There’s an interesting new NBER working paper out this week on the impacts of Fannie Mae and Freddie Mac on the mortgage market and the overall economy. I have to admit I’m still working through some of it (my matrix algebra is a little rusty).

To summarize the paper’s findings:

First, comparing stationary equilibria with and without the policy, a tax-financed interest rate subsidy of 40 basis points leads to a significant increase in mortgage origination, but has little effect on investment in housing assets or in the equilibrium construction of real estate. The mortgage subsidy does not significantly change the share of households with positive holdings of real estate, because on one hand the subsidy makes real estate ownership more attractive, but on the other hand the higher required taxes lower net of tax income and thus discourage homeownership for low-income and low-asset households. However, the subsidy does significantly affect the distribution of leverage in the economy by increasing both the fraction of households that have positive mortgage debt and the level of leverage. This suggests that the GSE’s may have led to over-investment in mortgages and excess household leverage, which may have exacerbated the response to the recent drop in house prices.

Using a steady state utilitarian social welfare functional we find that the aggregate welfare implications of the subsidy are negative, in the order of 0f 0.8% of consumption equivalent variation. However, since households are heterogeneous, there is disagreement over the desirability of the subsidy. Low-wealth households prefer to live in a world without the subsidy, whereas high wealth households prefer to live in a world with the subsidy. This can be explained by the fact that low-wealth households hold little or no housing, and thus do not benefit from the subsidy, as compared to high wealth households that have large homes and mortgages.

Of course you can always read the paper and decide for yourself. I didn’t need to work out all the equations to prove that Fannie and Freddie have been a massive regressive theft from all of us to a narrow segment of higher-income homeowners (and bankers).