The Journal of Real Estate Finance and Economics

, Volume 36, Issue 2, pp 207–231

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

Article

Abstract

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.

Keywords

Affordable housing goals GSE FHA Homeownership Underserved neighborhoods Credit rationing 

References

  1. Abt Associates Inc. (2004). The GSEs in the low-income market. Report to the US department of housing and urban development. September 17, 2004.Google Scholar
  2. Ambrose, B. W., Buttimer, R., & Thibodeau, T. G. (2001). A new spin on the jumbo/conforming loan rate differential. Journal of Real Estate Finance and Economics, 23, 309–335.CrossRefGoogle Scholar
  3. Ambrose, B. W., LaCour-Little, M., & Sanders, A. B. (2004). The effect of conforming loan status on mortgage yield spreads: A loan level analysis. Real Estate Economics, 32(4), 541–569.CrossRefGoogle Scholar
  4. Ambrose, B. W., Pennington-Cross, A., & Yezer, A. M. (2002). Credit rationing in the US mortgage market: Evidence based on variations in FHA market shares. Journal of Urban Economics, 51(2), 272–294.CrossRefGoogle Scholar
  5. Ambrose, B. W., & Thibodeau, T. G. (2004). Have the GSE affordable housing goals increased the supply of mortgage credit?. Regional Science and Urban Economics, 34(3), 263–273.CrossRefGoogle Scholar
  6. Avery, R. B., Calem, P. S., & Canner, G. B. (2003). The Effects of the Community Reinvestment Act on Local Communities. Proceedings of Federal Reserve System Conference, Washington, DC.Google Scholar
  7. Bostic, R. W., & Gabriel, S. A. (2006). Do the GSEs matter to low-income housing markets? An assessment of the effects of GSE loan purchase activity on California housing outcomes. Journal of Urban Economics, 59, 458–475.CrossRefGoogle Scholar
  8. Bradford, C. (2002). The patterns of GSE participation in minority and racially changing markets reviewed from the context of the levels of distress associated with high levels of FHA lending. Cityscape, 6(1), 145–214.Google Scholar
  9. Bunce, H. L. (2002). The GSEs’ funding of affordable loans: A 2000 update. US Department of Housing and Urban Development, Housing Finance Working Paper Series HF-013.Google Scholar
  10. Bunce, H. L., & Scheessele, R. M. (1996). The GSEs’ funding of affordable loans. US Department of Housing and Urban Development, Research Report, No. HF-001.Google Scholar
  11. Calem, P. S., Gillen, K., & Wachter, S. M. (2004). The neighborhood distribution of subprime mortgage lending. Journal of Real Estate Finance and Economics, 29(4), 393–410.CrossRefGoogle Scholar
  12. Capone, C. A. Jr. (2002). Credit risk, capital, and federal housing administration mortgage insurance. Journal of Housing Research, 11(2), 373–401.Google Scholar
  13. Case, B., Gillen, K., & Wachter, S. M. (2002). Spatial variation in GSE mortgage purchase activity. Cityscape, 6(1), 9–84.Google Scholar
  14. Cotterman, R. F., & Pearce, J. E. (1996). The effects of the federal national mortgage association and the federal home loan mortgage corporation on conventional fixed-rate mortgage yields, in studies on privatizing Fannie Mae and Freddie Mac. US Department of Housing and Urban Development, Washington, DC, May.Google Scholar
  15. Ferguson, M. F., & Peters, S. R. (1995). What constitutes evidence of lending discrimination?. Journal of Finance, 50(2), 739–748.CrossRefGoogle Scholar
  16. Freeman, L., & Galster, G. (2004). The impact of secondary mortgage market and GSE purchases on underserved neighborhood housing markets: A Cleveland case study, working paper.Google Scholar
  17. Gabriel, S. A., & Rosenthal, S. (1991). Credit rationing, race, and the mortgage market. Journal of Urban Economics, 29(3), 371–379.CrossRefGoogle Scholar
  18. Gan, J., & Riddiough, T. J. (2003). Piercing and then papering over the vail of ignorance: GSE monopoly and informational advantage in the market for residential mortgages. Working paper presented at the 2004 Annual American Finance Association (AFA) Meetings, San Diego.Google Scholar
  19. González-Rivera, G. (2000). Liquidity function and transference function in the market for mortgages: The role of retained portfolio investments. University of California, Riverside, Department of Economics working paper, September.Google Scholar
  20. Goodman, J. L. Jr., & Nichols, J. B. (1997). Does FHA increase homeownership or just accelerate it?. Journal of Housing Economics, 6(2), 184–202.CrossRefGoogle Scholar
  21. Harrison, D., Archer, W., Ling, D., & Smith, M. (2002). Mitigating information externalities in mortgage markets: The role of government-sponsored enterprises. Cityscape, 6(1), 115–143.Google Scholar
  22. Hendershott, P. H., Lafayette, W. C., & Haurin, D. R. (1997). Debt usage and mortgage choice: The FHA-conventional decision. Journal of Urban Economics, 41(2), 202–217.CrossRefGoogle Scholar
  23. Hendershott, P. H., & Shilling, J. D. (1989). The impact of the agencies on conventional fixed-rate mortgage yields. Journal of Real Estate Finance and Economics, 2(1), 1–15.Google Scholar
  24. Hendershott, P. H., & Waddell, J. A. (1992). The changing fortunes of FHA’s mutual mortgage insurance fund and the legislative procedure. Journal of Real Estate Finance and Economics, 5(2), 119–132.CrossRefGoogle Scholar
  25. ICF Inc. (1990). Effects of the conforming loan limit on mortgage markets. Report prepared for the US Department of Housing and Urban Development.Google Scholar
  26. Independent Community Bankers of America. (2004). Letters to regulators: Housing goals for Fannie Mae and Freddie Mac, to the US Department of Housing and Urban Development, July 16. http://www.icba.org/advocacy/commentlettersdetail.cfm?ItemNumber=677&sn.ItemNumber=1711
  27. Listokin, D. L., & Wyly, E. K. (2000). Making new mortgage markets: Case studies of institutions, home buyers, and communities. Housing Policy Debate, 11(3), 575–644.Google Scholar
  28. Manchester, P. B. (1998). Characteristics of mortgages purchased by Fannie Mae and Freddie Mac, 1996–97 Update. US Department of Housing and Urban Development, Housing Finance Working Paper Series HF-006.Google Scholar
  29. McKenzie, J. A. (2002). A reconsideration of the jumbo/non-jumbo mortgage rate differential. Journal of Real Estate Finance and Economics, 25(2/3), 197–214.CrossRefGoogle Scholar
  30. Naranjo, A., & Toevs, A. (2002). The effects of purchases of mortgages and securitization by government sponsored enterprises on mortgage yield spreads and volatility. Journal of Real Estate Finance and Economics, 25(2/3), 173–196.CrossRefGoogle Scholar
  31. National Association of Realtors. (2004). Re: Proposed housing goals for Fannie Mae and Freddie Mac for 2005–2008, Docket No. FR-4790-P-01. July 15. http://www.realtor.org/gapublic.nsf/pages/gsegoalslet?OpenDocument
  32. National Community Reinvestment Coalition. (2003). The broken credit system, discrimination and unequal access to affordable loans by race and age: Subprime lending in ten large metropolitan areas. Washington, DC:NCRC.Google Scholar
  33. Nothaft, F. E., & Trentcheva, P. T. (2003). Does FHA “crowd-out” private mortgage insurance?. Working paper presented at the 2003 Annual American Real Estate and Urban Economics Association (AREUEA) Meetings, Washington, DC.Google Scholar
  34. Passmore, W., Sherlund, S. M., & Burgess, G. (2003). The effect of housing government-sponsored enterprises on mortgage rates. Real Estate Economics, 33(3), 427–463.CrossRefGoogle Scholar
  35. Passmore, W., Sparks, R., & Ingpen, J. (2002). GSEs, mortgage rates, and the long-run effects of mortgage securitization. Journal of Real Estate Finance and Economics, 25(2/3), 215–243.CrossRefGoogle Scholar
  36. Roll, R. (2003). Benefits to homeowners from mortgage portfolios retained by Fannie Mae and Freddie Mac. Journal of Financial Services Research, 23(1), 29–42.CrossRefGoogle Scholar
  37. Sanders, A. B. (2005). Measuring the benefits of Fannie Mae and Freddie Mac to consumers: Between de minimis and small? The Ohio State University working paper, July.Google Scholar
  38. Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. American Economic Review, 71(3), 393–410.Google Scholar
  39. Temkin, K., Quercia, R., & Galster, G. (2001). The impact of secondary mortgage market guidelines on affordable and fair lending: A reconnaissance from the front lines. Review of Black Political Economy, 28(2), 29–52.CrossRefGoogle Scholar
  40. US Congressional Budget Office. (2001). Interest rate differentials between jumbo and conforming mortgages. A CBO Paper, May.Google Scholar
  41. US Department of Housing and Urban Development. (2005a). Overview of the GSEs’ Housing goal performance, 1996–2003. http://www.huduser.org/datasets/gse.html
  42. US Department of Housing and Urban Development. (2005b). Annual performance plan.Google Scholar

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

Personalised recommendations