Distribution Effects of GNMA Home Mortgage Purchases and Commitments Under the Tandem Plans

Abstract

Since January 1974 the Government National Mortgage Association (GNMA) has been authorized to purchase regular mortgages on new single-family homes at interest rates one or two percentage points below the market. In spite of a large volume of commitments and purchasesX housing starts reached an eight-year low at the end of 1974 and the recovery has been slow thereafter. Although single-family starts were less depressed than multifamily starts, preliminary indications (see [7] ) are that programs have had little effect raising starts. They are, however, conveying large income transfers. This study seeks to estimate the interest savings to mortgagors and any possible benefits to mortgagees which are likely to be conferred by the programs described below. Tandem or piggy-back procedures were first introduced 1968 partly to minimize the effect of federally assisted mortgage credit programs on the unified budget balance. Since the net lending of government agencies represents an outlay above the line, GNMA's acquisition of below-market interest rate mortgages increased the budget deficit by the full amount of the purchase price. Under tandem, these mortgages were resold to the private market at a price sufElciently below par to afford a normal return to investors. Thus only the discount or the present value of the interest subsidy represented an outlay and the cycle could continue in tandem with further purchases. Tandem activities were first limited to mortgages insured by the Federal Housing Administration (FHA) that involved either interest rates well below the market