Enabling access to affordable and sustainable homeownership has long been a goal of U.S. housing policy and is central to Fannie Mae’s mission. A critical part of achieving this mission is to support programs and lenders that extend homeownership sustainably, that is, providing mortgages to lower income households who are able to maintain their mortgage payments over time. Lower income households face significant barriers to purchasing homes, including lack of wealth for a downpayment and other challenges in qualifying for conventional mortgage financing. Further, after purchasing a home, lower income homeowners are often at higher risk of default due to unaffordable mortgage terms, higher loan-to-value ratios, and fragile household balance sheets.
Affordable lending programs administered through state Housing Finance Agencies (HFAs) provide a potential vehicle for realizing this goal. From the 1970s through 2014, state housing finance agencies (HFAs) in the U.S. facilitated home purchases for more than 3.2M households, the majority of whom were low-to-moderate income (LMI) first-time homebuyers with incomes below 115% of the area median income. Unlike higher cost subprime mortgages originated during the housing boom, mortgages originated by state HFAs do not rely on premium pricing and exotic product features to extend homeownership to LMI households, but instead originate mortgages at or below market interest rates. HFA loans often include value-added services such as homebuyer education and counseling and preventative servicing. Further, HFA originated mortgages typically meet conforming loan standards and the majority are securitized by Fannie Mae, Freddie Mac, or Ginnie Mae.
Despite a longstanding history of serving LMI homeowners, there are few empirical analyses of HFA originated mortgages. How do HFA borrowers compare to conventional first-time homebuyers? Do loans originated through HFA programs perform better than loans to otherwise similar borrowers? And if yes, what are the mechanisms that lead to better loan outcomes? Is it something about the structure of the loan, or additional services provided that reduces the risk of default? These are the questions that Professors Stephanie Moulton of The Ohio State University, Matthew Record of San Jose State University, and Erik Hembre of the University of Chicago tackle in their recent working paper.
The working paper leverages data on more than one million Fannie Mae single-family, home purchase loans to LMI first-time homebuyers, securitized between 2005 and 2014. Loan outcomes are tracked through September 2016. More than 10% of the loans in this sample were originated through state HFA loan programs. Of the HFA loans, 21% were to very low income households (incomes below 50% of area median), 50% were to low income households (between 50-80% of area median), 18% were to households with incomes between 81 and 100%, and only 12% were to households with incomes greater than 100% of area median. Thus, based on income alone, nearly 90 percent of the mortgages in the HFA sample went to households with income less than area median.
To analyze loan performance, the researchers construct a matched sample of HFA and non-HFA loans within the Fannie Mae database, ensuring that the borrowers were similar at the time of loan closing with regard to geography, loan terms, income, credit score, and loan-to-value (LTV) ratio. The working paper indicates that among this sample of LMI borrowers with loans originated between 2005 and 2014, by October 2016 more than one in five experienced a 90-day default, about 14% experienced foreclosure, and nearly half of the borrowers prepaid their loans (either through refinancing or home sale). Findings from a competing hazard analysis show that the risk of ever experiencing 90-day default is about 20 percent lower for borrowers with loans originated through HFAs, and the risk of foreclosure is about 30 percent lower. The relative likelihood of prepayment is also about 30% lower. To account for changing dynamics in the mortgage market during our study period, we estimate our models separately for origination cohorts in three time periods: 2005-2007; 2008-2011; and 2012-2014. The reduced risk of default associated with HFA loans is not observed for the 2012-2014 cohort of originations; however, less than one percent of loans in this cohort had experienced a 90-day default by the end of the study period.
**excerpts from article by Stephanie Moulton & Hamilton Fout for Fannie Mae via Economic Focus