Credit risk of low income mortgages

Using Fannie Mae data on purchase mortgage acquisitions, we examine the relative credit performance of low and moderate income homebuyers. We first document the higher observed default rates of low and moderate income borrowers relative to higher income borrowers for three different historical periods. Second, for the loans originated between 2002 and 2007 applying the tighter underwriting standards of the post-crisis period dramatically reduces default risks across income groups, indicating the importance of underwriting standards for sustainable lending and homeownership. Finally, for all but very low income borrowers, credit risk is well accounted for by standard underwriting risk factors.