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Are Underserved Borrowers Lower Risk? New Evidence on the Performance and Pricing of FHA-Insured Mortgages* (Revised)

  • Yongheng Deng
  • Stuart Gabriel

This paper estimates an option-based hazard model of the competing risks of FHA mortgage termination. Results indicate that the elevated default risks of loans originated among lower credit quality and minority borrowers are more than offset by the damped prepayment speeds of those loans, so as to result in markedly lower loan termination probabilities among underserved borrower groups. Those damped termination risks translate into sizable reductions in risk premia to investors in simulated lower credit-quality mortgage pools. Empirical findings suggest that such pooling and risk-based pricing of FHA-insured mortgages could serve to substantially reduce housing finance costs among underserved borrowers, so as to advance both their homeownership opportunities and related federal housing policy objectives.

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File URL: http://lusk.usc.edu/sites/default/files/working_papers/wp_2005-1012.pdf
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Paper provided by USC Lusk Center for Real Estate in its series Working Paper with number 8579.

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Date of creation: 2005
Date of revision:
Handle: RePEc:luk:wpaper:8579
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  1. Bradley, Michael G & Gabriel, Stuart A & Wohar, Mark E, 1995. "The Thrift Crisis, Mortgage-Credit Intermediation, and Housing Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 476-97, May.
  2. Kelly, Austin, 1995. "Racial and Ethnic Disparities in Mortgage Prepayment," Journal of Housing Economics, Elsevier, vol. 4(4), pages 350-372, December.
  3. Paul Bennett & Richard Peach & Stavros Peristiani, 1997. "Structural change in the mortgage market and the propensity to refinance," Research Paper 9736, Federal Reserve Bank of New York.
  4. Eduardo S. Schwartz & Walter N. Torous, 1993. "Mortgage Prepayment and Default Decisions: A Poisson Regression Approach," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(4), pages 431-449.
  5. Munnell, Alicia H. & Geoffrey M. B. Tootell & Lynn E. Browne & James McEneaney, 1996. "Mortgage Lending in Boston: Interpreting HMDA Data," American Economic Review, American Economic Association, vol. 86(1), pages 25-53, March.
  6. Judith Clarke & Marsha Courchane, 2004. "Implications of Stratified Sampling for Fair Lending Binary Logit Models," The Journal of Real Estate Finance and Economics, Springer, vol. 30(1), pages 5-31, October.
  7. Kau, James B, et al, 1992. "A Generalized Valuation Model for Fixed-Rate Residential Mortgages," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(3), pages 279-99, August.
  8. Gabriel, Stuart A. & Rosenthal, Stuart S., 2005. "Homeownership in the 1980s and 1990s: aggregate trends and racial gaps," Journal of Urban Economics, Elsevier, vol. 57(1), pages 101-127, January.
  9. Coulson, N. Edward, 1999. "Why Are Hispanic- and Asian-American Homeownership Rates So Low?: Immigration and Other Factors," Journal of Urban Economics, Elsevier, vol. 45(2), pages 209-227, March.
  10. Ambrose, Brent W & Capone, Charles A, Jr & Deng, Yongheng, 2001. "Optimal Put Exercise: An Empirical Examination of Conditions for Mortgage Foreclosure," The Journal of Real Estate Finance and Economics, Springer, vol. 23(2), pages 213-34, September.
  11. Caplin, Andrew & Freeman, Charles & Tracy, Joseph, 1997. "Collateral Damage: Refinancing Constraints and Regional Recessions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 496-516, November.
  12. Brent W. Ambrose & Michael LaCour-Little & Anthony B. Sanders, 2004. "The Effect of Conforming Loan Status on Mortgage Yield Spreads: A Loan Level Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(4), pages 541-569, December.
  13. Ondrich, Jan & Ross, Stephen L. & Yinger, John, 2000. "How Common is Housing Discrimination? Improving on Traditional Measures," Journal of Urban Economics, Elsevier, vol. 47(3), pages 470-500, May.
  14. Han, Aaron & Hausman, Jerry A, 1990. "Flexible Parametric Estimation of Duration and Competing Risk Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(1), pages 1-28, January-M.
  15. von Furstenberg, George M, 1970. "Risk Structures and the Distribution of Benefits within the FHA Home Mortgage Insurance Program," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(3), pages 303-22, August.
  16. Archer, Wayne R. & Ling, David C. & McGill, Gary A., 1997. "Demographic versus Option-Driven Mortgage Terminations," Journal of Housing Economics, Elsevier, vol. 6(2), pages 137-163, June.
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