FHA Loan Performance and Adverse Selection in Mortgage Insurance
Posted: 17 Aug 2016
Date Written: August 15, 2016
Abstract
Using propensity score matching and survival analysis, we examine the performance of FHA- and privately-insured home purchase mortgages relative to uninsured mortgages. Privately-insured loans are more likely to default than uninsured loans with comparable risk characteristics, indicating the presence of adverse selection. By contrast, loans insured by FHA are not more likely to default than similar uninsured loans. Hazard ratios for both insurance types fall when an adjusted rate spread variable, but does not eliminate the disparity between uninsured and privately-insured loans. On the other hand, privately-insured loans are less likely to prepay while FHA-insured loans are more likely to prepay relative to uninsured loans.
Keywords: Mortgage; Default; Insurance; Federal Housing Administration; Adverse Selection
JEL Classification: R3, R38, R51, G22, G28
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