Fed Paper: Were Fannie, Freddie Affordable Housing Goals Effective?

August 27, 2009, 10:51 AM ET
By Nick Timiraos
Comments 4


AFP/Getty Images The Fannie Mae headquarters in Washington, D.C.

Critics of government-backed Fannie Mae and Freddie Mac have long blamed the companies’ affordable housing mandates from federal housing officials for steering the mortgage-finance companies into backing poorer quality loans.

But a new Federal Reserve staff paper argues that those affordable housing goals had a limited impact on the volume and type of loans that the companies guaranteed. That conclusion calls into question the role that those mandates may have played in the companies’ extraordinary losses that hastened their downfall.

I find only that a subset of newly targeted [census] tracts—those whose relative income changed only slightly during the 1990s, but just enough to cross the threshold—experienced an increase in GSE purchases. This evidence conforms to the intuition that the GSEs would expand relatively stable neighborhoods where expansion is least costly, and suggests that the GSEs goal-related efforts conflict with the law’s intent to help stabilize neighborhoods in decline.

Overall, the results indicate that the goals bind but only slightly expanded lower-income and minority credit flow in the mid-1990s.

To be sure, the paper doesn’t address Fannie and Freddie’s purchases of securities backed by subprime and Alt-A mortgages from Wall Street firms, which the companies held on their portfolios and bought in part to satisfy affordable housing goals. Those loans have been responsible for an outsized share of the companies’ losses.

Still, if the paper’s finding that the affordable housing goals didn’t have as great an effect as previously thought, that raises important questions about how to promote affordable housing in the future housing-finance structure that policymakers are beginning to contemplate, not to mention the questions raised about the degree to which those goals should bear any blame for the demise of Fannie and Freddie.

A research note from Federal Financial Analytics, a Washington research firm, notes that the Fed paper conflicts with the conclusions of Fannie and Freddie’s regulator, the Federal Housing Finance Agency, which has maintained that affordable housing goals contributed to the companies’ risk and which has relaxed those goals in recent months.

http://blogs.wsj.com/developments/2009/ ... effective/