FHA Mortgage Research Articles

Machine learning Bureau score for Home Lending in an American finance company

Our client is a leading provider of mortgage financing, originating loans and lines of credit to consumers in the US. Currently, they receive applications where applicants provide personal information and a soft pull of their FICO score is requested. That score is used to evaluate the applicant’s credit worthiness and determine conditional approval and the type of product available for the customer, including conventional, FHA or other mortgage loans. After conditional approval, a formal application is initiated, and underwriters review the information to determine the final application decision. When evaluating applications below regulatory and business thresholds, the company has the intention to approve more applications and increase loan volume, and there is an expectation that through the enhanced credit assessment, our client will improve the percentage of Low to Moderate Income (LMI) population able to obtain mortgage loans. Both aspects have a direct impact on the reputation and economic profits of the firm, so they are of pressing importance to the company. This project aims to build an applicant-level bureau-only score based on upgraded bureau internal attributes. This score will eventually serve as the basis for evaluating a customer’s credit risk before any loan structure or collateral information is considered. It will be used as a standalone score that can be used in the initial customer evaluation to identify better leads (mortgage inquiries for preapproval) and as input to a future application-level model.

A ‘gray area’? Neighborhood decline and reclamation in 1950s and 1960s U.S. urban discourse and legislation

ABSTRACT With a focus on the period between the mid-1950s and mid-1960s, this paper analyses the use of the term gray areas as a descriptor for older neighborhoods in U.S. cities. First, the paper examines how the term gray areas was used in urban debates of the time. It is argued that the term reinforced assumptions of “blight” as a mobile force linked to inevitable decline. Furthermore, in following from stage theories of change, the term gray areas was also used to denote areas that could potentially be reclaimed. Secondly, the paper analyses the connection between gray areas and changes in FHA mortgage risk legislation in historic neighborhoods from “economically sound” to “acceptable risk.” Ultimately, in light of its “plastic” or “fuzzy” meaning, it is argued that the analysis of debates over gray areas highlights the importance of looking at urban change from a less linear, or epistemologically bounded, perspective.

Consumer-lending discrimination in the FinTech Era

U.S. fair-lending law prohibits lenders from making credit determinations that disparately affect minority borrowers if those determinations are based on characteristics unrelated to creditworthiness. Using an identification under this rule, we show risk-equivalent Latinx/Black borrowers pay significantly higher interest rates on GSE-securitized and FHA-insured loans, particularly in high-minority-share neighborhoods. We estimate these rate differences cost minority borrowers over $450 million yearly. FinTech lenders’ rate disparities were similar to those of non-Fintech lenders for GSE mortgages, but lower for FHA mortgages issued in 2009–2015 and for FHA refi mortgages issued in 2018–2019.

Avoiding COVID-19 Related Foreclosures by Implementing Cost-Effective Mortgage Modifications for Federally-Backed Loans

Millions of homeowners are having difficulty paying their mortgage because of the COVID-19 emergency, and those suffering from a sustained income loss will be unable to afford their original monthly payments. Research based on post-Great Recession defaults provide compelling evidence that a mortgage modification that delivers substantial payment reduction is the right tool to keep borrowers in their home and avoid foreclosures. Based on this research, I establish the steps of an “optimized” mortgage modification waterfall that offers substantial payment reduction to the borrower while minimizing the financial impact on the lender. I then compare the optimized waterfall to the GSE, FHA, and VA mortgage modification options and provide specific recommendations that, if implemented, would allow the Federal agencies to offer deeper payment reductions and broaden the availability to modifications to help more homeowners in need while minimizing the cost to lenders.

Effect of Bank Mergers on the Price and Availability of Mortgage Credit

We examine the effect of bank mergers on the price and availability of credit in the residential mortgage market. We find that, compared to non-acquiring banks in the same local market, acquiring banks that gain large market shares charge significantly higher interest rates but also lend larger amounts on non-agency mortgages in the years following the acquisition, and these effects vary significantly across prime, Alt-A and subprime loans. The corresponding effects for mortgages sold to Fannie Mae and Freddie Mac are economically insignificant. Acquiring banks also increase approval rates for conventional mortgage applications but this effect is weaker for low-income, black and Hispanic applicants; and decrease approval rates for FHA mortgage applications, especially for low-income and non-white applicants.

Cookie Cutter Covenants: Regulation-Induced Homogeneity of Homeowners Associations

Several authors have argued that homeowners associations (HOAs) constitute an ideal institution for implementing Buchanan and Tullock's Calculus of Consent. HOAs provide collective goods and mitigate collective action problems. Developers offer constitutions ready-made, economizing on the decision-making costs which render unanimity infeasible. Competition will constrain real-estate developers to offer exactly those constitutions which consumers themselves would have crafted. However, critics of HOAs have voiced a variety of criticisms. For example, they allege that HOAs often suffer from a high degree of conflict and consumer dissatisfaction. I argue that government regulation – especially FHA mortgage underwriting – has homogenized HOAs, reducing the scope for competition and product differentiation. Developers often adopt legal boilerplate, lifting their HOA contracts from government handbooks. This reduced competition undercuts the economic justification of HOAs. To some degree, the flaws and shortcomings of HOAs may owe themselves to regulatory-induced homogeneity.

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FHA Loans in Foreclosure Proceedings: Distinguishing Sources of Interdependence in Competing Risks

A mortgage borrower has several options once a foreclosure proceedings is initiated, mainly default and prepayment. Using a sample of FHA mortgage loans, we develop a dependent competing risks framework to examine the determinants of time to default and time to prepayment once the foreclosure proceedings is initiated. More importantly, we examine the interdependence between default and prepayment, through both the correlation of the unobserved heterogeneity terms and the preventive behavior of the individual mortgage borrowers. We find that time to default and time to prepayment are affected by several factors, such as the Loan-To-Value ratio (LTV), FICO score and unemployment rate. In addition, we find strong evidence that supports the existence of interdependence between the default and prepayment hazards through both the correlation of the unobserved heterogeneity terms and the preventive behavior of individual mortgage borrowers. We show that neglecting the interdependence through the preventive behavior of the individual mortgage borrowers can lead to biased estimates and misleading inference.

The Impact of State Foreclosure and Bankruptcy Laws on Higher-Risk Lending: Evidence from FHA and Subprime Mortgage Originations

State foreclosure and bankruptcy laws govern the rights of mortgage lenders and borrowers during foreclosure and bankruptcy proceedings and thereby affect lenders' exposure to credit risk. In this paper, we examine the impact of these laws on the types of mortgages originated. The empirical identification is based on state-level variations in foreclosure and bankruptcy laws and a border estimation strategy. We find that higher-risk loans (FHA and subprime loans) are more likely to be originated in states with lender-friendly foreclosure laws. Also, higher-risk loans are less likely to be originated in states with a more generous bankruptcy homestead exemption. In addition, our results are consistent with the idea that FHA and subprime loans share a similar clientele and are close substitutes. These results are robust without the ordering assumption among conventional prime, FHA, and subprime loans.

Examination of Alternative FHA Mortgage Insurance Programs for Financing Single-Family Rental and Small Multifamily Rental Properties

More than one-half of all rentals are in single-family properties (those containing from 1 to 4 units). Although these properties are generally financed through the single-family mortgage market, investors’ financing options are more limited than those of owner-occupants. Small multifamily properties also make up a large share of and play an important role in the rental market. They comprise nearly one-third of all unsubsidized rental housing and are more likely than larger properties to serve lower income households. Despite this fact, gaps in financing for small multifamily properties — often defined as those having from 5 to 49 units — have long been identified.

The Impact of State Foreclosure and Bankruptcy Laws on Higher-Risk Lending: Evidence from FHA and Subprime Mortgage Originations

State foreclosure and bankruptcy laws govern the rights of mortgage lenders and borrowers during foreclosure and bankruptcy proceedings and thereby affect lenders’ exposure to credit risk. This paper seeks to understand the impact of these laws on the types of mortgages originated. The empirical identification is based on state-level variations in foreclosure and bankruptcy laws and a border estimation strategy. We find that higher-risk loans (FHA and subprime loans) are more likely to be originated in states with lender-friendly foreclosure laws. Also, higher-risk loans are less likely to be originated in states with a more generous bankruptcy homestead exemption. In addition, our results are consistent with the idea that FHA and subprime loans share a similar clientele and are close substitutes. These results are robust without the ordering assumption among conventional prime, FHA and subprime loans.

Mortgage Banking in the United States, 1870-1940

Taken in concert with two previously written volumes on the mortgage industry that highlight the immediate post-World War II era and the 1963-1972 period, this study accounts for nearly a century of mortgage banking progress and activity in America. What emerges is a picture of a highly differentiated industry in the 1920s that began to focus more narrowly on federally sponsored mortgage products and a single funding channel during the 1930s and in the immediate post-World War II period, and then transitioned yet again to a more diverse business model by the mid-1960s. During their early pre-federal intervention periods, farm and urban mortgage bankers focused on three similar elements: •The use of informal guarantees or explicit mortgage insurance to protect and attract investors in the markets for whole mortgage loans; •The development of correspondent relationships with life insurance companies; and •A failed experimentation with European-style mortgage banking structures. The Federal Farm Loan Bank system and the FHA mortgage insurance programs that restructured both the farm and urban mortgage banking sectors shared three common features: •They each encouraged the widespread adoption of long-term, amortized mortgage loans; •They each created mechanisms to stimulate the inter-regional transfer of mortgage credit and the convergence of mortgage rates and lending terms across regions; and •They each established federal chartering systems for privately financed European-style mortgage banks to create active secondary markets for long-term, amortized loans.

The New Deal, Race, and Home Ownership in the 1920s and 1930s

Many federal government housing policies began during the New Deal of the 1930s. Many claim that minorities benefitted less from these policies than whites. We estimate the relationships between policies in the 1920s and 1930s and black and white home ownership in farm and nonfarm settings using a pseudo-panel of repeated cross-sections of households in 1920, 1930, and 1940 matched with policy measures in 460 state economic areas. The policies examined include FHA mortgage insurance, HOLC loan refinancing, state mortgage moratoria, farm loan programs, public housing, public works and relief, and payments to farmers to take land out of production.

FHA/VA Financing and Price Discounts

This study examines the effects of FHA and VA mortgage financing on home prices. Using a database of nearly 9,000 homes sales in the San Antonio, Texas area, hedonic analyses reveal that both types of government-backed financing are associated with reductions in selling prices. The results may imply a cost shifting behavior on the part of buyers and an implicit subsidy on the part of sellers. The regressions show that the price discounts for FHA underwriting are about 4% (3.81% to 4.14%) relative to conventional financing. VA discounts, as expected, are smaller, ranging from about 2% to 3.46%. Given the prior literature, the results are likely a result of the fact that FHA and VA homebuyers are able to shift some costs to sellers.

The New Suburban History by Kevin M. Kruse, Thomas J. Sugrue

152 Michigan Historical Review elementary school; and developed a human-relations curriculum for teachers. Continuing the work she did on Progressive-Era clubwomen in her book, Toward a Tenderer Humanity and a Nobler Womanhood, Knupfer argues in this new volume that midwestern black clubwomen flourished from 1930 through the 1950s. These middle-class women offered social welfare assistance to new migrants and were patrons of the arts. The author uses the efforts of Irene McCoy Gaines to ?lustrate clubwomen's continued relevance. Gaines in particular was instrumental in helping the National Association of Colored Women have an impact on national and international politics, and this is of particular interest to historians of women's international activism during the cold war. Local efforts also flourished in such organizations as the Parkway Community House that hosted forums, theater performances, and exhibits that employed the arts to protest educational segregation, dilapidated housing, and employment ctiscrimination. The Chicago Black Renaissance has much to offer midwestern historians. Students of the Chicago Freedom Movement can trace its origins during the 1940s in teachers' protests about educational segregation and their use of curriculum bu?ding as cultural resistance. The Chicago Metropolitan YWCA's pioneering work on race relations in the 1960s has its roots in the Bronzev?le's South Parkway Y. Welfare-rights historians w?l appreciate Knupfer's accounts of public housing residents' leadership and community budding. A minor fault of this work is that the author's po?tical analysis of the Chicago Renaissance as a cultural front would benefit from more historical context about the Popular Front. Amy Schneidhorst University of Illinois at Chicago Kevin M. Kruse and Thomas J. Sugrue, eds. The New Suburban History. Chicago: University of Chicago Press, 2006. Pp. 264. Bibliography. IUustrations. Index. Notes. Paper, $24.00. The New Suburban History is a collection of ten essays on the American suburban landscape written by scholars in the field. According to the editors, who are known more for their studies on cities (Kruse on Adanta, Sugrue on Detroit), these articles put suburbs Book Reviews 153 and suburbanization into "a broader metropolitan perspective" that notes their "political and economic relationship with central cities, competing suburbs, and their regions" (p. 6). Hence, there are chapters by Matthew D. Lassiter on the conflict in the early 1970s about court-ordered busing in the Charlotte-Mecklenburg metropolitan area of North Carolina, by Margaret Pugh O'Mara on how federal cold-war defense policies coincided with mass suburbanization and influenced the locales of high-tech suburbs from California to Massachusetts, by Robert O. Self on the politics of suburban growth in San Francisco's East Bay suburbs, and by Peter Siskind on examples of discontent and reform in the suburban counties of Washington, D.C., and New York City. The salient issue of most of the essays, however, is race. The first two articles by David M. P. Freund and Arnold R. Hirsch deal exclusively with how federal policies of the New Deal and Eisenhower years excluded African Americans from the new post-World-War-II suburbs. By withholding FHA and VA mortgages from African Americans, the government kept them segregated in the central cities. Moreover, federal agencies denied that these policies were c?scriminatory, downplayed their role in the housing and credit markets, and insisted that the segregated suburbs arose solely from a race-neutral free market in housing. The essay by Andrew Wiese elaborates on how middle-class African Americans aspired to a suburban home and saw this as asserting their equality with whites, wh?e the four chapters with a metropolitan focus also reveal the exclusionary forces at work and the segregated geography of these broad areas. These seven articles "push [Suburban History] in new directions" (p. 5), but two others do not. Becky Nicolaides rehashes critiques of suburbia by urban sociologists and theorists, wh?e Michael Jones-Correa speculates on the effect of recent immigrants who move direcdy into suburban areas. The tenth chapter, by legal scholar Gerald Frug, explains how exclusionary techniques now in use are eroding the concept of the "public" in metropolitan America and is the most disturbing essay of the lot. Drawing upon exc?dent research and...

Enhancing Mortgage Credit Availability Among Underserved and Higher Credit-Risk Populations: An Assessment of Default and Prepayment Option Exercise Among FHA-Insured Borrowers

This paper estimates an option-based hazard model of the competing risks of FHA mortgage termination. Results indicate that the elevated default risks of loans originated among lower credit quality and minority borrowers are more than offset by the damped prepayment speeds of those loans, so as to result in markedly lower loan termination probabilities among underserved borrower groups. Those damped termination risks translate into sizable reductions in risk premia to investors in simulated lower credit-quality mortgage pools. Empirical findings suggest that such pooling and risk-based pricing of FHA-insured mortgages could serve to substantially reduce housing finance costs among underserved borrowers, so as to advance both their homeownership opportunities and related federal housing policy objectives.

Risk-Based Pricing and the Enhancement of Mortgage Credit Availability among Underserved and Higher Credit-Risk Populations

This paper estimates an option-based hazard model of the competing risks of FHA mortgage termination. Results indicate that the elevated default risks of loans originated among lower credit-quality and minority borrowers are more than offset by the damped prepayment speeds of those loans, so as to result in markedly lower loan termination probabilities among underserved borrower groups. Those damped termination risks translate into sizable reductions in risk premia to investors in simulated lower creditquality mortgage pools. Empirical findings suggest that such pooling and risk-based pricing of FHA-insured mortgages could serve to substantially reduce housing finance costs among underserved borrowers, so as to advance both their homeownership opportunities and related federal housing policy objectives.

Credit History and the FHA–Conventional Choice

Models explaining whether households choose conventional or FHA mortgage financing typically use differential insurance premiums, loan‐to‐value (LTV) and payment‐to‐income underwriting standards, and local economic conditions to explain household behavior. Using a large and geographically diverse sample, we expand the standard choice model by including measures of borrower credit history. We find that the ability of a homebuyer to avoid credit problems is an important part of the FHA–conventional choice. In addition, credit scores of FHA borrowers are worse on average than those of conventional borrowers, but as LTV increases credit scores of conventional borrowers deteriorate.

Non‐linearity in race and FHA mortgage lending: a neural network analysis

Explains the strengths and weaknesses of neural networks and uses them to analyse racial patterns in 1994 mortgage (conventional and FHA) data for the city of Atlanta (USA). Admits the difficulty of interpreting the results of neural network models but suggests that race does have an impact on lending patterns. Compares the results from a regression analysis and finds that as the percentage black increases in a neighbourhood FHA loans increase, conventional loans decreased and conventional loans denied increase; but these trends reverse when the black percentage rises further. Considers the practical reasons for the findings and concludes that race remains an important factor in the spatial distribution of lending.

Individual and Neighborhood Effects on FHA Mortgage Activity: Evidence from HMDA Data

The effects of individual and neighborhood characteristics on relative FHA-insured mortgage applications and originations are examined. A sample of low- and moderate-income households drawn from the 1990 and 1991 Home Mortgage Disclosure Act is analyzed using census tract data. Although the relationship between relative FHA-insured mortgage activity and minority composition in a census tract is not significant, there is a negative relationship between median family income and FHA-insured mortgage activity controlling for individual characteristics of borrowers and some census tract characteristics.