#05-38
On Limiting the Retained Mortage Portfolios of Fannie Mae and Freddie Mac
Dwight M. Jaffee
Abstract: This paper evaluates a current policy proposal to limit the size of the retained mortgage
portfolios held by Fannie Mae and Freddie Mac (hereafter F&F). The proposal is a response to
the growing concerns that the interest rate risks contained in the F&F portfolios create a serious
threat to the US financial system. The analysis begins with a review of data on how F&F operate
and on the role they play within the US mortgage market. Special attention is paid to the manner in
which the firms hedge their interest rate risk. Key questions regarding the policy proposal
include (1) what fund sources will replace F&F as mortgage investors, how will the interest rate
risk be covered after it is removed from the F&F portfolios, and (3) what is the likely impact of
the change on US mortgage interest rates. The conclusion is to endorse legislation that will limit
the F&F retained mortgage portfolios.
Keywords: Fannie Mae, Freddie Mac, retained mortgage portfolio, interest rate risk, mortgage market
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