Gifts, Down Payments and Mortgage Default

Abstract

Previous research has focused on equity as a prime determinant of mortgage default propensities. This paper extends the analysis of mortgage default to include the source of initial equity for the purchaser. A continuous time hazard model is used to estimate the conditional probability of a serious delinquency, or a claim, as a function of a host of standard control variables, and indicators for the source of the down payment. The data consist of a nationally representative random sample of about 5,000 FHA insured single family mortgages endorsed in Fiscal Years 2000, 2001, and 2002, observed through January 31, 2006, and samples of about 1,000 FHA loans each from the Atlanta, Indianapolis, and Salt Lake City MSAs in the same time period. The results indicate that borrowers who provide down payments from their own resources have significantly lower default propensities than do borrowers whose down payments come from relatives, government agencies, or non-profits. Borrowers with down payments from seller-funded non-profits have the highest default rates. Additionally, borrowers who do not make down payments from their own resources tend to have higher loss given default in the small subset of loans that had completed the property disposition process.

Keywords: mortgage, default, down payment, gift down payment

JEL Classification: G21, R21