.

Footnote 9
OFHEO published an Advanced Notice of Proposed Rulemaking regarding these regulations in the Federal Register, February 8, 1995, pp. 7468-7479.

Footnote 10
Treasury (1990), CBO (1991).

Footnote 11
Its future, however, is by no means certain. Congress enacted legislation in 1993 that affects Sallie Mae's servicing and lending operations in major ways. Beginning in June 1994, the legislation phases in a program of direct government loans to college students that ultimately could diminish Sallie Mae's role as dominant intermediary in student loan financing. The legislation also cuts Sallie Mae's government-allowed markup on the guaranteed student loans it continues to handle, which the agency claims will reduce its profit margin by about one-third.

Footnote 12
On a $250 million MBS pool, an annual fee of 25 basis points would amount to $625,000. In exchange for this fee the GSE absorbs the losses on any defaulted mortgages in the pool, and the GSE guarantees the timely payment of principal and interest to the owners of the pool. Also, if needed, the GSE replaces defaulted mortgages with good mortgages from its own inventory so that the flow of payments in the pool will not be interrupted.

Footnote 13
The interest-rate risk on a guaranteed MBS is borne by the holder of the security, not the GSE.

Footnote 14
While the yield on GSE debt ordinarily exceeds the rate on Treasury issues, the actual difference (or spread) between the two yields depends importantly on supply and demand conditions in the capital markets. In the 1980s, when Fannie Mae and Freddie Mac activity in the mortgage market became well-established, large increases in funds raised by these agencies tended to coincide with increases in the yield spread over Treasury issues. During this period, the spread of ten-year GSE yields above ten-year Treasury yields varied generally between 25 and 60 basis points (U.S. Department of the Treasury, 1990, p. 41). This yield-spread, which has narrowed in recent years, stands currently in the 20 basis-point range.

Footnote 15
Patric H. Hendershot and James D. Shilling, The Impact of the Agencies on Conventional Fixed-Rate Mortgage Yields, Journal of Real Estate Finance and Economics 2 (1989): 101-115.

Footnote 16
A 30 basis-point reduction in the fixed 30-year mortgage rate, from say 8.8 percent to 8.5 percent, reduces the monthly payment on a $203,150 mortgage the current limit for conforming loans by $43.39.

Footnote 17
James L. Freund, Comment on Andrew S. Carron and R. Dan Brumbaugh, Jr.'s `The Variability of the Thrift Industry' Housing Policy Debate, Vol. 2, No. 1 (1991): 25-38.

Footnote 18
Wayne Passmore, Can Retail Depositories Fund Mortgages Profitably? Journal of Housing Research, Vol. 3, No. 2 (1992): 305-40.