The Performance of Low‐Income and Minority Mortgages

Abstract

This article analyzes the performance of low-income and minority mortgages (LIMMs) from a large sample of fixed-rate conventional conforming mortgages. We find that low-income borrowers are less likely to prepay when it is optimal, whereas black and Hispanic borrowers prepay more slowly than other borrowers, regardless of the option's value. After controlling for equity, credit history and some other variables, LIMMs default slightly more frequently and have about the same loss severity as other loans. Our results suggest that, for most yield curve situations, differences in LIMM prepayment behavior have little effect on pricing. Copyright 2007 American Real Estate and Urban Economics Association

Mortgage Default and Prepayment Risks among Moderate‐ and Low‐Income Households

“…Their data cover loans originated between 1992 and 1996 and loan performance to the end of 2000. Their sample mean household income is around $36,840, which is similar to U.S. median annual household income during the period 6 Firestone, Van Order and Zorn (2007). are able to study loan performance of borrowers whose income is less than 80% of area median.…”

Originating lender localness and mortgage sustainability: an evaluation of delinquency and foreclosure in Indiana's mortgage revenue bond program

“…6 The options theoretic perspective provides an abstract framework, specifying conditions under which a rational borrower will exercise their options to stay current, default, or prepay their mortgage (Firestone, Van Order, and Zorn 2007;Deng and Gabriel 2006;Deng, Quigley and Van Order 2000;Quercia and Stegman 1992). When an option is ''in the money,'' such that the borrower will gain in net wealth from either defaulting on the mortgage (when the amount owed exceeds the value) or prepaying the mortgage (as when interest rates drop), the rational borrower will ruthlessly exercise the ''put'' or ''call'' option, respectively.…”

“…Other factors such as transaction costs and borrower heterogeneity (e.g. income and credit), if considered, are viewed as secondary factors that may influence the ''rationality'' of the borrower's decision to exercise their options (Deng, Quigley, and Van Order 2000;Van Order and Zorn 2002;Deng and Gabriel 2006;Firestone, Van Order, and Zorn 2007). Under the triggering events perspective, while negative equity and market conditions may be a necessary condition for foreclosure, they are not sufficient conditions, and need not be conditions at all for delinquency (Avery et al 1996;Baku and Smith 1998;Quercia and Stegman 1992).…”

“…Affordable lending strategies include affordable mortgage loans targeted to LMI borrowers with prime (or near prime) interest rates, flexible underwriting, and/or financial assistance (Quercia et al 2002). Findings on the ability of affordable loans to provide for sustainable homeownership are mixed, with some studies finding that such loans have substantially higher delinquency and/or foreclosure rates, and others finding comparable or lower delinquency and/or foreclosure rates among LMI borrowers (Ding et al 2008;Stegman et al 2007;Firestone, Van Order, and Zorn 2007;Quercia 1999;Quercia et al 2002;Avery et al 1996;Deng and Gabriel 2006;Calem and Wachter 1999;Mills and Lubuele 1994).…”

Financial Econometrics and Empirical Market Microstructure

“…They find that, with all else equal, those who choose ARM estimate their probability of moving in the future as relatively high. Firestone et al (2007) analyzed the prepayment behavior of low-and moderateincome (LMI) borrowers. Using the data containing the performance of 1.3 million loans originated from 1993 to 1997 they found that lower-income borrowers prepay more slowly than with higher income and this results are stable over time.…”