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Zero down payment mortgage default


  • Kelly, Austin


Previous research has focused on equity as a prime determinant of mortgage default propensities. This paper extends the analysis of mortgage default to include mortgages that require no down payment from the purchaser. A continuous time hazard model is used to estimate the conditional probability of a serious delinquency, or a claim, as a function of a host of standard control variables, and indicators for the presence and source of the down payment. The data consist of a nationally representative random sample of about 5,000 FHA insured single family mortgages endorsed in Fiscal Years 2000, 2001, and 2002, observed through September 30, 2006, and samples of about 1,000 FHA loans each from the Atlanta, Indianapolis, and Salt Lake City MSAs in the same time period. The results indicate that borrowers who provide down payments from their own resources have significantly lower default propensities than do borrowers whose down payments come from relatives, government agencies, or non-profits. Borrowers with down payments from seller-funded non-profits, who make no down payment at all, have the highest default rates. Additionally, borrowers who do not make down payments from their own resources tend to have higher loss given default in the small subset of loans that had completed the property disposition process.

Suggested Citation

  • Kelly, Austin, 2007. "Zero down payment mortgage default," MPRA Paper 4318, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:4318

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    References listed on IDEAS

    1. Krumm, Ronald & Kelly, Austin, 1989. "Effects of homeownership on household savings," Journal of Urban Economics, Elsevier, vol. 26(3), pages 281-294, November.
    2. James B. Kau & Taewon Kim, 1994. "Waiting to Default: The Value of Delay," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(3), pages 539-551.
    3. Donald R. Haurin & Susan M. Wachter & Patric H. Hendershott, 1995. "Wealth Accumulation and Housing Choices of Young Households: An Exploratory Investigation," NBER Working Papers 5070, National Bureau of Economic Research, Inc.
    4. Peter Linneman & Susan Wachter, 1989. "The Impacts of Borrowing Constraints on Homeownership," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(4), pages 389-402.
    5. Deng, Yongheng & Quigley, John M. & Van Order, Robert & Mac, Freddie, 1996. "Mortgage default and low downpayment loans: The costs of public subsidy," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 263-285, June.
    6. David M. Harrison & Thomas G. Noordewier & Abdullah Yavas, 2004. "Do Riskier Borrowers Borrow More?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(3), pages 385-411, September.
    7. Michelle A. Danis & Anthony Pennington-Cross, 2005. "A dynamic look at subprime loan performance," Working Papers 2005-029, Federal Reserve Bank of St. Louis.
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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. Austin Kelly finds that Zero Down Mortgages perform really badly
      by Richard K. Green in Richard's Real Estate and Urban Economics Blog on 2008-03-24 07:45:00


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    Cited by:

    1. Xudong An & Yongheng Deng & Eric Rosenblatt & Vincent Yao, 2012. "Model Stability and the Subprime Mortgage Crisis," The Journal of Real Estate Finance and Economics, Springer, vol. 45(3), pages 545-568, October.
    2. Ben-David, Itzhak, 2011. "High Leverage and Willingness to Pay: Evidence from the Residential Housing Market," Working Paper Series 2011-17, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    3. Richard K. Green & Eric Rosenblatt & Vincent Yao, 2010. "Sunk Costs and Mortgage Default," Working Paper 9097, USC Lusk Center for Real Estate.
    4. Ken Lam & Robert Dunsky & Austin Kelly, 2013. "Impacts of Down Payment Underwriting Standards on Loan Performance," Staff Working Papers 13-03, Federal Housing Finance Agency.
    5. Xudong An & Yongheng Deng & Joseph Nichols & Anthony Sanders, 2013. "Local Traits and Securitized Commercial Mortgage Default," The Journal of Real Estate Finance and Economics, Springer, vol. 47(4), pages 787-813, November.
    6. Saty Patrabansh, 2015. "The Marginal Effect of First-Time Homebuyer Status on Mortgage Default and Prepayment," Staff Working Papers 15-02, Federal Housing Finance Agency.
    7. Bree Lang & Ellen Hurst, 2014. "The Effect of Down Payment Assistance on Mortgage Choice," The Journal of Real Estate Finance and Economics, Springer, vol. 49(3), pages 329-351, October.
    8. Richard K. Green & Gary Painter & Michelle J. White, 2012. "Measuring the Benefits of Homeowning: Effects on Children Redux," Working Paper 9102, USC Lusk Center for Real Estate.
    9. Richard T. Carson & Samuel R. Dastrup, 2013. "After The Fall: An Ex Post Characterization Of Housing Price Declines Across Metropolitan Areas," Contemporary Economic Policy, Western Economic Association International, vol. 31(1), pages 22-43, January.

    More about this item


    mortgage default; down payment; credit risk; mortgage termination; mortgage performance; FHA; down payment assistance; Nehemiah mortgage; Ameridream;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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