GSE Loan Purchases, the FHA, and Housing Outcomes in Targeted, Low-Income Neighborhoods
Recent years have witnessed ongoing research and policy debate regarding the effects on lower-income and underserved housing markets of the affordable housing goals set by government-sponsored enterprises (GSEs). While the GSEs were established to provide liquidity to mortgage markets and to mitigate severe cyclical fluctuations in housing, those entities are intended as well to support the provision of mortgage credit and the attainment of homeownership in lower-income and minority communities. Indeed, federal regulators have devoted much attention of late to the performance of Fannie Mae and Freddie Mac in promoting the flow of funds to, and hence the widespread availability of mortgage credit among, targeted and underserved communities.1 [End Page 205]
The Federal Housing Enterprise Financial Safety and Soundness Act of 1992 (GSE act) raised the level of support that the GSEs are required to provide to lower-income and minority communities and authorized the secretary of the Department of Housing and Urban Development (HUD) to establish "affordable housing goals" for the GSEs.2 According to those goals, a defined proportion of each GSE's annual loan purchases must derive from the following:
—Lower-income borrowers (the "low-moderate-income" goal), —Borrowers residing in lower-income communities and borrowers in certain "high-minority" neighborhoods (jointly, the "geographically targeted" or "underserved areas" goal), and —Very low-income borrowers and low-income borrowers living in low-income areas (the "special affordable" goal).The GSE act defines lower-income borrowers (for purposes of the low-moderate-income goal) as those having incomes less than the metropolitan area median income. Under the geographically targeted goal, lower-income neighborhoods are defined as those having median incomes less than 90 percent of the area median income, and high-minority neighborhoods are defined as those having a minority population that is at least 30 percent of the total population and a median income of less than 120 percent of the area median. For the special affordable goal, very low-income borrowers are those with incomes of less than 60 percent of the area median income. The special affordable goal also includes borrowers living in low-income areas with incomes less than 80 percent of the area median income.
The goals specify a required percentage of GSE loan purchases in each category. The specific percentages are adjusted periodically, as market conditions shift. The most recent HUD rules, set in November 2004 for purchase activity from 2005 through 2008, established the low-moderate-income goal in a range from 52 to 56 percent of total GSE purchases, the geographically targeted goal in a range from 37 to 39 percent, and the special affordable goal in a range from 22 to 27 percent.3 These categories are not mutually exclusive, so a single loan purchase can count toward multiple goals. Table 1 indicates how the HUD-specified affordable housing goal loan-purchase thresholds for the housing GSEs have evolved over time.
In this paper, we seek to determine whether the GSE mortgage-purchase goals are associated with improved housing conditions and homeownership [End Page 206] attainment among targeted communities that are the focus of the GSE act and the HUD affordable housing goals. More generally, we seek to assess the effects of the GSE mortgage-purchase goals on the geographic distribution of GSE mortgage-purchase activity and to evaluate whether GSE mortgage purchases are associated with improved housing outcomes. This is done using a standard ordinary least squares framework as well as a two-stage least squares framework that accounts for potential endogeneity issues. Finally, the analysis seeks to corroborate whether the credit quality and performance of FHA-insured home mortgages deteriorated subsequent to enactment of the GSE mortgage-purchase goals. Such deterioration in the...
