A Tale of Two Tensions: Balancing Access to Credit and Credit Risk in Mortgage Underwriting

Real Estate Economics, Forthcoming

Posted: 20 Jun 2015

See all articles by Marsha Courchane

Marsha Courchane

Charles River Associates (CRA)

Leonard C. Kiefer

Federal Home Loan Mortgage Corporation (FHLMC)

Peter M. Zorn

Freddie Mac

Date Written: January 1, 2015


Over the years 2000 through 2007, mortgage market underwriting conditions eased in response to public policy demands for increased homeownership. This easing of acceptable credit risk in order to accommodate increased access to credit, when coupled with the unanticipated house price declines during the Great Recession, resulted in substantial increases in delinquencies and foreclosures. The response to this mortgage market crisis led to myriad changes in the industry, including tightened underwriting standards and new market regulations. The result is a growing concern that credit standards are now too tight, restricting the recovery of the housing market. Faced with this history, policy analysts, regulators, and industry participants have been forced to consider how best to balance the tension inherent in managing mortgage credit risk without unduly restricting access to credit. Our research is unique in providing explicit consideration of this tradeoff in the context of mortgage underwriting. Using recent mortgage market data, we explore whether modern automated underwriting systems (AUS) can be used to extend credit to borrowers responsibly, with a particular focus on target populations that include minorities and those with low‐ and moderate incomes. We find that modern AUS do offer a potentially valuable tool for balancing the tensions of extending credit at acceptable risks, either by using scorecards that mix through‐the‐cycle and stress scorecard approaches or by adjusting the cutpoint — more relaxed cutpoints allow for higher levels of default while providing more access, tighter cutpoints accept fewer borrowers while allowing less credit risk.

Suggested Citation

Courchane, Marsha and Kiefer, Leonard C. and Zorn, Peter M., A Tale of Two Tensions: Balancing Access to Credit and Credit Risk in Mortgage Underwriting (January 1, 2015). Real Estate Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2620422

Marsha Courchane (Contact Author)

Charles River Associates (CRA) ( email )

1201 F Street, NW
Suite 700
Washington, DC 20004
United States

Leonard C. Kiefer

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States

Peter M. Zorn

Freddie Mac ( email )

1551 Park Run Drive
McLean, VA 22102
United States
(571) 382-3220 (Phone)
(571) 382-5074 (Fax)

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