Multifamily Mortgage Credit Risk: Lessons from Recent History

21 Pages Posted: 20 Feb 1999

See all articles by Lawrence Goldberg

Lawrence Goldberg

Government of the United States of America - Office of Federal Housing Enterprise Oversight

Charles A. Capone

Federal Housing Finance Agency

Abstract

This article uses an innovative default model to explain increases in conventional multifamily mortgage default rates in the 1980s. Factors behind these changes are well known, but quantification of relative influences has not yet been performed. Our theoretical model has investors or borrowers defaulting if the underlying project has both negative equity and negative cash flows, a "double trigger." This leads to modeling default probabilities as a function of primary underwriting ratios, rental market conditions after loan origination, and institutional factors. A binary logit model is estimated with data on over 7,500 conventional multifamily mortgages purchased by Fannie Mae and Freddie Mac from 1983 to 1995. The results are used in simulations to explain why default rates increased in the 1980s and 1990s. We find that the increase was due to lax underwriting, declines in the tax benefits of owning real estate, and declines in rental market conditions. Default rates would have been worse had it not been for declines in interest rates.

JEL Classification: G2, G1, H5, D6

Suggested Citation

Goldberg, Lawrence and Capone, Charles A., Multifamily Mortgage Credit Risk: Lessons from Recent History. Available at SSRN: https://ssrn.com/abstract=149409 or http://dx.doi.org/10.2139/ssrn.149409

Lawrence Goldberg (Contact Author)

Government of the United States of America - Office of Federal Housing Enterprise Oversight

1700 G Street NW., Suite 400
Washington, DC 20552
United States

Charles A. Capone

Federal Housing Finance Agency ( email )

451 7th St, SW
Washington, DC 20024
United States
2025851373 (Phone)

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