Mortgage Refinancing, Adverse Selection, and Fha's Streamline Program

Dice Center Working Paper No. 99-16

32 Pages Posted: 24 Mar 2000

See all articles by David M. Brickman

David M. Brickman

Federal Home Loan Mortgage Corporation (FHLMC)

Patric H. Hendershott

University of Aberdeen - Centre for Property Research; National Bureau of Economic Research (NBER)

Date Written: October 1999

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, etc.) in FHA's streamline refinance program in 1992 likely reduced the level of adverse selection in the FHA portfolio during the 1993-94 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.

JEL Classification: G21, G22

Suggested Citation

Brickman, David M. and Hendershott, Patric H., Mortgage Refinancing, Adverse Selection, and Fha's Streamline Program (October 1999). Dice Center Working Paper No. 99-16, Available at SSRN: https://ssrn.com/abstract=207950 or http://dx.doi.org/10.2139/ssrn.207950

David M. Brickman

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
Mailstop 486
McLean, VA 22101
United States
(703) 903-2343 (Phone)
(703) 903-3736 (Fax)

Patric H. Hendershott (Contact Author)

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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