Thursday, July 09, 2015

FHFA Paper: "The Marginal Effect of First-Time Homebuyer Status on Mortgage Default and Prepayment"

by Bill McBride on 7/09/2015 10:57:00 AM

Here is a new paper from FHFA Senior Economist Saty Patrabansh: The Marginal Effect of First-Time Homebuyer Status on Mortgage Default and Prepayment

During the housing bubble, there an increase in first time buyers as shown in the first graph below (from paper).

Also first time homebuyers defaulted at a higher rate than repeat buyers.

Patrabansh shows that the higher default rate for first-time homebuyers is related to borrower differences, and, after adjusting for these differences, first-time hombuyers defaulted at the same rate as repeat homebuyers.

 From the conclusion:

First-time homebuyer mortgages acquired by the Enterprises generally performed worse than repeat homebuyer mortgages. But fi rst-time homebuyers are also inherently diff erent from repeat homebuyers. For example, they are younger, and have lower credit scores, lower home equity, and less income and therefore are less likely to withstand fi nancial stress or take advantage of financial innovations available in the market than repeat homebuyers. In other words, in terms of many borrower, loan, and property characteristics that can be determined at the time of loan origination, the distributional make-up of fi rst-time homebuyers is somewhat weaker than that of repeat homebuyers.
Click on graph for larger image.

This graph from the paper shows the surge in first-time homebuying during the housing bubble.

Note: As I've noted before, this is one of the tragedies of the housing bubble - many people were lured into buying before they were really ready, and have soured on the homebuying experience.

Patrabansh presents several charts on the differences between first-time homebuyers and repeat buyers (see paper Appendix A). First time homebuyers are younger than repeat buyers, have lower monthly income, lower FICO scores, have a higher percentage of one borrower mortgages, took out higher LTV loans, and had a higher payment-to-income and debt-to-income ratios.

From the paper:
Once these distributional di fferences are accounted for in an econometric model, however, there appears to be virtually no di fference between the "average" first-time and repeat home- buyers in their probabilities of default. Therefore the di fference in the first-time and repeat homebuyer loan performance is due to the diff erence in distributional make-up of the two groups in terms of borrower, loan, and property characteristics and not because fi rst-time homebuyers are an inherently riskier group. As long as the borrower, property, and loan characteristics known at the time of origination are able to determine a borrower's ability to repay well and risk is priced accordingly, there should not be a concern that the average first-time homebuyer mortgages are inherently any riskier than the average repeat home- buyer mortgages once those characteristics are taken into account. Both types of mortgages can be expected to default at a similar rate if borrowers, loans, and properties are similar in all other regards.