GSE Purchases, Primary Market Restructuring and Homeownership Rate Change in the Underserved
Have the “Affordable Housing Goals” Improved Housing Markets?[1]
Xudong An
Raphael W. Bostic
Yongheng Deng
School of Policy, Planning, and Development
University of Southern California
Abstract
The HUD-established “affordable housing goals” for the GSEs aims to facilitate credit access, and thus homeownership, among underserved households by mandating Fannie Mae and Freddie Mac direct required proportions of their mortgage purchases to groups believed to have been historically underserved. It remains an open question whether the “affordable housing goals” have had the desired impact. Although there is substantial evidence showing increases in GSE service to targeted groups in response to the goals (examples include Bunce and Scheessele,1996, Manchester, 1998, Bunce, 2000, Listokin and Wyly, 2000 and Temkin, et al, 2001), other research suggests that this increased GSE purchase activity may not have had the significant effects on outcomes that were hoped for (e.g. Ambrose and Thibodeau, 2004 and Bostic and Gabriel, 2004).
This paper explores this question further by trying to reconcile the seeming paradox between increased GSE activity on one hand and relatively limited credit supply and homeownership responses on the other. Its focus is on the linkage between GSE purchases and the activities of the FHA, which also plays a key role regarding homeownership attainment by households in underserved populations through its insurance program.
Our hypothesis is that GSE activity has a feedback effect on the FHA. We theorize that 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 and obtain conforming conventional loans instead. In response, the FHA applies more strict underwriting standards in order to balance its risk profile, which results in reduced loan volumes. On balance, these effects offset and leave credit supply and homeownership effectively unchanged.
Empirically, we first seek to generalize the Bostic and Gabriel (2004) results on housing market outcomes beyond California. Second, we test whether intensified GSE purchases are associated with shrinking FHA activities in underserved neighborhoods as hypothesized. Third, we estimate how changes in both GSE purchases and FHA activities are related to homeownership change. Last, we use the preceding results to simulate impacts, both direct and indirect (through the FHA), of changes in GSE purchases on housing market outcomes such as homeownership.
Three main data sources are used in this study: the Census, HUD’s GSE Public Use Database (PUDB), and data collected pursuant to the Home Mortgage Disclosure Act (HMDA). The unit of analysis is census tract and, in addition to conducting a national analysis, we will also conduct more detailed, localized metropolitan-level investigations.
The key benefit of this research is that it will provide new information on whether the “affordable housing goals” have been working as expected. In particular, it will highlight the dynamics between different segments of the mortgage market, and try to shed light on the relationship between these dynamics, the “affordable housing goals,” and credit and housing market outcomes. These are clearly important issues for informing the debate regarding the appropriate thresholds for the affordable housing goals and whether new incentives should be provided for the GSEs to help expand home ownership opportunity for underserved populations. Finally, the study will help improve our understanding of how FHA’s insurance program is managed in the context of changing institutional settings.
Keywords
Affordable housing goals, GSE, FHA, homeownership, underserved households
References
Ambrose, B. W. & T. G. Thibodeau. (2004). Have the GSE Affordable Housing Goals Increased the Supply of Mortgage Credit? Regional Science and Urban Economics. 34 (2004): 263-273.
Bostic, R.W., & S. A. Gabriel (2004). Do the GSEs Matter to Low-income Housing Markets? USC Lusk Center for Real Estate Working Paper, University of Southern California.
Bunce, H. L. (2002). The GSEs’ Funding of Affordable Loans: A 2000 Update. Housing Finance Working Paper Series HF-013, U.S. Department of Housing and Urban Development.
Bunce, H. L., & R. M. Scheessele. (1996). The GSEs funding of affordable loans. Research report, No. HF-001, US Department of Housing and Urban Development.
Listokin, D. L., & E. K. Wyly. (2000). Making New Mortgage Markets: Case Studies of Institutions, Home Buyers, and Communities. Housing Policy Debate, 11(3), 575-644.
Temkin, K., R. Quercia, & G. Galster. (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.
Manchester, Paul B. (1998), Characteristics of Mortgages Purchased by Fannie Mae and Freddie Mac, 1996-97 Update. Housing Finance Working Paper Series HF-006, U.S. Department of Housing and Urban Development.
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[1] Contact information: (1) An, , 213-821-1351, 213- 740-0373 (fax); (2) Bostic, , 213-740-1220, 213-740-6170 (fax); (3) Deng, , 213-821-1030, 213-740-6170 (fax)