Research Publication

Credit Risk of Low Income Mortgages - White Paper, May 17, 2017

May 17, 2017


A new Fannie Mae Housing Working Paper studies the relationship between underwriting standards, housing market environment, and default risk for low and moderate income homebuyers. Using Fannie Mae loan-level data on fixed-rate, owner-occupied purchase mortgage acquisitions in three distinct underwriting regimes and subsequent home price environments (2002-2004, 2005-2007, and 2011-2013), the authors find that loan performance improves as a borrower’s income relative to area median income rises – for both actual performance and the marginal predicted performance after controlling for standard credit risk measures, vintage, and region. The authors also find that for pre-crisis loans applying the tighter underwriting standards of the post-crisis period dramatically reduces the performance differences across relative income, indicating the importance of underwriting standards for sustainable low and moderate income lending and homeownership. Additionally, for the majority of low income borrowers, credit risk is well accounted for by the usual risk factors considered in the underwriting process, along with vintage and regional controls. For the very low income population (i.e., less than or equal to 50% area median income), the authors find that the additional risk has been predictably stable across different underwriting and housing market environments.

To learn more, read our latest Fannie Mae Housing Working Paper: Credit Risk of Low Income Mortgages.