Take Action

Home | Faculty & Research Overview | Research

Research Details

An Options-Based Approach to Evaluating the Risk of Fannie Mae and Freddie Mac, Journal of Monetary Economics

Abstract

Fannie Mae and Freddie Mac assume a significant amount of interest and prepayment risk and all of the credit risk for about half of the $8 trillion U.S. residential mortgage market. Their hybrid government-private status, and the perception that they are too big to fail, make them a potentially large, but largely unaccounted for, risk to the federal government. Measuring the size and risk of this liability is technically difficult, but important for the debate over the appropriate regulation of these institutions. Here we take an options pricing approach to evaluating these costs and risks. We evaluate the sensitivity of our estimates to various modeling assumptions, and also to the regulatory regime, including forbearance policies and capital requirements. The analysis highlights the benefits, but also the challenges, of taking on options-based approach to evaluating the value of federal credit guarantees.

Type

Article

Author(s)

Deborah Lucas, Robert L. McDonald

Date Published

2006

Citations

Lucas, Deborah, and Robert L. McDonald. 2006. An Options-Based Approach to Evaluating the Risk of Fannie Mae and Freddie Mac. Journal of Monetary Economics. 53(1): 155-176.

KELLOGG INSIGHT

Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more

COURSE CATALOG

Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.
LEARN MORE

DEGREE PROGRAMS

Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more

Take Action