Zero down payment mortgage default

Kelly, Austin (2007): Zero down payment mortgage default.

Abstract

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.

• Item Type: MPRA Paper
• Institution: Office of Federal Housing Enterprise Oversight (OFHEO)
• Language: English
• Keywords: mortgage default; down payment; credit risk; mortgage termination; mortgage performance; FHA; down payment assistance; Nehemiah mortgage; Ameridream
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R2 - Household Analysis > R21 - Housing Demand

References

Ambrose, Brent, and Capone, C. “The Hazard Rates of First and Second Defaults.” Journal of Real Estate Finance and Economics 20, 275-293 Boehm, Thomes “Income, Wealth Accumulation, and First-Time Homeownership: An Intertemporal Analysis” Journal of Housing Economics (3) 1993 pp. 16-30 Concentrance Consulting Group “Audit of Loans with Down Payment Assistance” prepared for the U.S. Department of Housing and Urban Development, Washington, D.C. Feb. 6, 2004 Concentrance Consulting Group “An Examination of Down Payment Gift Programs Administered by Non-Profit Organizations” prepared for the U.S. Department of Housing and Urban Development, Washington, D.C. March 1, 2005 Cotterman, Robert “Analysis of FHA Single Family Default and Loss Rates” a report for the Office of Policy Development and Research, US Department of Housing and Urban Development, Washington, D.C. March 5, 2004 Danis, Michelle A. and Anthony Pennington-Cross. "A Dynamic Look at Subprime Loan Performance." Federal Reserve Bank of St. Louis. Working Paper 2005-029A. May 2005 Deng, Yongheng, Quigley, J., and VanOrder, R. “Mortgage Default and Low Downpayment Loans: The Costs of Public Subsidy” NBER Working Paper 5184, 1995 Fong, Peggy, Murphy, D., Fogelbach, F., and Koepp, R. “Expanding Affordable Homeownership with Private Capital: A Study of the Nehemiah Down Payment Assistance Program” The Milken Institute April 2004. Harrison, David, Noordewier, T. and Yavas A. “Do Riskier Borrowers Borrow More?” Real Estate Economics V. 32 #3, Fall 2004 pp. 385-411 Haurin, Don, Wachter, S. and Hendershott, P. “Wealth Accumulation and Housing Choices of Young Households: An Exploratory Investigation” NBER Working Paper 5070, 1995 Herbert, Christopher and Tsen, W. “The Potential of Downpayment Assistance for Increasing Homeownership Among Minority and Low-Income Households” prepared for HUD, Abt Associates, Cambridge, MA January 2005 Herzog, John, and Earley, J. “Home Mortgage Delinquency and Foreclosure” New York, NBER, 1970 Kau, James, and Kim, T. “Waiting to Default: The Value of Delay” AREUEA Journal, V. 22 #3, 1994, pp.539-551 Krumm, Ron and Kelly, A. “Effects of Homeownership on Household Savings” Journal of Urban Economics (21) pp. 281-294 (1989) Linneman, P. and Wachter, S. “The Impact of Borrowing Constraints on Homeownership” AREUEA Journal v. 17 #4, 1989 pp. 389-402 Mayer, C. and Engelhardt, G. “Gifts, Down Payments, and Housing Affordability” Journal of Housing Research v. 7 # 1, 1996, pp. 59-77 Reid, Carolina Katz “Achieving the American Dream: A Longitudinal Analysis of the Home Ownership Experiences of Low Income Households” Center for Social Development Working Paper 05-02, George Washington University, St. Louis, MO, 2005 Reznick, Fedder, and Silverman, CPA “Analysis of Default and Claim Rates of FHA Insured Single Family Mortgages Involving Non-Profit Down Payment Assistance” Behesda, MD Sept. 2003 Ridder, Gert and Woutersen, T. M. “The Singularity of the Information Matrix of the Mixed Proportional Hazard Model” Econometrica v. 71 #5, 2003, pp. 579-1590 Technical Analysis Center, Inc. with Integrated Financial Engineering, Inc. "An Actuarial Review of the Federal Housing Administration Mutual Mortgage Insurance Fund for Fiscal Year 2005," prepared for the U.S. Department of Housing and Urban Development, Fairfax, VA: Oct. 14, 2005 US GAO, Homeownership: “Appropriations Made to Finance VA's Housing Program May Be Overestimated,” GAO-RCED-93-173 (Washington, D.C. Sept. 8, 1993) US GAO, Mortgage Financing: “FHA' Has Achieved It's Home Mortgage Reserve Target”, GAO-RCED-96-50 (Washington, D.C. Feb. 28, 1996) US GAO, Mortgage Financing: “FHA's Fund Has Grown, but Options for Drawing on the Fund Have Uncertain Outcomes”, GAO-01-460 (Washington, D.C. Feb. 28, 2001) US GAO, Mortgage Financing: “Actions Needed to Help FHA Manage Risks from New Mortgage Products”, GAO-05-194 (Washington, D.C. Feb. 11, 2005) US GAO, Mortgage Financing: “Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment Assistance”, GAO-06-24 (Washington, D.C. Nov. 11, 2005) Yi, Kei-Mu, Walker, L., and Honoré, B. “CTM: A User’s Guide” University of Chicago, 1985.