Abstract

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The Government-Sponsored Enterprises and the Mortgage Crisis: The Role of the Affordable Housing Goals


Valentin Bolotnyy


Federal Reserve Board

March 22, 2012

FEDS Working Paper

Abstract:     
The U.S. mortgage crisis that began in 2007 generated questions about the role played by Fannie Mae and Freddie Mac, the Government-Sponsored Enterprises (GSEs), in its causes. Some have claimed that the Affordable Housing Goals (AHGs), introduced by Congress through the GSE Act of 1992, and the resulting purchases of single-family mortgages the GSEs made to meet those goals, drove lending to high-risk borrowers. Using regression discontinuity analysis, I measure the effect of one of the goals, the Underserved Areas Goal (UAG), on the number of whole single-family mortgages purchased by the GSEs in targeted census tracts from 1996 to 2002. Focusing additionally on tracts that became UAG-eligible in 2005-2006, when the Department of Housing and Urban Development (HUD) began to determine eligibility using the 2000 Census, I measure the effect of the UAG on the GSEs’ whole single-family mortgage purchases during peak years for the subprime mortgage market. Under the first approach, I estimate that the GSEs purchased 0 to 3 percent more goal-eligible mortgages than they would have without the UAG in place. Under the second approach, I estimate this effect to be 2.5 to 5 percent. The results suggest a small UAG effect and challenge the view that the goals caused the GSEs to supply substantially more credit to high-risk borrowers than they otherwise would have supplied. Although the goals may have spurred the GSEs to purchase more multi-family mortgages and REMICs than they otherwise would have, my analyses suggest that the GSEs’ purchases of whole single-family mortgages to satisfy the goals did not drive the subprime lending boom of 2002-2006.

Number of Pages in PDF File: 36

Keywords: GSE, government sponsored enterprises, subprime mortgages, subprime crisis, housing bubble

JEL Classification: G21, G28, I38, L51, R38

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Date posted: April 24, 2012 ; Last revised: May 9, 2012

Suggested Citation

Bolotnyy, Valentin, The Government-Sponsored Enterprises and the Mortgage Crisis: The Role of the Affordable Housing Goals (March 22, 2012). FEDS Working Paper. Available at SSRN: http://ssrn.com/abstract=2045725 or http://dx.doi.org/10.2139/ssrn.2045725

Contact Information

Valentin Bolotnyy (Contact Author)
Federal Reserve Board ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
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