Mortgages by first-time homebuyers tend to perform worse than those of established buyers, but that doesn’t mean first-timers are an inherently riskier group, according to a new working paper authored by Saty Patrabansh of the Federal Housing Finance Agency's Office of Policy Analysis and Research.
The working paper, released Thursday, analyzed mortgages backed by Fannie Mae and Freddie Mac between 1996 and 2013. The author found that while first-time mortgages performed worse than repeat homebuyer mortgages, the comparison is actually an apples-to-oranges mismatch.
Patrabansh called first-time homebuyers “inherently different from repeat homebuyers. They are younger and have lower credit scores, lower home equity, and less income and, therefore, are less likely to withstand financial stress or take advantage of financial innovations available in the market than repeat homebuyers.”
However, with these “distributional differences” factored out, Patrabansh reported, there is virtually no difference between the “average” first-time and repeat homebuyer in their probabilities of default. “The difference in the first-time and repeat homebuyer loan performance is due to the … borrower, loan, and property characteristics and not because first-time homebuyers are an inherently riskier group,” the author stated.
According to the paper, if first-time buyers were riskier, it could have consequences. If first-timers were actually more likely to default, the author wrote, any community that sees an influx of first-time buyers could portend increased foreclosures.
As long as the borrower, property, and loan characteristics at the time of origination reflect a borrower’s ability to repay, there should not be a concern that the average first-time buyer is inherently any riskier than the average repeat homebuyer, the author stated. “Both types of mortgages can be expected to default at a similar rate if borrowers, loans, and properties are similar in all other regards,” Patrabansh wrote.
That said, the author did find that first-time buyers are less likely to prepay a mortgage compared to repeat homebuyers, and the author suggested paying closer attention to prepayment issues in future studies.
“At the very least, this result suggests that a loan-month level mortgage default-prepayment model should test controlling for whether or not borrowers are first-time buyers,” Patrabansh stated.