Fannie Mae and Freddie Mac sustained the 30-year fixed-rate mortgage by being able to borrow long (issuing long-dated bonds to match their mortgage portfolios) far more cheaply than ordinary banks, thanks to their reputations and implicit government guarantee, while the taxpayers bore the tail risk of the default option (and likely prepayment option) becoming extremely valuable—which is what ultimately destroyed them.

causalpending

Speaker

Arnold Kling

Evidence Quote

the problem is that the taxpayers were taking the tail risk that is the risk that these options would turn out to be extremely valuable so the taxpayers it turned out we're on the hook for the default option becoming valuable

Source

Arnold Kling on the Unseen World of Banking, Mortgages, and Government 07/5/2010EconTalk
Created: 6/13/2026, 7:04:06 PM

My Notes

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