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 Multi-year study finds 'hotspots' of ammonia over world's major agricultural areas
17.03.2017 | University of Maryland

nachricht Diabetes Drug May Improve Bone Fat-induced Defects of Fracture Healing
17.03.2017 | Deutsches Institut für Ernährungsforschung Potsdam-Rehbrücke

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: A Challenging European Research Project to Develop New Tiny Microscopes

The Institute of Semiconductor Technology and the Institute of Physical and Theoretical Chemistry, both members of the Laboratory for Emerging Nanometrology (LENA), at Technische Universität Braunschweig are partners in a new European research project entitled ChipScope, which aims to develop a completely new and extremely small optical microscope capable of observing the interior of living cells in real time. A consortium of 7 partners from 5 countries will tackle this issue with very ambitious objectives during a four-year research program.

To demonstrate the usefulness of this new scientific tool, at the end of the project the developed chip-sized microscope will be used to observe in real-time...

Im Focus: Giant Magnetic Fields in the Universe

Astronomers from Bonn and Tautenburg in Thuringia (Germany) used the 100-m radio telescope at Effelsberg to observe several galaxy clusters. At the edges of these large accumulations of dark matter, stellar systems (galaxies), hot gas, and charged particles, they found magnetic fields that are exceptionally ordered over distances of many million light years. This makes them the most extended magnetic fields in the universe known so far.

The results will be published on March 22 in the journal „Astronomy & Astrophysics“.

Galaxy clusters are the largest gravitationally bound structures in the universe. With a typical extent of about 10 million light years, i.e. 100 times the...

Im Focus: Tracing down linear ubiquitination

Researchers at the Goethe University Frankfurt, together with partners from the University of Tübingen in Germany and Queen Mary University as well as Francis Crick Institute from London (UK) have developed a novel technology to decipher the secret ubiquitin code.

Ubiquitin is a small protein that can be linked to other cellular proteins, thereby controlling and modulating their functions. The attachment occurs in many...

Im Focus: Perovskite edges can be tuned for optoelectronic performance

Layered 2D material improves efficiency for solar cells and LEDs

In the eternal search for next generation high-efficiency solar cells and LEDs, scientists at Los Alamos National Laboratory and their partners are creating...

Im Focus: Polymer-coated silicon nanosheets as alternative to graphene: A perfect team for nanoelectronics

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are less stable. Now researchers at the Technical University of Munich (TUM) have, for the first time ever, produced a composite material combining silicon nanosheets and a polymer that is both UV-resistant and easy to process. This brings the scientists a significant step closer to industrial applications like flexible displays and photosensors.

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

International Land Use Symposium ILUS 2017: Call for Abstracts and Registration open

20.03.2017 | Event News

CONNECT 2017: International congress on connective tissue

14.03.2017 | Event News

ICTM Conference: Turbine Construction between Big Data and Additive Manufacturing

07.03.2017 | Event News

 
Latest News

German Federal Government Promotes Health Care Research

29.03.2017 | Awards Funding

Periodic ventilation keeps more pollen out than tilted-open windows

29.03.2017 | Health and Medicine

Researchers discover dust plays prominent role in nutrients of mountain forest ecoystems

29.03.2017 | Earth Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>