Encouraging Mortgage Lending in 'Underserved' Areas: The Potential for Expanding Home Ownership in the US

This study estimates the size of the potential US home owner market and examines the relative default risks associated with expanded home ownership among lower-income, 'underserved' households. Using the 1990 SIPP database, a logit model is developed that predicts the likelihood that a renter household will move into home ownership during an 18-month period. Parameters are estimated using a white, suburban renter sub-population. These are then applied to a nationally-representative sample of renter householdsto produce an aggregate,expected number of transitions into home ownership. The difference between this expected number and the actual number of transitions represents the baseline estimate of the number of additional transitions that might be expected were lending practices and conditions prevailing for whites in suburban areas to be applied everywhere else. The relative default risks are assessed of these potential home owners and the renter households who moved into home ownership by applying a well-known default probability equation. The resulting distributions of default probabilities are then compared, using low- and median-priced housing cost assumptions and for several income groups. In the extended phase of the analysis, an estimation is made of various pools of prospective home owners that might be tapped with more aggressive lending policies. These prospective home owners have both a large propensity to make the move into home ownership (relative to those that actually do), and do not present above average default risks were they to do so. The baseline analyses indicate that just over 600 000 (2.1 per cent) more US renter households would become home owners during the period if they could buy low-cost homes and the underwriting practices and opportunitiesfound in white suburban areas were applied uniformly across the nation. If they were limited to purchase of a median-cost home, this figure drops slightly to 522 000 (1.85 per cent). Extended analyses suggest that up to 2.71 million low-to-moderateincome renter households (7.6 per cent of all renter households) should prove more attractive to mortgage lenders than the average first-time home buyer and possess a relatively high probability of moving into home ownership.