The FHA and the GSEs as Countercyclical Tools in the Mortgage Markets

Abstract

The authors examine the connection between government mortgage programs and economic outcomes during and after the financial crisis. They find a strong correlation between counties that participated more heavily in Federal Housing Administration (FHA)/Veterans Affairs (VA) and government-sponsored enterprise (GSE) mortgage lending before the crisis and better economic outcomes during and after the crisis. Although the financial crisis was a substantial shock to all counties, those more reliant on FHA/VA or GSE lending experienced smaller increases in unemployment rates; smaller declines in new automobile purchases, home prices, home sales, and mortgage purchase originations; and smaller increases in mortgage delinquency rates. Moreover, the authors find that the FHA was a more effective countercyclical tool during and after the 2007-09 financial crisis than the GSEs. This finding may have implications for GSE reform: Greater access to government backing during crises may mitigate tighter underwriting standards and rising securitization costs in mortgage markets.