NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Endogenous Mortgage Choice, Borrowing Constraints and the Tenure Decision

William C. LaFayette, Donald R. Haurin, Patric H. Hendershott

NBER Working Paper No. 5074
Issued in March 1995
NBER Program(s):   PE

Earlier research has shown that lender income and wealth constraint ratios discourage homeownership. This empirical research has been based on home purchasers using an 80 percent loan-to-value (LTV) fixed-rate conventional loan. Employing the same assumption, we find that the constraints lowered the ownership rate of our 1919 young home purchasers by about 20 percentage points. However, households are not restricted to putting 20 percent down and choosing a fixed- rate loan. When we allow households to select the optimal LTV and mortgage type (adjustable or fixed-rate with Federal Housing Administration (FHA) or conventional insurance), the percentage of our sample that is credit constrained declines from 71 to 49. Moreover, the measured impact on the homeownership rate of the constraints falls to only 4 percentage points. Further, FHA loans are estimated to increase homeownership by only 0.1 to 0.2 percentage points.

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Document Object Identifier (DOI): 10.3386/w5074

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