The Impact of Secondary Mortgage Market and GSE Purchases on Home Prices

Abstract

Since 1992, the federal government has established regulations encouraging the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac to purchase home mortgages originated in neighborhoods traditionally underserved by financial institutions, with the aim of stimulating housing-market activity within such neighborhoods. This research tests this proposition empirically through an econometric analysis of variations in secondary mortgage market activity and single-family home prices across underserved census tracts in Cleveland, Ohio, from 1993 to 1999. We find no large or statistically significant relationship between variations in secondary-market purchasing rates of home-purchase mortgages in underserved neighborhoods and home prices one or two years hence, controlling for a rich variety of dwelling and neighborhood characteristics. These conclusions follow both for GSE and other sectors of the secondary market. We find some evidence that the secondary market was more responsive to changes in home prices than vice versa. We offer a possible explanation and draw policy implications.