How to prevent mortgage default without skin in the game: Evidence from an integrated homeownership support nonprofit

We test the assumption that borrowers need sufficient “skin in the game”, or a large down payment, to perform well on their mortgages. To do so, we estimate the effects of a homeownership support organization's attempt to help low- and moderate- income households purchase homes through a range of integrated services, including the provision of a second mortgage that allows for a low down payment with no mortgage insurance. Using client-level data from the homeownership support organization, Homewise, and controlling for income and other demographics, we first show that the organization's clients successfully avoid the savings barrier to home purchase – a barrier which impedes many low-income households from obtaining a mortgage. We then combine Homewise administrative data with CoreLogic and Home Mortgage Disclosure Act (HMDA) data to compare the post-purchase behavior of participating households to those of similar households using a propensity score matching technique. Results indicate that Homewise's clients perform better on their loans than other similar borrowers in their region. For every 100 home purchasers, clients purchasing homes through Homewise have 6.3 fewer 30 day delinquencies in the first two years of their mortgage than a matched comparison group of purchasers, 2.3 fewer 60 day delinquencies, 1.8 fewer 90 day delinquencies, and 1.1 fewer 180 day delinquencies. These results show that with the correct combination of homeownership support services, low- and moderate- income households can sustain a mortgage with a low-down payment.