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

Abstract

Using a unique sample of community reinvestment loans, we study the propensity of very low‐income households to terminate a mortgage and compare it to the outcomes for low‐income and moderate‐income households. The results indicate that, even within moderate‐ and low‐income segments, lower or very low income is associated with higher default and lower prepayment probabilities. In addition, depending on how low the borrower's income is, classic determinants of loan termination such as credit scores, the amount of equity in the home and local labor market conditions can have different impacts on default and prepayment probabilities.

Location Efficiency and Mortgage Risks for Low-Income Households

“…Moreover, certain characteristics of the borrower, the lender, and the servicer have consistent effects. For instance, Quercia, Pennington-Cross, and Tian (2012) confirmed the importance of the CLTV ratio, borrower credit score, borrower income, and unemployment rate in explaining default and prepayment. In this article, we examine the link between mortgage risk and location efficiency, defined in variety of ways.…”

National Culture and Default on Mortgages

“…Moreover, while a number of studies (e.g. Bernanke ; Igan and Pinheiro ; Quercia et al ) have investigated the economic, socio‐demographic, and health determinants of DOM (e.g. income, unemployment, ethnic, divorce, disability), no empirical research has examined the relationship between national cultural dimensions and DOM.…”

“…In recent years, the need to understand the modern determinants of DOM has received increasing attention by economists and policymakers (e.g. Bernanke ; Igan and Pinheiro ; Quercia et al ) because of the recent rise in DOM and foreclosures in many advanced economies, especially the USA, where this contributed to the recent Global Financial Crisis (GFC).…”

Unemployment rate hysteresis and the great recession: exploring the metropolitan evidence

“…Second, we find evidence that the unemployment rate shock produced by the Great Recession caused an upward 8 Since employment is an essential condition for most households to meet their financial obligations, rising local unemployment rates can cause rising mortgage defaults and foreclosures. That is, the unemployment rate positively associates with mortgage delinquency (Campbell and Dietrich, 1983), mortgage default (Capozza, et al, 1997;Deng, et al, 2000;Pennington-Cross and Ho, 2010;Quercia, et al, 2012), mortgage default risk (Quercia, et al, 2012), and mortgage foreclosure (Elmer and Seelig, 1999).…”