Practical Applications of The Lowdown on Low-Down-Payment Mortgages: Is It Safe?

Abstract

In The Lowdown on Low-Down-Payment Mortgages: Is It Safe?, from the Summer 2021 issue of The Journal of Fixed Income, authors Gary Fissel, an independent consultant, and Gerald Hanweck and Anthony Sanders of the School of Business at George Mason University address the key drivers of mortgage loan default around the time of the 2007–2009 financial crisis.

Using substantial individual mortgage data from the period of 2000 to 2008, the authors developed a model for evaluating the significance of various factors in explaining and predicting changes in the status of mortgage delinquencies and whether they became more severely delinquent or recovered. The model includes factors such as initial borrower and mortgage characteristics, county-level employment, and housing markets. Based on their application of the model, the authors found that the dominant factors in delinquencies are initial borrower and mortgage characteristics such as the loan-to-value (LTV) ratio, documentation of borrower income and assets, and borrower credit scores (FICO scores).