Abstract

Mortgage Default and Prepayment Risks among Moderate- and Low-Income Households [PDF]
Authors: Roberto G. Quercia, Anthony Pennington-Cross, and Chao Yue Tian
Working Paper, September 2010

To assess the sustainability of affordable housing credit, a unique sample of community reinvestment loans is analyzed. Conditional probability (hazard) of default tends to be higher and prepayment, lower for lower income groups. However, after controlling for observed mortgage and borrower characteristics, the hazards converge and even reverse in order of magnitude. Furthermore, very low-, low-, and moderate-income groups react with distinct patterns to changes in the loan-to-value ratio and the local unemployment rate. Finally, more financially stretched borrowers (those with high debt-to income ratios) seem to initiate the default option more aggressively as home equity declines.

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