Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Some banks help keep mortgage holders out of default, studies find

04.01.2011
While the nation’s foreclosure crisis has focused blame on bad loan practices by some lenders, new research shows how some banks may have actually reduced the default risk of their homebuyers.

Researchers found that low-income homeowners who received a mortgage from a local lender were less likely to default on their loans than are those who borrowed from a more distant bank or mortgage company.

Even if two similar homeowners received the same home loan, with the same interest rate, the one who got the loan at the local lender might be better off in the long run.

“The door you walk into when you’re looking for a loan matters a lot,” said Stephanie Moulton, assistant professor in the John Glenn School of Public Affairs at Ohio State University.

“Local banks seem to offer some protection to homebuyers, particularly those with low incomes who may be seen as risky borrowers.”

A few other studies have found that borrowers who get mortgages from banks rather than mortgage brokers are less likely to default on their loans. But Moulton said this new research is among the first to find that not all banks are equal, and that bank location is a key.

Moulton’s research looks at homebuyers who have participated in state administered Mortgage Revenue Bond (MRB) programs. MRB programs are funded through tax-exempt mortgage revenue bonds, and help lower-income, first-time home buyers by offering affordable mortgages. In contrast to the subprime mortgage product that offered high-interest rate loans, the MRB loan product provides market or below-market interest rate loans to similar borrowers.

Moulton previously studied Indiana’s program, and is now researching Ohio’s program.

Overall, her findings from both studies show that delinquency and default rates for state MRB programs are much lower than the rates for subprime or even other conventional loans to similar borrowers.

However, Moulton finds that there are significant differences by lender. For some lenders, fewer than 9 percent of their MRB borrowers were ever 60 days late in making a payment. However, for other lenders, up to 37 percent of their borrowers were similarly late in making payments.

“I was trying to find out why there was such a wide variation in default rates, even though they were all offering the same loan product,” Moulton said.

Both studies show that for higher-risk borrowers (those with credit scores below 660), delinquency and foreclosure rates are significantly lower if they got their mortgage from a local lender.

Moulton emphasized that this effect is not due to the loan product, as all borrowers receive the same type of mortgage (including interest rate) through the program. And personal characteristics of the borrowers, such as credit score, debt and income, are controlled for in the analysis. In other words, the effect truly seems to be related to the localness of the bank, and not other hidden factors.

In the Indiana study, recently published in Housing Policy Debate, Moulton examined the loan performance (as of March 2008) of more than 5,000 homebuyers who purchased homes between 2004 and 2006. Higher-risk borrowers with loans from lenders with a lot of local loan activity (a high concentration of loans in the county where the homebuyer bought their home) were much less likely to be late on their mortgage or enter foreclosure, than homebuyers with loans from non-local lenders.

In the Ohio analysis, presented recently at the Association for Public Policy Analysis and Management conference in Boston, Moulton is studying the loan performance (as of June 2010) of more than 20,000 homebuyers who purchased homes between 2005 and 2008. Rather than focusing on the location of the lender’s loan activity (as in the Indiana study), this study examines the location of bank branches relative to where the homebuyers purchased their homes. Again, Moulton finds that higher-risk homebuyers with loans from banks with branches close to their new homes (less than 10 miles) were significantly less likely to default on their mortgages.

But what is it about local banks that make them better choices for many low-income borrowers?

Moulton said she believes it has to do with the type of information banks collect on potential borrowers, and the support they offer to their borrowers.

Many mortgage brokers base their decisions on whether to offer a mortgage on one or more key numbers, such as a credit score. In other words, if your credit score is above a certain level, and you meet other criteria, the broker will offer the loan. The same may be true of large, non-local banks, Moulton said.

But local lenders may place more weight on other factors, such as how long you’ve been working for your current employer, and whether you make regular deposits in a savings account.

“This kind of information may give a more complete picture of whether a person can really afford a mortgage, particularly for higher-risk borrowers,” Moulton said.

“Some of the local bankers told me they won’t even look at a credit score until they have talked to an individual and determined if they think he or she can make the payments.”

In addition, local bankers are more likely to have a continuing relationship with the borrower, through the checking and savings accounts held by the customer.

“If there’s a relationship, the borrower may feel more obligated to make their payments. And the banks may provide more education and information to the borrowers, equipping them to be better homeowners,” she said.

The results of these studies suggest that policies aimed at making homeownership affordable may need to expand their focus, Moulton said.

“A lot of policies concentrate on the loan itself, and that’s definitely important. But for higher-risk, lower-income borrowers, mortgage institutions also matter quite a bit,” she said.

“These borrowers need to work with lenders that will properly evaluate their application and give them support after they receive the mortgage.”

This research was supported in part by grants from the U.S. Department of Housing and Urban Development.

Contact: Stephanie Moulton, (614) 247-8161; Moulton.23@osu.edu
Written by Jeff Grabmeier, (614) 292-8457; Grabmeier.1@osu.edu

Stephanie Moulton | EurekAlert!
Further information:
http://www.osu.edu

More articles from Studies and Analyses:

nachricht Smart Data Transformation – Surfing the Big Wave
02.12.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT

nachricht Climate change could outpace EPA Lake Champlain protections
18.11.2016 | University of Vermont

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Novel silicon etching technique crafts 3-D gradient refractive index micro-optics

A multi-institutional research collaboration has created a novel approach for fabricating three-dimensional micro-optics through the shape-defined formation of porous silicon (PSi), with broad impacts in integrated optoelectronics, imaging, and photovoltaics.

Working with colleagues at Stanford and The Dow Chemical Company, researchers at the University of Illinois at Urbana-Champaign fabricated 3-D birefringent...

Im Focus: Quantum Particles Form Droplets

In experiments with magnetic atoms conducted at extremely low temperatures, scientists have demonstrated a unique phase of matter: The atoms form a new type of quantum liquid or quantum droplet state. These so called quantum droplets may preserve their form in absence of external confinement because of quantum effects. The joint team of experimental physicists from Innsbruck and theoretical physicists from Hannover report on their findings in the journal Physical Review X.

“Our Quantum droplets are in the gas phase but they still drop like a rock,” explains experimental physicist Francesca Ferlaino when talking about the...

Im Focus: MADMAX: Max Planck Institute for Physics takes up axion research

The Max Planck Institute for Physics (MPP) is opening up a new research field. A workshop from November 21 - 22, 2016 will mark the start of activities for an innovative axion experiment. Axions are still only purely hypothetical particles. Their detection could solve two fundamental problems in particle physics: What dark matter consists of and why it has not yet been possible to directly observe a CP violation for the strong interaction.

The “MADMAX” project is the MPP’s commitment to axion research. Axions are so far only a theoretical prediction and are difficult to detect: on the one hand,...

Im Focus: Molecules change shape when wet

Broadband rotational spectroscopy unravels structural reshaping of isolated molecules in the gas phase to accommodate water

In two recent publications in the Journal of Chemical Physics and in the Journal of Physical Chemistry Letters, researchers around Melanie Schnell from the Max...

Im Focus: Fraunhofer ISE Develops Highly Compact, High Frequency DC/DC Converter for Aviation

The efficiency of power electronic systems is not solely dependent on electrical efficiency but also on weight, for example, in mobile systems. When the weight of relevant components and devices in airplanes, for instance, is reduced, fuel savings can be achieved and correspondingly greenhouse gas emissions decreased. New materials and components based on gallium nitride (GaN) can help to reduce weight and increase the efficiency. With these new materials, power electronic switches can be operated at higher switching frequency, resulting in higher power density and lower material costs.

Researchers at the Fraunhofer Institute for Solar Energy Systems ISE together with partners have investigated how these materials can be used to make power...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

ICTM Conference 2017: Production technology for turbomachine manufacturing of the future

16.11.2016 | Event News

Innovation Day Laser Technology – Laser Additive Manufacturing

01.11.2016 | Event News

#IC2S2: When Social Science meets Computer Science - GESIS will host the IC2S2 conference 2017

14.10.2016 | Event News

 
Latest News

UTSA study describes new minimally invasive device to treat cancer and other illnesses

02.12.2016 | Medical Engineering

Plasma-zapping process could yield trans fat-free soybean oil product

02.12.2016 | Agricultural and Forestry Science

What do Netflix, Google and planetary systems have in common?

02.12.2016 | Physics and Astronomy

VideoLinks
B2B-VideoLinks
More VideoLinks >>>