The Performance of Non-Owner-Occupied Mortgages During the Housing Crisis

Abstract

This article documents the contributions of non-owner occupants to the demand for housing prior to the housing crisis. In addition, this article observes the post-origination performance of non-owner-occupied mortgages during the crisis. Theory tells us that non-owner occupant homeowners differ from owner occupants in that they tend to view homeownership as a financial transaction that can be terminated if the investment is no longer financially feasible. As a result, theory tells us that lenders hold non-owner occupants to a higher underwriting standard in an attempt to mitigate the increased risk of lending to this group. My results show that non-owner occupants have lower risk characteristics when compared to owner occupants and this lower risk may be a contributing factor in explaining the similarity in foreclosure rates between owner and non-owner occupants. In order to identify the impact of foreclosures from mortgages originated to non-owner occupants during the housing crisis, I isolate the impact into two components: the prevalence and the performance of non-owner-occupied mortgages. The data show that there is variation at the state level in impact measures from foreclosures on mortgages to non-owner occupants. In addition, the source of this impact is different by region of the country. For example, some Midwestern states have been impacted by foreclosures to non-owner occupants as a result of their poor performance during the housing crisis. However, the high impact factor for some Western and coastal states is largely attributable to the large volume of mortgages originated to non-owner occupants. In states like Nevada and Florida, high overall impact is a function of both high prevalence and poor performance on mortgages originated to non-owner occupants.