Beyond the Transaction: Depository Institutions and Reduced Mortgage Default for Low-Income Homebuyers

Abstract

We evaluate the effects of the lending institution and soft information on mortgage loan performance for low-income homebuyers. We fi nd that even after controlling for bank selection, those who receive a loan from a local bank are signifi cantly less likely to become delinquent or default than other bank or nonbank borrowers, suggesting an information effect. These effects are most pronounced for higher-risk borrowers, who likely benefi t more from informational advantages of local banks. These fi ndings support previous research on small business lending and provide additional explanation for observed differences in mortgage loan performance between bank and nonbank lenders.