Abstract

This research examined the relative risk of loans from two broad categories: subprime mortgages and special lending programs targeted to low- and moderate-income (LMI) purchasers. Using the propensity score match method, we constructed a sample of comparable borrowers with similar risk characteristics but holding different loan products. We found that loans in a LMI-targeted community-lending program have a lower default risk than subprime loans, very likely because they were not originated by brokers and lack risky features such as adjustable rates and prepayment penalties. Our results suggest that the higher default risk of subprime loans may not be attributed to borrower risk profile only but is instead significantly associated with certain characteristics of loan products and the origination channel in the subprime market.

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