Mitigating Information Externalities in Mortgage Markets: The Role of

Financial theory, supported by recent empirical evidence, suggests that property transactions in a particular market area generate information that makes similar future transactions in that area less risky for prospective lenders. Specifically, infor mation from home sales helps appraisers develop more precise value estimates, which reduce the uncertainty (risk) faced by lenders and, in turn, may increase acceptance rates and the flow of funds to the given market area. Interestingly, Federal housing policy efforts have been noticeably absent in the assessment and correction of these potential mortgage market imperfections known as information externalities. Using a sample of government-sponsored enterprise (GSE) purchasing activities across 12 Florida counties, we find both Fannie Mae and Freddie Mac are more active in neighborhoods with historically low transaction volume than they are in other neighborhoods. In addition, the results of our investigation are generally con sistent with the previous literature suggesting Fannie Mae outperformed Freddie Mac in historically under served market segments in 1993-95. Finally, when the analysis is restricted to loans with a high imputed payment relative to borrowers' income, we again find that Fannie Mae and Freddie Mac are more active in neigh borhoods with historically low transaction volume. These findings are consistent with the view that GSE activity mitigates information externalities, at least within our 12-county sample.