Risk-Based Pricing and the Enhancement of Mortgage Credit Availability Among Underserved and Higher Credit-Risk Populations

47 Pages Posted: 17 Sep 2002

See all articles by Yongheng Deng

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management

Date Written: May 2005

Abstract

This paper estimates an option-based hazard model of the competing risks of FHA mortgage termination. Results indicate that the elevated default risks of loans originated among lower credit quality and minority borrowers are more than offset by the damped prepayment speeds of those loans, so as to result in markedly lower loan termination probabilities among underserved borrower groups. Those damped termination risks translate into sizable reductions in risk premia to investors in simulated lower credit-quality mortgage pools. Empirical findings suggest that such pooling and risk-based pricing of FHA-insured mortgages could serve to substantially reduce housing finance costs among underserved borrowers, so as to advance both their homeownership opportunities and related federal housing policy objectives.

JEL Classification: G21, J78, R20

Suggested Citation

Deng, Yongheng and Gabriel, Stuart A., Risk-Based Pricing and the Enhancement of Mortgage Credit Availability Among Underserved and Higher Credit-Risk Populations (May 2005). Available at SSRN: https://ssrn.com/abstract=330340 or http://dx.doi.org/10.2139/ssrn.330340

Yongheng Deng (Contact Author)

Wisconsin School of Business, University of Wisconsin-Madison ( email )

4110 Grainger Hall
975 University Avenue
Madison, WI 53706
United States
+1 (608) 262-4865 (Phone)

HOME PAGE: http://https://bus.wisc.edu/faculty/yongheng-deng

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-2922 (Phone)
310-206-5455 (Fax)

HOME PAGE: http://www.anderson.ucla.edu

Register to save articles to
your library

Register

Paper statistics

Downloads
922
Abstract Views
4,333
rank
24,158
PlumX Metrics