Mortgage Refinancing, Adverse Selection, and Fha's Streamline Program
Dice Center Working Paper No. 99-16
32 Pages Posted: 24 Mar 2000
Date Written: October 1999
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: Suggested Citation