Credit Risk of Low Income Mortgages

53 Pages Posted: 20 Dec 2017 Last revised: 22 Dec 2017

See all articles by Hamilton B. Fout

Hamilton B. Fout

Kansas State University; Federal National Mortgage Association (Fannie Mae)

Guo Li

Fannie Mae

Mark Palim

Federal National Mortgage Association (Fannie Mae)

Ying Pan

Fannie Mae

Date Written: October 1, 2017

Abstract

Using Fannie Mae loan-level data on fixed-rate owner occupied purchase mortgage acquisitions, we examine the role of tightened underwriting standards on the default risk of low and moderate income (LMI) homebuyers. In three distinct underwriting regimes and subsequent housing market environments – 2002-2004, 2005-2007 and 2011-2013 – we find that loan performance improves as a borrower’s income relative to area median income rises – for both actual performance and the marginal predicted performance after controlling for standard credit risk measures, vintage and region. Second, for pre-crisis loans applying the tighter underwriting standards of the post-crisis period dramatically reduces the performance differences across relative income, indicating the importance of underwriting standards for sustainable low and moderate income lending and home ownership. Finally, for all but very-low income borrowers (<= 50% area median income), credit risk is well accounted for by the usual risk factors considered in the underwriting process along with vintage and regional controls.

Keywords: Low Income Lending, Credit Risk, Underwriting Standards

JEL Classification: G21, R31, R38

Suggested Citation

Fout, Hamilton B. and Fout, Hamilton B. and Li, Guo and Palim, Mark and Pan, Ying, Credit Risk of Low Income Mortgages (October 1, 2017). Available at SSRN: https://ssrn.com/abstract=2982427 or http://dx.doi.org/10.2139/ssrn.2982427

Hamilton B. Fout (Contact Author)

Kansas State University ( email )

Manhattan, KS 66502-4001
United States

Federal National Mortgage Association (Fannie Mae) ( email )

3900 Wisconsin Avenue, NW
Washington, DC 20016-2892
United States

Guo Li

Fannie Mae ( email )

3900 Wisconsin Ave NW
Washington DC, DC 20003
United States

Mark Palim

Federal National Mortgage Association (Fannie Mae) ( email )

3900 Wisconsin Avenue, NW
Washington, DC 20016-2892
United States

Ying Pan

Fannie Mae ( email )

3900 Wisconsin Avenue, NW
Washington, DC 20016-2892
United States

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