Abstract
When interest rates decline, borrowers whose houses have appreciated significantly refinance out of FHA, while those whose houses have not do not. We provide evidence of the negative impact of regular (nonstreamline) refinancing in the mid-1980s on the average quality of FHA's surviving business. We demonstrate this adverse selection both informally and econometrically. We also argue that the sharp reduction in the cost of streamline refinancing (limited documentation, no required appraisal, and so on) in FHA's streamline refinance program in 1992 likely reduced the level of adverse selection in the FHA portfolio during the 1993 to 1994 refinancing boom, and we provide quantitative estimates of the resultant reduction in claim rates. While this reduction in cost almost certainly increased the financial viability of FHA during the middle 1990s, it may not in the long run.
Similar content being viewed by others
References
Abraham, J. E. and P. H. Hendershott. (1997). "Bubbles in Metropolitan Housing Markets," Journal of Housing Research 7, 191–207.
Ambrose, B. W., R. J. Buttimer, Jr., and C. A. Capone. (1997). "Pricing Mortgage Default and Foreclosure Delay," Journal of Money Credit and Banking 29, 314–325.
Archer, W., D. C. Ling, and G. A. McGill. (1996). "The Effect of Income and Collateral Constraints on Residential Mortgage Terminations," Regional Science and Urban Economics 26, 235–261.
Caplin, A., C. Freeman, and J. Tracy. (1997). "Collateral Damage: How Refinancing Constraints Exacerbate Regional Recessions," Journal of Money Credit and Banking 29, 496–516.
Cox, D. R. (1970). The Analysis of Binary Data. London: Spottiswoode, Ballantyne.
Davidson, A., and M. Herskoritz. (1995). "Analyzing the Path of Depending in MBSs," In The Handbook of Mortgage-Backes Securities (pp. 687–718). Chicago: Probus.
Deng, Y., J.M. Quigley, and R. Van Order. (1996). "Mortgage Default and Low Downpayment Loans: The Costs of Public Subsidy," Regional Science and Urban Economics 29, 263–285.
Deng, Y., J. M. Quigley, and R. Van Order. (2000). "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica 68, 275–307.
Foster, C. and R. Van Order. (1990–1991). "Estimating Prepayments," Secondary Mortgage Markets (Winter), 24–26.
Hendershott, P. H., W. LaFayette, and D. H. Haurin. (1997). "Debt Usage and Mortgage Choice: The FHAConventional Decision," Journal of Urban Economics 41, 202–217.
Hendershott, P. H., and W. Schultz. (1993). "Equity and Nonequity Determinants of FHA Single-Family Mortgage Foreclosures in the 1980s," Journal of the American Real Estate and Urban Economics Association 21, 405–430.
Hendershott, P. H., and J. A. Waddell. (1992). "The Changing Fortunes of FHA's Mutual Mortgage Insurance Fund and the Legislative Response," Journal of Real Estate Finance and Economics 5, 119–132.
Kau, J. B. and D. C. Keenan. (1995). "An Overview of the Option-Theoretic Pricing of Mortgages," Journal of Housing Research 6, 217–244.
Mattey, J. and N. Wallace. (1998). Housing Prices and the (In)stability of Mortgage Prepayment Models: Evidence from California. Working Paper 98-05, Federal Reserve Bank of San Francisco, July.
Peristiani, S., P. Bennett, G. Monsen, R. Peach, and J. Raiff. (1997). "Credit, Equity and Mortgage Refinancing," Economic Policy Review, Federal Reserve Bank of New York (July).
Price Waterhouse. (1995). An Actuarial Review for Fiscal Year 1994 of the Federal Housing Administration's Mutual Mortgage Insurance Fund. Office of Government Services, Washington, D C.
Stiglitz, J. and A. Weiss. (1981). "Credit Rationing in Markets with Imperfect Information," American Economic Review 71, 393–410.
Weicher, J. C. (1992). "FHA Reform: Balancing Public Purpose and Financial Soundness," Journal of Real Estate Finance and Economics 5, 133–150.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Brickman, D.M., Hendershott, P.H. Mortgage Refinancing, Adverse Selection, and FHA's Streamline Program. The Journal of Real Estate Finance and Economics 21, 153–174 (2000). https://doi.org/10.1023/A:1007891926416
Issue Date:
DOI: https://doi.org/10.1023/A:1007891926416