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Research Into Mortgage Default and Affordable Housing: A Primer
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Published 2003-09-09 06:45:00
Author Charles A. Capone, Jr., Ph.D
Source LISC
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AUTHOR: Charles A. Capone, Jr., Ph.D DATE POSTED: 05/16/2002 Introduction As we enter the twenty-first century, mortgage lending is largely driven by computerbased decision models built on econometric research. These models also lie behind borrower credit scores, are used to help loan servicers track which delinquencies need immediate attention, and direct which workout options may be available to defaulting homeowners. Thus, to understand the risks of mortgage lending to low-income and minority communities, one must have a basic understanding of how to learn from econometric studies. This paper is intended to give such an understanding to affordable housing practitioners. That there is risk in mortgage lending and borrowing is without question. There is risk from changes in interest rates, which affect the investment value of mortgages, and there is credit risk--the chance of loans going into default and leaving investors with substantial losses. For borrowers, both increases in interest rates and declines in house prices make selling homes more difficult. If prices fall, then homeowners who must move are faced with the loss of investments in the property. They may also lose access to new credit if home prices fall to where the homeowner decides to default and allow the property to go through foreclosure. This study focuses on credit, or default risk. Much of the research discussed here is of the scholarly or academicvariety, though not all is produced inside universities. Mortgage research is often sponsored by government agencies or prominent firms in the mortgage and housing finance industry. It is disseminated through working paper series and other in-house publications at the sponsoring institutions, and sometimes through academic journals and various media outlets. In-house publication is often used because the data available to study affordable housing loan performance is proprietary. Thus, university scholars have limited access. When

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