GSE Loan Purchases, the FHA, and Housing Outcomes in Targeted, Low-Income Neighborhoods

Abstract

The authors conduct two tests to evaluate the effectiveness of the affordable housing goals. First, they try to determine the effects of the GSE loan purchase goals on local housing outcomes, including median home value and homeownership and vacancy rates. Second, they test whether GSE loan purchase goals have resulted in a decline in the credit quality and performance of Federal Housing Administration (FHA)-insured home mortgages. In evaluating the effect of the affordable housing goals on housing outcomes, the authors exploit a difference in the definition of lower-income neighborhoods given by the GSE act and the Community Reinvestment Act of 1977 (CRA). The CRA, which sets regulations for federally insured banking institutions, defines lower-income neighborhoods, or census tracts, as those neighborhoods with a median family income less than 80 percent of the median family income in the wider metropolitan area. In contrast, the GSE loan purchase goal defines a lower-income neighborhood as one that has a median family income below 90 percent of the median family income of the surrounding area. The result of this discrepancy is that the authors are able to define a treatment group that is potentially affected by GSE regulations but is not affected by CRA regulations.