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Credit History and the FHA-Conventional Choice

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  • Anthony Pennington-Cross
  • Joseph Nichols

Abstract

Models of household choice of conventional and FHA financing typically use differential insurance premiums, loan to value and payment to income underwriting standards, and local economic conditions to explain household behavior. The credit history of the borrower has not been included in these models. In this paper we expand the standard conditional FHA choice model by including various measures of borrower credit history using a sample of over 40,000 loans from 40 MSAs. We find that the ability of a homebuyer to avoid credit problems in the past is an important indicator of the FHA-conventional choice, but borrower demographic characteristics, location, downpayment, and income also play a significant role. For instance, a one standard deviation increase in the FICO score decreases the odds of choosing FHA financing by approximately 95%. In short, credit history is a powerful indicator of the FHA-conventional choice In addition, we test for differences in credit history distributions across different sub-samples of homebuyers. While FHA borrowers do have lower FICO scores on average, there is a substantial overlap of scores. As LTV rises, conventional and FHA FICO score distributions become more alike. In general, FICO scores improve when LTV and PTI are lower and income is higher.

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Bibliographic Info

Paper provided by Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania in its series Zell/Lurie Center Working Papers with number 319.

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Handle: RePEc:wop:pennzl:319

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Cited by:
  1. Kristopher S. Gerardi & Paul S. Willen, 2008. "Subprime mortgages, foreclosures, and urban neighborhoods," Public Policy Discussion Paper 08-6, Federal Reserve Bank of Boston.
  2. Musto, David K. & Souleles, Nicholas S., 2006. "A portfolio view of consumer credit," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 59-84, January.
  3. Souphala Chomsisengphet & Ronel Elul, 2005. "Bankruptcy exemptions, credit history, and the mortgage market," Working Papers 04-14, Federal Reserve Bank of Philadelphia.
  4. John Karikari & Ioan Voicu & Irene Fang, 2011. "FHA vs. Subprime Mortgage Originations: Is FHA the Answer to Subprime Lending?," The Journal of Real Estate Finance and Economics, Springer, vol. 43(4), pages 441-458, November.
  5. Joseph Nichols & Anthony Pennington-Cross & Anthony Yezer, 2004. "Borrower Self-Selection, Underwriting Costs, and Subprime Mortgage Credit Supply," The Journal of Real Estate Finance and Economics, Springer, vol. 30(2), pages 197-219, November.
  6. Gyourko, Joseph & Hu, Dapeng, 2002. "Spatial distribution of affordable home loan purchases in major metropolitan areas: documentation and analysis," Regional Science and Urban Economics, Elsevier, vol. 32(5), pages 549-589, September.
  7. Rubén Hernández-Murillo & Rajdeep Sengupta, 2011. "The effect of neighborhood contagion on mortgage selection," Working Papers 2011-036, Federal Reserve Bank of St. Louis.
  8. 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.
  9. Jonathan Spader & Roberto Quercia, 2012. "CRA Lending in a Changing Context: Evidence of Interaction with FHA and Subprime Originations," The Journal of Real Estate Finance and Economics, Springer, vol. 44(4), pages 505-525, May.
  10. Gary Painter & Christian L. Redfearn, 2001. "The Role of Interest Rates in Influencing Long-Run Homeownership Rates," Working Paper 8629, USC Lusk Center for Real Estate.
  11. Ambrose, Brent W. & Pennington-Cross, Anthony, 2000. "Local economic risk factors and the primary and secondary mortgage markets," Regional Science and Urban Economics, Elsevier, vol. 30(6), pages 683-701, December.
  12. Paul K. Asabere & Forrest Huffman, 2008. "FHA/VA Financing and Price Discounts," Journal of Real Estate Research, American Real Estate Society, vol. 30(2), pages 191-206.
  13. Ambrose, Brent W. & Pennington-Cross, Anthony & Yezer, Anthony M., 2002. "Credit Rationing in the U.S. Mortgage Market: Evidence from Variation in FHA Market Shares," Journal of Urban Economics, Elsevier, vol. 51(2), pages 272-294, March.

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