GSE Activity, FHA Feedback, and Implications for the Efficacy of the Affordable Housing Goals

There is a seeming paradox about the "affordable housing goals": GSE activities in
targeted communities have increased under the goals but there has been little measurable
improvement in housing market conditions in these communities. This paper seeks to
reconcile this paradox by focusing on linkage between GSE purchases and FHA activities.
We build a simple model based on credit rationing theory that suggests that GSE
activities can have a feedback effect on FHA. More aggressive GSE pursuit of targeted
borrowers under the affordable housing goals induces potential FHA borrowers with best
credit quality to use the conventional market. In response, the FHA applies more strict
underwriting standards under new market equilibrium, which results in reduced loan
volumes. On balance, these effects can offset and make credit supply and homeownership
effectively unchanged. Empirical evidence on changes in GSE and FHA lending after
affordable housing goals were made more binding is found to be consistent with the
theoretical predictions.