The Influence of Fannie and Freddie on Mortgage Loan Terms

Abstract

This article uses a novel instrumental variables approach to quantify the effect that government‐sponsored enterprise (GSE) purchase eligibility had on equilibrium mortgage loan terms in the period from 2003 to 2007. The technique is designed to eliminate sources of bias that may have affected previous studies. GSE eligibility appears to have lowered interest rates by about ten basis points, encouraged fixed‐rate loans over ARMs and discouraged low documentation and brokered loans. There is no measurable effect on loan performance or on the prevalence of certain types of “exotic” mortgages. The overall picture suggests that GSE purchases had only a modest impact on loan terms during this period.

Securitization and the Fixed-Rate Mortgage

“…The first strategy is closely related to Kaufman (2012), who uses an RDD to analyze the effect of F&F on a number of mortgage contract features as well as delinquencies and foreclosures. 13 We instead focus on a more in-depth analysis of a particular contract element, namely the FRM feature.…”

“…Similarly, none of the other characteristics we use as controls in some of our regressions (condo, investor, and subprime dummies) change significantly around the threshold. Kaufman (2012) discusses the institutional details of the appraisal process in more detail.…”

“…Since loan size itself is endogenous, we use appraised home values as an instrument for mortgage size, along similar lines to Kaufman (2012) and Adelino, Schoar, and Severino (2012). This strategy makes use of the fact that many borrowers select a mortgage amount close to 80 percent of the home value.…”

The marginal effect of government mortgage guarantees on homeownership

“…Early work includes Passmore, Sherlund, and Burgess (2005) and Sherlund (2008). More recently, Kaufman (2014) uses a regression discontinuity design around the CLL to estimate the effect of GSE-eligibility on mortgage characteristics such as interest rates. In addition, Fuster and Vickery (2015) study the effects of securitization on the prevalence of fixedrate mortgages, exploiting the fact that it is more difficult to securitize a jumbo mortgage above the CLL.…”

Jumbo rates below conforming rates: When did this happen and why?

“…Before the financial crisis, borrowers bunched at the GSE conforming loan limit to take advantage of the lower mortgage rates for conforming loans versus jumbo loans (An and Yao, 2016; DeFusco and Paciorek, 2017; Kaufman, 2014). With the switch to lower rates for jumbo loans starting in 2014, one might expect the bunching to have disappeared, as borrowers at the limit could have reduced their mortgage rate by taking out a slightly larger loan.…”