Housing Finance Working Paper Series

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The main purpose of this study is to assess the extent to which Fannie Mae and Freddie Mac are funding loans for low-income borrowers and others who historically have not been well served by the mortgage market. The study is the fourth in a series of working papers examining the affordable lending performance of these two Government Sponsored Enterprises (GSEs) in the secondary mortgage market. This study, which updates the earlier analyses to include year 2000 data, compares the borrower and neighborhood characteristics of single-family mortgages purchased by Fannie Mae and Freddie Mac between 1992 and 2000 with the characteristics of loans originated in the primary market during the same time period.

There are five main findings. First, while both GSEs improved their affordable lending performance during the 1990s, they continued in the year 2000 to underperform the conventional conforming market in funding mortgages for lower-income borrowers and for properties located in low-income and high-minority census tracts (i.e., underserved areas). Second, the GSEs’ performance improved markedly between 1999 and 2000, allowing them to partially close their performance gap relative to the market. Third, during most of the 1990s, Fannie Mae’s purchases were more targeted to low-income borrowers and underserved areas than Freddie Mac’s purchases; however, the relative performance of the two GSEs has been rather similar during the past two years. Fourth, while the GSEs account for a significant share of the total market for home purchase loans (government-backed and all conventional conforming home loans), their market share for each of the affordable lending categories is much less than their share of the overall market, and they contribute only a small share of funding in important market segments such as the market serving first-time minority homebuyers. And finally, the GSEs’ small market share in the firsttime homebuyer market could be due to the preponderance of high (over-20-percent) downpayment loans in their mortgage purchases, although further study is needed to fully explain the reasons for the GSEs’ limited role in these markets.