The Journal of Real Estate Finance and Economics

, Volume 36, Issue 2, pp 207–231 | Cite as

GSE Activity, FHA Feedback, and Implications for the Efficacy of the Affordable Housing Goals

  • Xudong AnEmail author
  • Raphael W. Bostic


There is a seeming paradox regarding the “affordable housing goals”: GSE activities in targeted communities have increased under the goals but there has been little measurable improvement in housing market conditions in these communities. This paper seeks to reconcile this paradox by focusing on linkage between GSE purchases and FHA activities. We present a simple theoretical framework suggesting that GSE activities can have a feedback effect on FHA. More aggressive GSE pursuit of targeted borrowers under the affordable housing goals induces potential FHA borrowers with best credit quality to use the conventional market. Changes to the housing market will depend on the FHA response to the loss of its best credits, with many different possible outcomes for credit supply and homeownership, including scenarios in which they remain effectively unchanged. While market-level benefits might not be forthcoming, the shift from FHA to less costly conventional loans is clearly beneficial for affected borrowers. Two-stage least squares estimates of the relationship between GSE and FHA lending after the affordable housing goals were made more binding are found to be consistent with the theoretical predictions.


Affordable housing goals GSE FHA Homeownership Underserved neighborhoods Credit rationing 



The authors are grateful for helpful comments from Yongheng Deng, Robert Dunsky, James Follain, George Galster, Patric Hendershott, Cheng Hsiao, Juliet Musso, Frank Nothaft, Wayne Passmore, John Quigley, the journal editor C. F. Sirmans, two anonymous referees and participants at the 2006 Annual AREUEA meetings, the 46th ACSP annual conference, and the 2006 Western Regional Science Association annual meeting. We thank the USC Lusk Center for Real Estate for financial support.


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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Finance Department, College of Business AdministrationSan Diego State UniversitySan DiegoUSA
  2. 2.School of Policy, Planning, and Development, Lusk Center for Real EstateUniversity of Southern CaliforniaLos AngelesUSA

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