Serious Delinquency and Strategic Default Among Low-Income Urban Homeowners
Despite various government lending programs that target low-income families, those families have the highest overall rates of mortgage default, and default has well-documented, adverse effects on families. Because of these effects, mortgage delinquency and strategic default pose issues of high relevance for social workers. Using mortgage performance data and survey data drawn from the Community Advantage Program (CAP), this study examines the prevalence of delinquency and strategic default among low-income families.
Established in 1998 as a secondary-market mortgage demonstration program for community reinvestment loans, CAP provides 30-year fixed-rate loans with near-prime interest rates to low-income borrowers who would not ordinarily qualify for access to prime credit, and over 46,000 loans have been made as part of CAP. Data for this study include mortgage-origination data, monthly-payment history, and zip-code-level house-price estimates. A subset of about 3,700 borrowers has provided supplemental survey data annually since 2003. The analysis proceeds in two parts. First, I compare the serious delinquency (delinquent at least 90 days or in foreclosure) rates for CAP mortgages with those for other mortgage products. For comparison purposes, I draw data from the National Mortgage Delinquency Survey. Second, I investigate the extent to which low-income households default on their mortgages and compare rates of default due to liquidity constraints with rates of default due to negative equity. Previous analyses of strategic default for the general U.S. homeowner population use data from credit bureaus or the Financial Trust Index Survey. An upper bound on the incidence of strategic default can be obtained from loan-payment history. Survey data facilitate an assessment of hypothetical negative equity scenarios that are only rarely observed in practice. I replicate both types of prior analyses using the CAP data and then compare the results to those of other studies.
The serious-delinquency rate among CAP mortgages in the fourth quarter of 2011 is lower than that among other mortgages made to similar borrowers (9% vs. 19–35%). Although CAP borrowers are about twice as likely to express a willingness to default strategically for a given amount of negative equity, their perceptions and beliefs about the morality of strategic default are equivalent to those of higher-income borrowers: about 82% of CAP borrowers believe that strategic default is morally wrong, and they perceive the strategic-default rate among their peers to be 34%. Moreover, the cumulative incidence of strategic default is lower among CAP borrowers (upper bound of 4–9%) than among the general U.S. homeowner population (12–17%). Thus, most low-income defaults result from liquidity constraints rather than from negative equity.
Conclusions and Implications
The U.S. Housing crisis illustrates the importance of foreclosure prevention efforts for low-income families. Those efforts should begin with low-risk mortgage products and full-documentation underwriting. They should end with interventions (e.g., loan modifications) that relax liquidity constraints. Social Workers can and should play an important role in implementing and running interventions like CAP.