The Twin Mandates Given to the GSEs: Which Works Best, Helping Low-Income Homebuyers or Helping Underserved Areas?

Abstract

This research examines the twin mandates of the GSE Act of 1992: to direct mortgage credit to neighborhoods that have been underserved by mortgage lenders and to direct mortgage credit to low-income and minority households. Using the Kansas City metropolitan area as a test site, data from the GSEs have been compared with non-GSE mortgage lenders to determine the performance of the GSEs in meeting these two objectives. This research finds that the GSEs have not performed as well as the conventional lenders. Independent of the use of the secondary mortgage market, borrowers are better served if credit is directed to them independent of location. The alternative approach of directing credit to underserved areas is helpful only insofar as it helps to direct credit to neighborhoods that are marginally less desirable than the neighborhoods deemed to be well served.