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Just Released: Analysis of FHA Single-Family Default and Loss Rates

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HUD's Office of Policy Development & Research recently
commissioned a study of default and loss rates for FHA
single-family loans. The report uses data on FHA-insured
loans from 1992, 1994, and 1996 inclusive of borrower
credit to examine the factors that influence both the
probability of default and the size of dollar losses per
default (loss rate).

The analysis shows that increases in the front-end ratio,
LTV, note rate, and borrower incomes are associated with
increases in loss rates. Increases in FICO scores,
borrower reserves, loan amounts, house price growth,
relative house prices, and tract incomes are associated
with lower loss rates.

In addition, while there is a link between factors
affecting default probabilities and those affecting loss
rates, there are differences in the relative importance
of the factors affecting each. For example, FICO scores
appear to be more important in determining default
behavior; house price growth and relative house price
appear to be more important in affecting loss rates.

The analysis also takes a look at minorities' default
rates versus dollar losses. Though tentative, the
findings suggest that basing automated underwriting on
the expected loss rate per loan, rather than on default
probabilities, will not substantially improve the accept
rate for African American applicants; conversely, it
might lead to a higher representation of these
individuals and families in the higher-risk category.

"Analysis of FHA Single-Family Default and Loss Rates" is
available as a free download from HUD USER at
https://www.huduser.gov/portal/publications/affhsg/FHASingleFamily.html
or in printed form for a nominal charge by calling HUD
USER at 1-800-245-2691.
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