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Enhancing Mortgage Credit Availability Among Underserved And Higher Credit-Risk Populations: An Assessment Of Default And Prepayment Option Exercise Among Fha-Insured Borrowers

  • Stuart Gabriel
  • Yongheng Deng

While prior analyses have provided substantial evidence of elevated default probabilities among mortgages originated to lower income, less credit worthy and minority borrowers, those risks may be offset by the reduced prepayment probabilities of those loans. To the investor in FHA-insured mortgages, such offsets could serve to appreciably reduce total loan termination risk and in so doing boost investment returns. To assess those effects, this paper employs micro-data from the FHA to estimate an option-based hazard model of the competing risks of mortgage termination. The empirical model derives from option theory and includes controls for mortgage put and call options, borrower credit worthiness, and a large number of other contemporaneous and time-invariant indicators of borrower, loan, and locational risk. Results of the analysis indicate that the elevated default probabilities of loans originated to lower credit quality and minority borrowers are more than offset by their reduced prepayment risks. The estimated cumulative probability of mortgage termination among lower credit-quality and African-American borrowers is only about three-fourths that of higher credit-quality and white borrowers, respectively. Recognition of this mortgage performance advantage should enhance the willingness of lenders and investors to originate and acquire such loans and at more competitive pricing. Findings suggest that the extension of mortgage credit to less credit-worthy and underserved borrowers, in a manner consistent with their lower termination risks, would serve to advance both their homeownership opportunities and related federal housing policy objectives.

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Paper provided by USC Lusk Center for Real Estate in its series Working Paper with number 8622.

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Date of creation: 2002
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Handle: RePEc:luk:wpaper:8622
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  1. Yongheng Deng & John M. Quigley & Robert Van Order, . "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Zell/Lurie Center Working Papers 322, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  2. repec:luk:wpaper:8635 is not listed on IDEAS
  3. Jerry Green & John B. Shoven, 1983. "The Effects of Interest Rates on Mortgage Prepayments," NBER Working Papers 1246, National Bureau of Economic Research, Inc.
  4. 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.
  5. Bennett, Paul & Peach, Richard & Peristiani, Stavros, 2001. "Structural Change in the Mortgage Market and the Propensity to Refinance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 955-75, November.
  6. 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.
  7. Quigley, John M, 1987. "Interest Rate Variations, Mortgage Prepayments and Household Mobility," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 636-43, November.
  8. Alicia H. Munnell, 1992. "Mortgage lending in Boston: interpreting HMDA data," Working Papers 92-7, Federal Reserve Bank of Boston.
  9. Kain, John F & Quigley, John Michael, 1972. "Housing Market Discrimination, Homeownership, and Savings Behavior," American Economic Review, American Economic Association, vol. 62(3), pages 263-77, June.
  10. 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.
  11. 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.
  12. Brent W. Ambrose & Charles A. Capone, 1998. "Modeling the Conditional Probability of Foreclosure in the Context of Single-Family Mortgage Default Resolutions," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(3), pages 391-429.
  13. Jimmy E. Hilliard & James B. Kau & V. Carlos Slawson, 1998. "Valuing Prepayment and Default in a Fixed-Rate Mortgage: A Bivariate Binomial Options Pricing Technique," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(3), pages 431-468.
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