Do the GSEs Meet the Credit Needs of Underserved Communities of Color?

Michela Zonta
Center for American Progress

The government-sponsored enterprises (GSEs) are required by Congress to promote access to mortgage credit in underserved markets by meeting explicit affordable housing goals. Although the GSEs have met these goals in the aggregate, previous research suggests that the GSEs’ targeted purchases have not encouraged sufficient lending to the most underserved homebuyers. By comparing primary-market lending and GSE secondary-market purchases in the periods before and after the Housing and Economic Recovery Act of 2008, this study revisits the questions of whether the GSEs lead the market and serve all members of underserved markets equally or serve primarily the least underserved of the underserved, especially when it relates to communities of color, who tend to be concentrated in many of the geographically targeted areas. Results from a series of logit models of the determinants of GSE purchases suggest that, although the new designations of underserved markets seem to do a better job in pinpointing low-income and minority communities compared with the early broader definitions, they do not guarantee that the GSEs serve the most underserved of the underserved, especially when it relates to communities of color. Policymakers should revisit the criteria currently adopted for the designation of underserved markets and consider incorporating race and ethnicity in the formulation of affordable housing goals, revising the designation of geographically targeted areas, and establishing subgoals that are specific to geography.