Phasing Out the GSEs / Vadim Elenev, Tim Landvoigt, Stijn Van Nieuwerburgh.

Format:

Book

Author/Creator:

Elenev, Vadim.

Contributor:

National Bureau of Economic Research.

Landvoigt, Tim.

Van Nieuwerburgh, Stijn.

Series:

Working Paper Series (National Bureau of Economic Research) no. w21626.

NBER working paper series no. w21626

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2015.

Summary:

We develop a new model of the mortgage market where both borrowers and lenders can default. Risk tolerant savers act as intermediaries between risk averse depositors and impatient borrowers. The government plays a crucial role by providing both mortgage guarantees and deposit insurance. Underpriced government mortgage guarantees lead to more and riskier mortgage originations as well as to high financial sector leverage. Mortgage crises occasionally turn into financial crises and government bailouts due to the fragility of the intermediaries' balance sheets. Increasing the price of the mortgage guarantee "crowds in" the private sector, reduces financial fragility, leads to fewer but safer mortgages, lowers house prices, and raises mortgage and risk-free interest rates. Due to a more robust financial sector, consumption smoothing improves and aggregate welfare increases. While borrowers are nearly indifferent to a world with or without mortgage guarantees, savers are substantially better off. While aggregate welfare increases, so does wealth inequality.

Notes:

Print version record

October 2015.