Board of Governors of the Federal Reserve System

April 2016

FHA, Fannie Mae, Freddie Mac, and the Great Recession

Wayne Passmore and Shane M. Sherlund

Abstract:

The Great Recession provides an opportunity to test the proposition that government mortgage insurance programs mitigated the effects of the financial crisis and enhanced the economic recovery from 2009 to 2014. We find that government-sponsored mortgage insurance programs have been responsible for better economic outcomes in counties that participated heavily in these programs. In particular, counties with high levels of participation from government-sponsored enterprises and the Federal Housing Authority had relatively lower unemployment rates, higher home sales, higher home prices, lower mortgage delinquency rates, and less foreclosure activity, both in 2009 (soon after the peak of the financial crisis) and in 2014 (six years after the crisis) than did counties with lower levels of participation. The persistence of better outcomes in counties with heavy participation in federal government programs is consistent with a view that lower government liquidity premiums , lower government credit-risk premiums, and looser government mortgage-underwriting standards yield higher private-sector economic activity after a financial crisis.

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Keywords: Financial crisis, Great Recssion, government policy, mortgages

DOI: http://dx.doi.org/10.17016/FEDS.2016.031

PDF: Full Paper