Have the Affordable Housing Goals been a Shield against Subprime? Regulatory Incentives and the Extension of Mortgage Credit

While the subprime mortgage loan product clearly expands access to credit, concerns have been raised about its costs, particularly to lower-income and minority populations. This paper examines whether GSE loan purchase activities might serve as an effective vehicle for mitigating these costs. The empirical evidence shows that measured in terms of market shares, increases in GSE purchase activity are associated with declines in subprime mortgage activity. Moreover, the effects tend to be stronger in neighborhoods with significant minority populations, precisely the neighborhoods where subprime lending has been concentrated and growing the fastest. A rough calculation shows that a ten percent increase in GSE market share could lead to 20,000 borrowers using prime instead of subprime loans, at a cost savings of about $100 million.