Year Published
2005
Abstract
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.
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.
Research Category