Mortgage Default and Prepayment Risks Among Moderate and Low Income Households

Abstract

Utilizing a unique sample of community reinvestment loans, we study the propensity of very low income households to default or prepay on a mortgage and compare it to the outcomes for low income and moderate income households. The results indicate that, even within moderate and low income segments, lower or very low income is associated with higher default and lower prepayment probabilities. In addition, depending on how low the borrower’s income is, classic determinants of loan termination such as credit scores, the amount of equity in the home, and local labor market conditions can have different impacts on default and prepayment probabilities.

Keywords: low income, mortgage, credit score, default, prepayment

JEL Classification: D12, R2