broker origination help explain why subprime loans are more ... Broker Originated Subprime Loans). CAP ... Given an oppo
Risky Borrowers or Risky Mortgages? Innovative Financial Services for the Underserved: Opportunities and Outcomes 2009 Community Affairs Research Conference
Research Funded by the Ford Foundation
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Findings: Mortgage Matters •For borrowers with similar characteristics, the estimated default risk is much lower with a prime, CRA-type loan than with a subprime mortgage. •Variable interest rates, repayment penalties, and broker origination help explain why subprime loans are more likely to fail. 2 Research Funded by the Ford Foundation
CAP Program Overview
• Partnership between Self-Help, Ford Foundation, Fannie Mae • Secondary market outlet for CRA/Affordable Housing loans • Fixed rate, 30-year, prime mortgages • 50,000 loans funded; $4.5 Billion • Who is served? • Low down-payments • More than half had original LTV of 97% or above • Flexibility on credit and income • More than 40% minorities; more than 40% female-headed • Average income $32,600 (62% of Area Median Income).3 Research Funded by the Ford Foundation
CAP Borrowers & Subprime Borrowers CreditCredit Score Distribution 2003-2006 Score Distribution 2003-2006 0.06
CAP
CAPsubprime Subprime
0.05
Density
0.04
0.03
0.02
0.01
0 300
390
480
570
660
750
840
FICO Score
ORIG. FICO SCORE 4 Research Funded by the Ford Foundation
Propensity Score Match: Focus on borrowers with similar risk characteristics but holding different products.
Prime Loans
Subprime Loans
Prime Borrowers Subprime Borrowers
CA P
Subprime 5 Research Funded by the Ford Foundation
For Similar Borrowers – Subprime Loans Do Worse Predicted Serious Delinquency 24 Months after Origination
3.5x
CAP Subprime 3.99x
2004 Originations
2006 Originations
Note: Estimation is based on a borrower with a FICO score between 580-620 with the mean value of other regressors. Controlling variables include borrower DTI, FICO score, home equity, loan age, loan size, area credit risk, area unemployment rate, and interest rate environment.
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Research Funded by the Ford Foundation
Subprime Features are Linked to Elevated Default Risk: Subprime Loan Feature
Default Rate of subprime vs CAP
ARM
2004 Loans
2006 Loan
1.6 x
1.26 x
3.3 x
3.3 x
5.9 x
3.04 x
5.7 x
3.6 x
Prepay Broker Penalty
[1]
The predicted cumulative default rate is defined as 90-day delinquency as of 24 months after origination for a borrower with a FICO score between 580-620 and holding a mortgage originated in 2004 or 2006, with the mean value of other regressors. The estimation is based on regression results to be found in the full paper. The subprime default is compared to the level of default for CAP loans, which are retail originated, fixed-rate loans without prepayment penalty.
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Research Funded by the Ford Foundation
Predicted Serious Delinquency 24 Months After Origination Community Lending (CAP) and Broker Originated Subprime Loans Cumulative Serious Delinquency Rate 24 Months after Origination (CAP vs. Broker Originated Subprime Loans) CAP 60% 50% 40%
sub_bro sub_bro&ppp sub_bro&arm sub_bro&arm&ppp
30% 20% 10% 0% 2004 Orig
2006 Orig
Note: Estimation is based on a borrower with a FICO score between 580-620 with the mean value of other regressors. sub_bro&ppp and sub_bro represent broker-originated subprime FRMs with and without 8 prepayment penalties respectively; sub_bro&arm&ppp and sub_bro&arm represent broker-originated subprimeARMs with and without prepayment penalties respectively. Research Funded by the Ford Foundation
Findings •For low-income/low-wealth households, mortgage default risk can be significantly mitigated by product and origination process. •Subprime features (Variable interest rates, repayment penalties, and broker origination) increase likelihood of mortgage default. Implications • Subprime products/broker channel are root causes. • Given an opportunity to access fair mortgages, many foreclosed families would still be in their homes. 9 Research Funded by the Ford Foundation
UNC Center for Community Capital University of North Carolina at Chapel Hill 919-843-2140 www.ccc.unc.edu 10 Research Funded by the Ford Foundation
