THREE EMPIRICAL ANALYSES OF THE HUD "AFFORDABLE HOUSING GOALS" REGULATION OF FANNIE MAE AND FREDDIE MAC (THE GSES)

This dissertation studies one of the HUD's regulations of Fannie Mae and Freddie Mac (collectively, the GSEs) -- the affordable goals, which governs the GSEs' purchase of mortgages financing low- and moderate-income housing by setting a minimum percentage-of-business for affordable lending. The dissertation consists of three empirical studies, with the aim of contributing to the debate on overhauling the GSEs. The first study assesses the effectiveness of the affordable goals in promoting homeownership for low- and moderate-income families. Although the economics literature indicates that the GSEs' reaction to the affordable goals have the potential to reduce well known barriers to homeownership, it is unclear whether the expansion of mortgage credit to targeted borrowers would result in a discernible increase in the homeownership rate of the targeted group, due to the fact that the GSEs' goal-compliance activities must be filtered through primary mortgage market institutions to ultimately affect targeted borrowers. Relating variation in the GSEs' low- and moderate-income percentage-of-business in different MSAs to household homeownership status in those MSAs, the study finds evidence that the GSEs' response to the policy has increased the likelihood of achieving homeownership for the households in the highest income quartile of the lower-income group, but not for lower-income families as a whole, holding other determinants of homeownership constant. The second study examines the effect of the GSEs' reaction to this regulation on the prices of the houses typically occupied by lower-income families. If the GSEs' intensified purchases of affordable-goals-qualified mortgages can increase demand for owner-occupied housing by the low- and moderate-income families, and the supply of housing is not perfectly elastic, then an important indirect consequence of the GSE affordable housing goals could likely be an increase in home prices for the targeted group, which constitutes a hidden cost to the intended beneficiary group of this policy. The study develops a reduced-form model where housing demand, housing supply, and mortgage supply are at equilibrium. Using this model, this study provides evidence that the low- and moderate-income housing price is lower in MSAs where the GSEs have a higher percentage-of-business for affordable lending, controlling for other important factors influencing housing price. The third study explores the GSEs' loan-purchasing strategies to balance political and economic considerations as they comply with the affordable goal regulation. The GSEs have disincentives to purchase the affordable-goal-qualifying loans, because the economic return from purchasing those mortgages is lower. However, to retain the "implicit subsidy" from government, they had to respond to the requests of lawmakers. This study's results suggest that Senators' political ideology has a very limited impact on the GSEs' purchasing of affordable mortgages in the constituencies they represent, controlling for other factors that would likely affect the GSEs' purchases of affordable mortgages in different areas. The study's results also suggest that the GSEs have a higher percentage-of-business for low- and moderate-income families in wealthier MSAs than in poorer ones, holding all else equal, for the GSEs may use this strategy to lower their economic loss associated with complying with this regulation.