Changing the Scope of GSE Loan Guarantees: Estimating Effects on Mortgage Pricing and Availability

Abstract

Using a novel combination of mortgage datasets, we analyze the effects of two policy levers that influence the scope of Fannie Mae and Freddie Mac's (GSEs) involvement in the U.S. residential mortgage market. First, we find that small changes in mortgage guarantee fees charged by the GSEs were essentially fully passed through to consumers, with limited effects on mortgage demand. This implies that fee increases are primarily transfers from mortgage consumers to taxpayers while the GSEs remain in federal conservatorship. Second, the data suggest that marginally lowering maximum conforming loan size limits would cause most affected consumers to reduce their loan amounts to the new maximum. Our findings highlight the key role of GSE policy in mortgage availability and contrast the differing effects on consumers of two potential policy levers to reduce (or increase) the scope of GSE lending. Additional survey data indicate that borrowers' shopping behavior and incomplete information may also influence the effects of GSE policy changes.