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GSE Activity, FHA Feedback, and Implications for the Efficacy of the Affordable Housing Goals

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  • Xudong An

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  • Raphael Bostic

    ()

Abstract

There is a seeming paradox about the "affordable housing goals": GSE activities in targeted communities have increased under the goals but there has been little measurable improvement in housing market conditions in these communities. This paper seeks to reconcile this paradox by focusing on linkage between GSE purchases and FHA activities. We build a simple model based on credit rationing theory that suggests that GSE activities can have a feedback effect on FHA. 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. In response, the FHA applies more strict underwriting standards under new market equilibrium, which results in reduced loan volumes. On balance, these effects can offset and make credit supply and homeownership effectively unchanged. Empirical evidence on changes in GSE and FHA lending after affordable housing goals were made more binding is found to be consistent with the theoretical predictions.
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Suggested Citation

  • Xudong An & Raphael Bostic, 2008. "GSE Activity, FHA Feedback, and Implications for the Efficacy of the Affordable Housing Goals," The Journal of Real Estate Finance and Economics, Springer, vol. 36(2), pages 207-231, February.
  • Handle: RePEc:kap:jrefec:v:36:y:2008:i:2:p:207-231 DOI: 10.1007/s11146-007-9066-2
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    Citations

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    Cited by:

    1. Neil Bhutta, 2012. "GSE Activity and Mortgage Supply in Lower-Income and Minority Neighborhoods: The Effect of the Affordable Housing Goals," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 238-261, June.
    2. John M. Quigley, 2006. "Federal credit and insurance programs: housing," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 281-310.
    3. Allen C. Goodman & Brent C. Smith, 2010. "Housing default: theory works and so does policy," Working Paper 10-10, Federal Reserve Bank of Richmond.
    4. Neil Bhutta, 2009. "Regression discontinuity estimates of the effects of the GSE act of 1992," Finance and Economics Discussion Series 2009-03, Board of Governors of the Federal Reserve System (U.S.), revised 01 Jan 2009.
    5. Goodman, Allen C. & Smith, Brent C., 2010. "Residential mortgage default: Theory works and so does policy," Journal of Housing Economics, Elsevier, vol. 19(4), pages 280-294, December.
    6. Moulton, Shawn, 2014. "Did affordable housing mandates cause the subprime mortgage crisis?," Journal of Housing Economics, Elsevier, vol. 24(C), pages 21-38.
    7. Gabriel, Stuart A. & Rosenthal, Stuart S., 2010. "Do the GSEs expand the supply of mortgage credit? New evidence of crowd out in the secondary mortgage market," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 975-986, December.
    8. Jonathan Spader & Roberto Quercia, 2012. "CRA Lending in a Changing Context: Evidence of Interaction with FHA and Subprime Originations," The Journal of Real Estate Finance and Economics, Springer, vol. 44(4), pages 505-525, May.

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