Impact of GSE activity on FHA feedback and implications for FHA delinquency rates – evidence from prime and subprime mortgages

The US government has adopted an affordable housing goal and under this goal Government sponsored enterprises have increased their presence in certain targeted areas which are primarily low income groups. This increased activity should increase credit supply and ideally should improve the housing market conditions for these groups. Unfortunately, this has not been the case and this paper aims to resolve this paradox. As GSE activities increase in certain areas by targeting lower income groups, they eat into FHA’s market share. With this expansion the GSE targets the higher income group for FHA loans. In response the FHA applies more strict underwriting standards and as a result, in the new market equilibrium, the FHA loan proportion reduces. So overall, the credit supply and homeownership does not change. Additionally, the paper also intends to check if an increased GSE activity has affected the delinquency rates of other government loan programs, namely the FHA.