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Reassessing FHA Risk

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Author Info

  • Diego Aragon
  • Andrew Caplin
  • Sumit Chopra
  • John V. Leahy
  • Yann LeCun
  • Marco Scoffier
  • Joseph Tracy

Abstract

Federal Housing Administration (FHA) insurance has doubled over the past two years and is projected to redouble to $1.5 trillion over the next five. Despite clear signs of strain in the FHA’s Mutual Mortgage Insurance Fund, a recent actuarial review indicates that the FHA will not need any form of government support. We identify four risk factors that make such a funding request more likely; the review underestimates how many FHA borrowers are underwater and in economic distress; it uses measures of house values that lower loss estimates; it does not incorporate early-warning signals of future losses that are available from mortgage delinquency; and it ignores potential risks associated with recent down-payment assistant programs despite higher losses on previous programs of this type. We propose measures that could be taken to improve the predictive accuracy of FHA risk assessment.

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File URL: http://www.nber.org/papers/w15802.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15802.

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Date of creation: Mar 2010
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Handle: RePEc:nbr:nberwo:15802

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Cited by:
  1. Finn Poschmann, 2011. "What Governments Should Do in Mortgage Markets," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 318, January.
  2. Steven Laufer, 2013. "Equity extraction and mortgage default," Finance and Economics Discussion Series 2013-30, Board of Governors of the Federal Reserve System (U.S.).
  3. Chan, Sewin & Gedal, Michael & Been, Vicki & Haughwout, Andrew, 2013. "The role of neighborhood characteristics in mortgage default risk: Evidence from New York City," Journal of Housing Economics, Elsevier, vol. 22(2), pages 100-118.
  4. Brent Smith, 2012. "Lending Through the Cycle: The Federal Housing Administration’s Evolving Risk in the Primary Market," Atlantic Economic Journal, International Atlantic Economic Society, vol. 40(3), pages 253-271, September.

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