May 2008
In this Issue
Housing: Critical for Working Families and Communities
Rewarding Design and Innovation
Affordable and Green?
Assessing GSE Performance
In the next issue of ResearchWorks
Assessing GSE Performance
The government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, play an integral role in promoting affordable homeownership in the United States. These institutions are charged with making credit accessible to low- and moderate-income famil
ies purchasing a home.
Alternative Assessments of GSE Performance, Influence, and Impact 1993 – 2003, published by HUD's Office of Policy Development and Research, analyzes the GSEs' market leadership by examining GSE purchases of mortgage loans made to five types of underserved families: very-low-income, low-income in low- to moderate-income areas, African American, Hispanic, and living in targeted (central city, rural, and other underserved) areas. In addition, the study attempts to determine the sources of GSE performance gains and the extent of the GSEs' influence on primary mortgage lenders to lend to the underserved.
Making Progress
Using Home Mortgage Disclosure Act and GSE Public Use databases for the years 1993 to 2003, the report finds that, although the GSEs have never led the mortgage finance industry in supplying capital to underserved markets, they are making progress in buying loans made to the underserved.
The GSEs consistently lag behind traditional lenders in making loans to the underserved, but from 2001 to 2003, they improved in all underserved categories except among Hispanics. In 2003, GSE purchases exceeded traditional lender originations to very low-income homebuyers for the first time. The Hispanic market fared less well; GSE loan purchases there increased by only 2.3 percentage points between 1993 and 1996 (4.97 percent) and between 2001 and 2003 (7.27 percent), with traditional lenders originating loans to Hispanics at a faster pace.
The author notes that limiting the comparison of GSE performance against traditional mortgage lenders minimizes the gains underserved families have made over the years in accessing capital from all lending sources, including subprime and manufactured housing lenders — two sources with which the GSEs have had traditionally limited interaction. For example, when all traditional and conventional lenders are included, lending to African Americans improved from 3.64 percent in 1993 to 6.46 percent in 2003. By comparison, traditional lending to this group showed a smaller gain, from 3.57 percent in 1993 to 5.01 percent in 2003. When evaluated using the more inclusive lender definition, the GSEs’ underserved mortgage purchases still increase, but the gap in progress between lenders and the GSEs becomes much wider.
Another way to assess GSE performance is to compare the GSEs' underserved loan purchases against those of other secondary mortgage market buyers. The data show the GSEs trailing other secondary market competitors in holding underserved loans. However, just as with traditional lenders, GSEs' purchases increased between 1993 and 2003, closing the gap in all markets except among Hispanics. Moreover, in the years 2001 to 2003, the GSEs led secondary mortgage buyers in purchases of very-low-income loans. When comparing Freddie Mac and Fannie Mae, Fannie Mae generally purchases a higher percentage of underserved loans than Freddie Mac.
Another measure of the GSEs' market leadership comes from analyzing underserved loan activity by traditional lenders. Theoretically, the more loans sold to GSEs by a primary lender, the more activity that lender shows in underserved markets. However, the data show the opposite; during the early years, primary lenders conducting the most business with GSEs were less likely to make loans to underserved markets. This trend is changing, however, and now lenders selling loans to GSEs are more likely to make loans to very-low-income borrowers.
Sources of Progress
The study attributes GSE performance gains to three possible sources. First, the purchase of seasoned loans established with a record of steady payment is credited with a small but positive impact on GSE performance in the underserved market since 1995. Second, GSE loan purchases are more likely than in earlier periods to be from the most underserved groups. In fact, these purchases became more likely to involve more than one underserved characteristic. Third, more flexible and accurate underwriting, as well as programs aimed at underserved market borrowers, may have helped improve GSE performance. Finally, the author suggests that the new affordable housing goals set by HUD in 2000 have helped the GSEs remain goal-oriented and motivated over time.
Paths for Further Improvement
Despite these performance gains, the study suggests that the GSEs must further demonstrate their leadership and improve access to affordable mortgages for low- and moderate-income families. Possible ways for the GSEs to better serve underserved markets include exerting greater influence on their primary mortgage lending partners, expanding efforts in the subprime and manufactured housing arenas, and improving outreach to Hispanics.
Alternative Assessments of GSE Performance, Influence, and Impact 1993 – 2003 can be downloaded at no cost at www.huduser.gov/publications/polleg/altassessment_gse.html. Two recent working papers show that GSE performance has continued to improve since this analysis was completed. These manuscripts, Working Paper No. HF-017, "Goal Performance and Characteristics of Mortgages Purchased by Fannie Mae and Freddie Mac, 2001 – 2005" and Working Paper No. HF-018, "The GSEs' Funding of Affordable Loans: A 2004 – 05 Update," are available online at www.huduser.gov/publications/hsgfin/workpapr.html. To learn more about HUD's affordable housing goals for GSEs, go to www.hud.gov/offices/hsg/gse/gse.cfm.
