Working Paper: NBER ID: w15802
Authors: Diego Aragon; Andrew Caplin; Sumit Chopra; John V. Leahy; Yann Lecun; Marco Scoffier; Joseph Tracy
Abstract: Federal Housing Administration (FHA) insurance has doubled over the past two years and is projected to redouble to $1.5 trillion over the next five. Despite clear signs of strain in the FHA's Mutual Mortgage Insurance Fund, a recent actuarial review indicates that the FHA will not need any form of government support. We identify four risk factors that make such a funding request more likely; the review underestimates how many FHA borrowers are underwater and in economic distress; it uses measures of house values that lower loss estimates; it does not incorporate early-warning signals of future losses that are available from mortgage delinquency; and it ignores potential risks associated with recent down-payment assistant programs despite higher losses on previous programs of this type. We propose measures that could be taken to improve the predictive accuracy of FHA risk assessment.
Keywords: No keywords provided
JEL Codes: D14; G21; G28; H81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| underwater status (Q22) | increased default risk (G33) |
| unemployment (J64) | increased default risk (G33) |
| inaccurate house value models (R31) | miscalculation of claims on the MMI fund (G22) |
| underestimation of default costs (G33) | miscalculation of claims on the MMI fund (G22) |
| downpayment assistance programs (H53) | increased risk to the FHA insurance fund (G28) |
| improved risk assessment methods (C53) | reduced risk of funding requests (G32) |
| reliance on inaccurate house value models (R31) | overvaluation of collateral (G33) |
| overvaluation of collateral (G33) | increased default rates (G33) |
| increased default rates (G33) | higher claims on the MMI fund (G52) |
| delinquency rates (G33) | higher claims on the MMI fund (G52) |
| downpayment assistance programs (H53) | higher loss rates (G33) |