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- W137602915 abstract "Over the last decade, FannieMae and FreddieMac have enlarged their retained mortgage portfolios, increasing exposure to interest rate and prepayment risk. The size of these portfolios has led to concerns that the financial system is exposed to systemic risk. In this paper, we attempt to quantify the risk by considering a stochastic factor cash flow model of the two firms. We estimate an agency debt term structure model and a mortgage contract rate model, and use it to construct a detailed cash flow model of the combined firms, allowing us to quantify the expected insolvency rate, loss-givendefault, and value-at-risk curves. The most important assumptions for firm operation are that the effective maturity gap between assets and liabilities is kept at its initial small value, and that prepayment risk is partially hedged, but credit risk is not modeled explicitly. For base case parameters and initial rates as of year-end 1999, we find a 480bps 10-year probability of insolvency, leading to an estimate of the 10-year expected loss of 8 billion dollars. The corresponding 99.9% Value-at-Risk measure is 300 billion dollars. For conditions at year-end 2003, on the other hand, we find a relatively small values of 15bps, 200 million dollars, and 70 billion dollars, respectively. Provided hedging goals are met, we conclude that the risk of insolvency is highly dependent on the interest rate environment, and less so on the details of the initial portfolio composition. This suggests that a more systematic study of loss measures as a function of initial rates needs to be undertaken. We investigate the sensitivity of our results to model assumptions, such as the level of hedging activity and credit losses, and various possible regulatory proposals to mitigate the interest rate risk of the retained portfolio. The latter include portfolio growth rates, the effects of privatization and required risk capital levels." @default.
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- W137602915 date "2007-01-01" @default.
- W137602915 modified "2023-09-27" @default.
- W137602915 title "On the Interest Rate Risk of Housing Government Sponsored Enterprises" @default.
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