Published Article – Peer Reviewed | 2011
Risky Borrowers or Risky Mortgages Disaggregating Effects Using Propensity Score Models
Low-income home loan borrowers who obtain more sustainable, less risky, mortgage products exhibit significantly lower default risks.
This research examines the relative risk of subprime mortgages and a sample of community reinvestment loans originated through the Community Advantage Program (CAP).
Using the propensity score matching method, researchers construct a sample of comparable borrowers with similar risk characteristics but holding the two different loan products.
They find that the sample of community reinvestment loans have a lower default risk than subprime loans, very likely because they are not originated by brokers and lack risky features, such as adjustable rates and prepayment penalties.
Results suggest that similar borrowers holding more sustainable products exhibit significantly lower default risks.