Affordable lending programs administered through state Housing Finance Agencies have limited studies specifying how those mortgages compare to regular mortgages, but a recent analysis conducted using Fannie Mae data suggests that HFA mortgages are less likely to default.
As part of Fannie Mae and Freddie Mac’s strategic plan commissioned by the Federal Housing Finance Agency in 2018, the agencies must, among other things, continue to support liquidity, stability and access to homeownership in the housing market.
These programs are essential to struggling lower-income households, dealing with barriers like wealth and location. In fact, a recent study conducted by Apartment List, an online retail marketplace, suggests that residential segregation also impacts the likelihood of lower-income households from affording mortgages.
While empirical data is still lacking about whether or not these programs are beneficial, this new study offers some answers.
Authors from The Ohio State University, San Jose State University and the University of Chicago collected data from 1 million Fannie Mae single-family home purchase loans to low-to-moderate first-time homebuyers to estimate the impact of HFA originations on loan performance.
The analysis indicated that HFA loans have a lower risk of default and foreclosure than loans originated to otherwise similar LMI borrowers. This means that through assistance, HFA borrowers are more likely to make mortgage payments, compared to other low-income borrowers.
The study shows loans originated through HFA programs are 20% less likely to go into default than for similar non-HFA borrowers. They also have a 30% lower relative risk of foreclosure and the likelihood of prepayment is 30% lower.
The study also discovered that certain mechanisms lead to different loan outcomes. HFA borrowers who were lacking in documentation or had none at all were more likely to default in their loans, and the location between the borrower and the branch was a significant predictor of the relativity of payment.
On the other hand, preventive practices like loan education reduced the likelihood of default mortgages. HFA borrowers that trusted lenders through education and counseling experienced a higher rate of commitment.
Loan default risk may also depend on the structure of the HFA loan program. According to the study, a substantially higher proportion of HFA loans have sub-financing compared to first time homebuyer loans in Fannie Mae’s general population. Nearly 50% of HFA borrowers in 2008 had community second mortgages from 2012 to 2014, which is 47% higher than non-HFA first time home buyers during the same period, according to the study.
This and the fact that HFA loans are less likely to be originated through broker channels across all periods of time, may be a defining factor.