According to a new study released by HUD, Fannie Mae and Freddie Mac have helped to make homeownership more attainable for low- and moderate-income families by purchasing more loans originated to low-income families and increasing their overall market share in areas with higher concentrations of target groups. The study, "An Analysis of the Effects of the GSE Affordable Goals on Low- and Moderate-Income Families," provides an empirical analysis of the lending activities of Government Sponsored Enterprises (GSEs) in response to goals mandated by the Federal Housing Enterprises Financial Safety and Soundness Act (FHEFSSA). Making Homeownership Accessible to All Who Qualify Congress enacted the FHEFSSA in 1992 to encourage Fannie Mae and Freddie Mac to increase their purchases of mortgages on housing for low- and moderate-income families and neighborhoods. The legislation authorized HUD to set affordable housing goals (AHGs), including:
The study focuses on two major areas: capital market outcomes, such as changes in GSE market shares and increased flows of capital to targeted areas resulting from the goals; and housing market outcomes, as defined by homeownership rate changes among low- and moderate-income and minority families. The study was based on theoretical and empirical analyses, which considered such factors as decreasing interest rates, rising incomes, and the effects of the Community Reinvestment Act, which requires lenders to help meet the credit needs of the communities they serve. GSE Purchase Activity Researchers hypothesized that an increase in GSE purchase activity would decrease market shares of portfolio lenders in the conventional market. Researchers used Home Mortgage Disclosure Act (HMDA) data to identify mortgages originated by Metropolitan Statistical Area (MSA) and to determine their final disposition. The analysis of underserved markets, excluding the subprime loan market, found that GSE market share of mortgage dollar volume increased from 29 percent in 1995 to 39 percent in 1999, while the average market share, in terms of the number of loans, increased from 24 to 34 percent. This result is consistent with the theory that the AHGs would encourage GSEs to change their underwriting guidelines so that more loans would qualify for their purchase. Researchers also examined whether GSE market shares have increased in areas with higher concentrations of target groups. This analysis was performed using a model that interacted the percentage of underserved borrower groups with a time trend to test whether GSE purchase activity shifted in response to AHG regulations. Researchers expected to find a positive relationship between GSE market shares and the percentage of underserved census tracts in an MSA. However, the results indicated small, if any, discernable pattern. GSE Market Share Effect on Interest Rates Researchers also looked at the effect of GSE market share on interest rates by regressing average interest rates, reported in the Federal Housing Finance Board's Monthly Interest Rate Survey, against the loan-to-value ratios and GSE market share. The hypothesis was that if GSE purchase activity lowers interest rates in the primary market, then census tracts with higher market shares should have lower interest rates. The results of this test confirmed this hypothesis for borrowers in the 60 - 80 percent, 80 - 100 percent, and 100 - 120 percent area median income (AMI) categories. However, interest rates increased for borrowers with less than 60 percent of AMI. Overall, researchers concluded that AHGs had limited impact on mortgage interest rates. A central question for HUD is whether AHGs have increased the supply of mortgage credit to geo-targeted areas. An empirical analysis of mortgage market supply and demand using MSA level data provides no definitive assessment of the AHG effect on mortgage supply. There is no direct link between total mortgage lending volume and the proportion of an MSA's census tracts that meet the definition of underserved. It does appear, however, that GSE purchases of seasoned loans to meet the goals are enabling primary lenders to recycle the proceeds into more mortgage lending in their areas. In addition to capital market outcomes, researchers examined the effects of AHGs on homeownership rates. Researchers expected that if GSEs increased their purchasing activity in underserved markets, they would help to increase homeownership rates for low- and moderate-income families. Researchers used metropolitan American Housing Survey data for eight cities to compute homeownership rates for various groups at two points in time during the 1990s and then compared the changes. Overall, homeownership rates increased faster for low- and moderate-income groups in MSAs with higher GSE market shares. An analysis of homeownership rates in 80 cities over a six-year timespan found that GSE purchase of loans originated to low-income families increased the liquidity of the market. Greater overall market liquidity enabled primary lenders to mount more targeted lending efforts, which helped make homeownership possible for a larger number of traditionally underserved groups. The findings offer some evidence that GSEs have helped make it easier for low-income families to become homeowners by increasing market share and adding liquidity. However, the report concludes that further research using 2000 Census data would provide more definitive results. "An Analysis of the Effects of the GSE Affordable Goals on Low- and Moderate-Income Families" is available for $5.00 from HUD USER. Please use the order form on the back of this newsletter. You can also download the form from the HUD USER Web site at www.huduser.gov. |
