Home Energy Efficiency and Mortgage Risks: Research funded by the Institute for Market Transformation

Many have theorized that energy efficient homes should have lower default risks than standard homes because the former are associated with lower energy costs, which leaves more money to make the mortgage payment. However, few empirical studies have been conducted due to limited data availability. This study examines actual loan performance data obtained from CoreLogic, the lending industry's leading source of such data. To assess whether residential energy efficiency is associated with lower default and prepayment risks, a national sample of about 71,000 ENERGY STAR- and non-ENERGY STAR-rated single-family home mortgages was carefully constructed, accounting for loan, household, and neighborhood characteristics.The study finds that default risks are on average 32 percent lower in energy-efficient homes, controlling for other loan determinants. This finding is robust, significant, and consistent across several model specifications. A borrower in an ENERGY STAR residence is also one-quarter less likely to prepay the mortgage. Within ENERGY STAR-rated homes, default risk is lower for more energy-efficient homes. The lower risks associated with energy efficiency should be taken into consideration when underwriting mortgages

Individual and Neighborhood Impacts of Neighborhood Reinvestment's Homeownership Pilot Program

The benefits of owning versus renting a home have been extolled by policy makers for many years, and there is substantial recent research to support those views. Yet the research supporting these claims largely has been conducted on general samples of homeowners. Low- and moderate-income homeowners may have a different experience due to difficulties in keeping up with housing-related payments or a difference in the quality of the homes being purchased. A major objective of this report is to assess the impacts of home ownership on a sample of low- and moderate-income homebuyers.We also know very little about the experience of lower-income homebuyers after they purchase their homes. To what extent do low-income homebuyers experience unexpected costs associated with maintenance or repairs? What proportion of low-income buyers take out home equity loans and what do they use the funds for? What proportion of low-income homebuyers default on their loans? What do buyers feel are the greatest advantages and challenges to owning a home? Answers to these questions may provide insight into how prospective lower-income homebuyers can be better prepared for home ownership.The research described in this report involved a sample of persons who graduated from home-ownership classes taught by eight NeighborWorks organizations that participated in the Neighborhood Reinvestment Homeownership Pilot program. Neighborhood Reinvestment has encouraged its affiliated NeighborWorks organizations to offer services designed to increase access to home ownership among low- and moderate-income families. Building on Neighborhood Reinvestment's Campaign for Home Ownership, the Homeownership Pilot program was designed to assist low- and moderate-income households to obtain home ownership by providing them with counseling, down-payment assistance and affordable loans.This report is the third of three reports on the implementation, outcomes and impacts of the Homeownership Pilot program. The first report, entitled An Assessment of Neighborhood Reinvestment's Homeownership Pilot Program: A Preliminary Report (2000), covered the early implementation of the Pilot. The second report, entitled Supporting the American Dream of Home Ownership: An Assessment of Neighborhood Reinvestment's Homeownership Pilot Program (2002), covers the outcomes of the Homeownership Pilot, including the number of persons counseled and new homebuyers assisted. This final report was designed to:1. Assess the proportion of customers trained by NeighborWorks organizations who go on to buy homes, as well as the factors that predict who among those graduating from the homeownership training go on to buy homes and who do not.2. Assess both the social and financial impacts of buying a home on the program participants.3. Assess the postpurchase experience of low-income homebuyers.4. Assess the loan repayment experience of a sample of the affordable loans held by Neighborhood Housing Services of America (NHSA).5. Assess changes in the Pilot program target areas before, during and after the Pilot program was in effect

Neighborhood Subprime Lending and the Performance of Community Reinvestment Mortgages

This study analyzes the spillover effect of the spatial concentration of subprime lending on the performance of recently originated community reinvestment mortgages targeting low- to moderate-income borrowers. The level of subprime lending in a census tract is found to be a significant predictor of the default and prepayment probability of the community reinvestment loans in the same neighborhoods. The results suggest that the concentration of subprime lending and the resulting clusters of foreclosed properties reduce neighborhood property values and increase price volatility. The lowered property values and the increased volatility increase the default probability of borrowers holding any loan product, including community reinvestment mortgages. This study provides new evidence concerning the negative impacts of the concentration of subprime lending in certain neighborhoods.

Supporting the American Dream of Homeownership: An Assessment of Neighborhood Reinvestment's Home Ownership Pilot Program

Based on recommendations from a group of NeighborWorks organization (NWO) directors, Neighborhood Reinvestment initiated the Campaign for Home Ownership in 1993. That campaign provided NWOs with both funding and technical assistance to expand homeownership opportunities in the communities they serve. Based on the experiences of organizations involved with that campaign, Neighborhood Reinvestment staff distilled a model homeownership assistance strategy they call Full-Cycle Lending. This model includes six components: partnership building, pre-purchase home-buyer education, flexible loan products, property services, post-purchase counseling and neighborhood impact. Based on the success of this first five-year Campaign, Neighborhood Reinvestment supported a second five-year campaign called the Campaign for Home Ownership 2002.In 1998 Congress authorized $25 million for a NeighborWorks Home Ownership Pilot program designed to leverage additional local support and test new strategies for assisting first-time home buyers. In less than four months, the Neighborhood Reinvestment Home Ownership Campaign staff developed and implemented specific program guidelines for the distribution of funds to local NWOs. These guidelines allowed NWOs great flexibility in the use of Pilot funds including using the funds for upgrading computers, hiring staff, developing marketing plans and programs, capitalizing loan funds, providing down payment assistance as well as other uses.Campaign staff developed guidelines for three funding categories, A, B, and C, designed to respond to the different needs of NWOs. Category A grants (up to$500,000) were to assist NWOs that were already assisting 30 or more home buyers a year increase the number of home buyers assisted. Category B grants (up to $500,000) were to assist NWOs that were already assisting a large number of new home buyers enhance the positive impacts of home ownership on their target areas by undertaking other neighborhood improvement activities as well as increasing the number of home buyers assisted. Category C grants (up to$50,000) were to assist NWOs that were assisting a relatively low number of new home buyers build their capacities to do so. A total of 35 Category A grants were made, nine Category B grants and 40 Category C grants.To assist Campaign and Pilot sites in achieving their goals, Neighborhood Reinvestment provides several types of technical assistance. The semi-annual Neighborhood Reinvestment Training Institute offers a variety of courses on developing homeownership promotion programs and home-owner education methods. Neighborhood Reinvestment has also developed an extensive array of marketing materials that can be used by Campaign and Pilot organizations. Finally, Neighborhood Reinvestment Campaign and field staff assist participating organizations with special challenges as they arise.This report is the second of three reports evaluating the outcomes, implementation process and impacts of the Pilot. The outcome evaluation was designed to document the results of the Pilot including the number of persons trained and/or counseled, the number of new home owners assisted, and the value of housing units purchased, built or rehabilitated with the assistance of the Pilot organizations. This evaluation is based on information provided to Neighborhood Reinvestment by participating NWOs. The process evaluation was designed to document and evaluate the efforts of Neighborhood Reinvestment and participating NWOs in planning and implementing the Pilot programs. This part of the evaluation is based on interviews conducted in two rounds of site visits to eight Category A and B Pilot programs -- once in the fall of 1999 and once in the spring and summer of 2001. Finally, the impact evaluation was designed to assess the influence of the Pilot on the participating NWOs and their clients. The evaluation is based on interviews with NWO staff and focus groups of new home owners assisted in the eight sites visited

The Value Impact of New Residential Construction and Neighborhood Disinvestment on Residential Sales Price

The topic of neighborhood redevelopment is central to residential appraisal and the lending process. We examine both the effect of neighborhood upgrading and decline, captured by subsidized new residential construction and sustained property tax delinquency respectively, on the sales price of one-to-two family homes. The research uses a two stage hedonic price model of 12,100 individual residential sales in Cleveland, Ohio during 1992-94. Results show a significant positive effect of $670 on the sales price of existing housing for each new unit built in a one-to-two block area. A decrease in sales price of$778 is associated with a 1% increase in the tax delinquency rate. The spatial variability of these effects is also explored.

Expanding the Mortgage Credit Box: Lessons from the Community Advantage Program

The Great Recession has raised concerns about the promotion of homeownership to low- and moderate-income families. The subprime credit boom of the early 2000s was replaced with an overall credit retrenchment. The reforms to the housing finance system, begun with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, remain incomplete given the uncertain future of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). In light of this uncertainty, can or should homeownership continue to be supported, and if so, in what way? In this paper, we examine one model of targeted mortgage lending for low-income households: the Community Advantage Program (CAP). Using more than ten years of longitudinal data, we summarize the design and key outcomes of CAP before and after the financial crisis, including mortgage performance, wealth accumulation, and the drivers of these outcomes. We then present lessons learned and suggest innovative approaches for the design of similar programs in the future

NC's Anti-Predatory Lending Law: Doing What It's Supposed To Do: A Reply

We reply to criticisms of our recent study about North Carolina's Anti-Predatory Lending Law reducing predatory loan terms and preserving access to credit (NC's Anti-Predatory Lending Law: Doing What it's Supposed to Do). To examine whether the decline in overall subprime lending in North Carolina, following passage of the predatory lending law, was due to a decline in loans with legitimate terms or to a reduction in loans with abusive terms, we examined specific market segments and market practices using loan level data from the Loan Performance Asset Backed Securities (ABS) database. Our study revealed that, although the total volume of subprime originations in North Carolina declined, the number of home purchase loans was unaffected by the law. Given the robustness of the LP data, we are baffled by the criticism and disappointed by confusion that has arisen over mistaken data interpretation. For reasons discussed in this paper, we stand by our descriptive study and will continue to use LP data in our future work.Technology and Industry, Regulatory Reform

Risky Borrowers or Risky Mortgages Disaggregating Effects Using Propensity Score Models

In this research, we examine 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, we construct a sample of comparable borrowers with similar risk characteristics but holding the two different loan products. We 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.

Differential Impacts of Structural and Cyclical Unemployment on Mortgage Default and Prepayment

The Great Recession (the fourth quarter of 2007 through the second quarter of 2009) has been characterized by high rates of foreclosures and unemployment. Using a sample of community reinvestment loans, we examine the impact of structural unemployment and cyclical unemployment on mortgage terminations (default and prepayment). We find that mortgage default and prepayment are more sensitive to changes in the structural component of the local unemployment rate than in the cyclical component. In addition, depending on whether structural unemployment rates are high or low, borrowers and lenders react differently to the incentives to terminate a loan