Working Paper: NBER ID: w18190
Authors: Andrew Caplin; Anna Cororaton; Joseph Tracy
Abstract: We produce first results on the sustainability of homeownership for recent (2007-2009) FHA-insured borrowers. More than 15 percent of these borrowers have already been 90 days or more delinquent, while less than 7 percent have completed their graduation to sustainable homeownership by finally paying off all FHA mortgages. We project that the proportion who have been 90 days or more delinquent will rise above 30 percent within five years, while fewer than 15 percent will have completed their graduation to sustainable homeownership. We show that the FHA uses an outmoded econometric model that leads it to underestimate delinquency risk to borrowers and financial risks to taxpayers. Fannie Mae and Freddie Mac use this same outmoded model. More accurate estimates would serve the cause of transparency and help policy-makers to determine these organizations' appropriate roles in the U.S. housing finance markets of the future.
Keywords: FHA; homeownership; delinquency; sustainability
JEL Codes: H81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| FHA's lending practices (G21) | borrower delinquency (G51) |
| economic context (E66) | borrower outcomes (G51) |
| FHA's outdated econometric model (C51) | underestimation of delinquency risk (G33) |
| high loan-to-value ratios (LTVs) (G21) | likelihood of defaults (G33) |