GSE risks

In a speech, William Poole notes that Fannie Mae and Freddie Mac face five major sources of business risk: credit risk, prepayment risk, interest rate risk from mismatched duration of assets and liabilities, liquidity risk, and operational risk. A sixth risk, so-called political risk, arises from th...

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Bibliographic Details
Published inReview - Federal Reserve Bank of St. Louis Vol. 87; no. 2; pp. 85 - 91
Main Author Poole, William
Format Journal Article Trade Publication Article
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.03.2005
Subjects
Capital market
Corporate bonds
Credit management
Credit market
Credit risk
Default
Economic dynamics
Engineering
Enterprises
Federal Reserve monetary policy
Finance
Financial economics
Government
Government sponsored enterprises
Guarantees
Hedging
Homeowners
Housing prices
Interest rates
Loans
Management
Mortgage banks
Mortgage companies
Mortgages
Prepayments
Public policy
Risk
Risk assessment
Short term debt
U.S.A
United States
United States > US
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Summary:In a speech, William Poole notes that Fannie Mae and Freddie Mac face five major sources of business risk: credit risk, prepayment risk, interest rate risk from mismatched duration of assets and liabilities, liquidity risk, and operational risk. A sixth risk, so-called political risk, arises from the possibility of regulatory or statutory revisions that could adversely affect those who hold the firms' debt or equity. Credit risk occurs because homeowners can and do default on mortgage loans. Fannie Mae and Freddie Mac issue mortgage-backed securities (MBS) against pools of conforming mortgages-mortgages with dollar value at or below the conforming limit that qualifies the mortgages for Fannie Mae and Freddie Mac operations. All such mortgages have no prepayment penalties and are therefore subject to prepayment risk. Fannie and Freddie create interest rate risk for themselves by financing their portfolio through a mixture of long-term non-callable bonds and short-term obligations.
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ISSN:0014-9187
2163-4505
DOI:10.20955/r.87.85-91