Cityscape Reports on GSEs and Affordable Housing

In pathbreaking legislation, Congress in 1992 established a system of affordable housing goals for Fannie Mae and Freddie Mac, the two large government-sponsored enterprises (GSEs) that provide secondary home mortgages. This legislation directed HUD to set and enforce percentage-of-business targets for the two companies' purchases of mortgages on affordable housing and in underserved geographical areas. These goals have stimulated Fannie Mae and Freddie Mac to finance mortgages that have enabled hundreds of thousands of additional low- and moderate-income borrowers and borrowers in targeted neighborhoods to purchase homes.

The recent issue of Cityscape: A Journal of Policy Development and Research provides perspective on how Fannie Mae and Freddie Mac responded to these housing goals during the first few years that they were in effect. The articles reflect a broad range of interests and analytical expertise among the authors and include both case studies of individual markets and statistical analyses of mortgage market patterns nationwide.

Richard Williams, Eileen McConnell, and Reynold Nesiba, in "The Effect of GSEs, CRA, and Institutional Characteristics on Home Mortgage Lending to Underserved Markets," look at mortgage lending in underserved markets in the primary and secondary mortgage markets for metropolitan areas in Indiana. The authors compare the performance in underserved markets of the GSEs and financial institutions (banks and thrifts) subject to the Community Reinvestment Act (CRA) between 1992 and 1995. They conclude that although the GSEs continued to lag behind primary market CRA lenders, they narrowed the gap over this period.

Kirk McClure, in "The Twin Mandates Given to the GSEs: Which Works Best, Helping Low-Income Homebuyers or Helping Underserved Areas in the Kansas City Metropolitan Area?" examines the twin mandates of the 1992 GSE Act: to direct mortgage credit to neighborhoods that have been underserved by mortgage lenders, and to direct mortgage credit to low-income and minority households. McClure concludes that, relative to each of the mandates, the GSEs did not perform as well as primary credit lenders in the Kansas City metropolitan area in 1993-96. In terms of helping underserved areas, the GSEs lagged behind the industry in the proportion of loans found in these areas. In terms of helping low-income and minority borrowers, the GSEs also lagged behind the primary market in Kansas City.

Patrick Boxall and Joshua Silver, in "Performance of the GSEs at the Metropolitan Level," examine differences in the GSEs' purchases as shares of single-family loans originated in metropolitan statistical areas (MSAs) across the country. The specific objective of the research was to determine whether differences in the relationships between the GSEs and lending institutions, government agencies, and nonprofit community-based organizations explain differences between MSAs in the GSEs' purchases of loans made to traditionally underserved populations, including lower income families and minorities.

From case studies in four metropolitan areas, the authors conclude that the GSEs purchase higher percentages of loans made to underserved populations where there are strong linkages between the GSEs and the local affordable housing system. In their opinion, institutional relationships can bolster the GSEs' efforts to serve minority and lower income populations.

Heather MacDonald, in "Fannie Mae and Freddie Mac in Nonmetropolitan Housing Markets: Does Space Matter," investigates variations in GSE market share among a sample of counties. MacDonald considers whether GSE market shares differed significantly by location, after controlling for the economic, demographic, housing stock, and credit market differences among counties that could affect use of the secondary markets. The study also investigates whether there are significant differences between the nonmetropolitan borrowers served by Fannie Mae and those served by Freddie Mac.

MacDonald finds that proximity to metropolitan areas contributes significantly to explaining variations in GSE market shares among nonmetropolitan counties, but its effects are quite specific. The study also finds that there are significant disparities between the income levels of the borrowers served by each agency, with Freddie Mac buying loans from borrowers with higher incomes than those of borrowers served by Fannie Mae.

James Pearce, in "Fannie Mae and Freddie Mac Mortgage Purchases in Low-Income and High-Minority Neighborhoods: 1994-96," analyzes mortgage lending and GSE purchases in 10 large metropolitan areas from 1994 to 1996, focusing on the underserved areas goal established by HUD for the GSEs. Pearce examines whether the primary market serves high-cost and low-cost areas equally well. He finds that homeownership is more difficult for lower income households in areas where homes are more expensive relative to area median income.

The article discusses constraints that face the enterprises, such as the GSEs' conforming loan limits, charter-based underwriting standards, and competition from government-backed lending programs and special affordable lending programs by banks and thrifts, that may differentially impact GSE purchases across MSAs.

Paul Manchester, in a Note, "Mortgage Lending on the Pine Ridge Indian Reservation," analyzes a variety of data sources to estimate the volume of mortgage lending and secondary mortgage market activity on the Oglala Sioux (Pine Ridge) Indian Reservation in South Dakota. Some published reports have cast doubt about the viability of such lending on this reservation, one of the poorest in the United States, and one of the areas targeted by the HUD-Treasury One-Stop Mortgage Center Initiative. While Manchester finds a shortage of lending relative to need on the Pine Ridge Indian Reservation, he concludes that such activity is taking place to a greater extent than generally recognized.

The articles in this issue of Cityscape enhance the information available to policymakers and the public regarding the important roles played in our housing finance system by Fannie Mae and Freddie Mac.

Cityscape, Volume 5, Number 3, 2001, is available from HUD USER for $5. Use the order form. The journal can also be downloaded from the HUD USER website at www.huduser.gov.