Financial Health of Fha's Home Mortgage Insurance Program Has Improved
U.S. GENERAL ACCOUNTING OFFICE, No. RCED95-20
Posted: 3 May 1998
This paper develops discrete time proportional hazards models of foreclosure and prepayment estimated on 900,000 FHA mortgages insured between 1975 and 1993. The estimated foreclosure and prepayment functions are combined with forecasts of the independent variables and a cash flow model to determine the economic net worth of the fund as of September 1993.Borrower behavior is modeled as a function of initial and accumulated equity, size of loan, levels and changes in interest rates, etc, with separate equations for long term FRM's, short term FRM's, and Investor mortgages. We find strong impacts of equity on foreclosure and interest rate changes on prepayment. Additionally, the level of contract rates increases foreclosures, equity increases prepayment, and loans which miss seemingly advantageous refinancing opportunities have diminished probabilities of future prepayment, and increased probabilities of future foreclosure. This indicates an "adverse selection" of "good" mortgages out of the existing portfolio and into refinancing.
JEL Classification: G21
Suggested Citation: Suggested Citation