Availability of Mortgage Loans in Volatile Real Estate Markets |
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Authors: | Michael Marschoun |
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Affiliation: | Freddie Mac, Model Development Department, 8200 Jones Branch Drive, McLean, Virginia, 22102 |
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Abstract: | This paper presents a default model for mortgages on single-family houses implying a higher probability of negative equity and thus default in real estate markets with high price volatility. Mortgage lenders compensate for the increased default probability in volatile markets by demanding higher downpayments or increased creditworthiness of loan applicants, thus making mortgage loans more difficult to obtain. An empirical analysis finds greatly varying price volatility in single-family real estate markets in a sample of 42 cities. Consistent with the implications of the model, the empirical analysis finds that the fraction of low-downpayment loans declines in volatile markets. |
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