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Regression discontinuity estimates of the effects of the GSE act of 1992

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  • Neil Bhutta

Abstract

In this paper I estimate the effect of the Underserved Areas Goal (UAG) established under the “GSE Act”, a 1992 law mandating that the housing government-sponsored enterprises Fannie Mae and Freddie Mac help promote credit access and homeownership opportunities for low-income households and in low-income and minority neighborhoods. I identify the goal’s impact by taking advantage of a discontinuity in the census tract eligibility rule. Employing local linear and non-parametric regression discontinuity methods, I find that this goal has had a direct effect on GSE purchasing activity of 3-4% and increases overall GSE-eligible originations by 2-3% on average at the cutoff between 1997 and 2002. Changing eligibility status following the release of Census 2000 data provides another source of variation to identify the UAG’s effect in 2005 and 2006, years of sharply increasing goals levels and years which have contributed heavily to current credit losses. I find that while the UAG affected GSE behavior in 2005 and 2006, GSE risk avoidance limited their response. Unlike previous research, I find no evidence that UAG-induced increases in GSE credit supply crowds-out FHA and subprime lending.

Suggested Citation

  • 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.
  • Handle: RePEc:fip:fedgfe:2009-03
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    References listed on IDEAS

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    2. Bostic, Raphael W. & Gabriel, Stuart A., 2006. "Do the GSEs matter to low-income housing markets? An assessment of the effects of the GSE loan purchase goals on California housing outcomes," Journal of Urban Economics, Elsevier, vol. 59(3), pages 458-475, May.
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    5. Xudong An & Raphael W. Bostic, 2006. "Have the Affordable Housing Goals been a Shield against Subprime? Regulatory Incentives and the Extension of Mortgage Credit," Working Paper 8572, USC Lusk Center for Real Estate.
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    10. Quercia, Roberto G. & McCarthy, George W. & Wachter, Susan M., 2003. "The impacts of affordable lending efforts on homeownership rates," Journal of Housing Economics, Elsevier, vol. 12(1), pages 29-59, March.
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    Keywords

    Mortgage loans ; Mortgages;

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