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Seller Contributions and Mortgage Performance

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Abstract

A growing share of mortgages display some financial assistance from sellers, or seller contributions, leading to an inflated transaction price thus distorting the loan-to-value ratio (LTV). Our study finds that such loans have sharply increased rates of delinquency, even after accounting for this LTV distortion effect. Further, when contributions are more likely to have been requested by the buyers, instead of the sellers bringing them to the bargaining table, the association with delinquency is clearest. These contributions signal buyers’ potential liquidity constraints which may make them more vulnerable to financial shocks after origination, thus more likely to enter delinquency.

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Data Availability

Data used in this research paper is Fannie Mae proprietary information and is not publicly available.

Notes

  1. See for example: Von Fustenberg (1969); Campbell and Dietrich (1983); Foote et al. (2008); Campbell and Cocco (2015). For a review of the literature see Quercia and Stegman (1992).

  2. It should be noted that such distinction may not be as straightforward, since borrowers can choose to pay more points to reduce interest rate or pick the smaller closing cost option through a slightly higher rate, while the lenders’ profit are likely not affected. This choice reflects borrowers’ liquidity constraints and their expected tenures in a property.

  3. Per regulation policy, sellers are usually prohibited from giving the potential buyers downpayment funds, but they can provide some gift assistance in term of the closing cost, so long as it falls within the limits set by the lender.

  4. In 2015 the Consumer Financial Protection Bureau (CFPB) combined relevant mortgage disclosure regulations into a single Closing Disclosure. Information from this form is captured in a new common industry dataset called the Uniform Closing Dataset.

  5. The HUD-1 form was used to itemize the services and fees charged to the buyer and to the seller by the lender, prior to the introduction of CFPB’s Closing Disclosure in 2015.

  6. See Sect. 3.7 for a comparison of the impact of seller contribution on loan performance based on the measures from these alternative data sources.

  7. Maximum IPC amount for investor properties is 2%, regardless of LTV, for more details see: https://www.fanniemae.com/content/guide/selling/b3/4.1/02.html.

  8. Note that the model includes FICO scores below 620. Although a borrower with a FICO score in this range would typically not be able to obtain a conforming loan in the current environment, these scores were more common in the pre-Great Recession years.

  9. We present the full set of yearly coefficient estimates in Appendix (Table 9). We observe that for the 2006–2007 year pair, there is a more notable difference in the coefficient estimates across these two years than for any other year pair. That being said, for ease of exposition, the figures present results by year-pair samples.

  10. These fees include those charged for: underwriting; appraisal; escrow; discount points; prepaid interest; mortgage insurance; rate lock; processing; credit report; loan origination; or loan application.

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Acknowledgements

The authors wish to thank Michael LaCour-Little for valuable feedback on this paper. The authors are solely responsible for the contents, findings, and views expressed in this paper, which do not necessarily reflect the opinions of their respective employers. Any errors are our own.

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Authors and Affiliations

  1. Kukun, Inc., Menlo Park, CA, USA

    Franklin Carroll

  2. Fannie Mae, Washington, DC, USA

    Nuno Mota & Weifeng Wu

  3. Unaffiliated, Washington, DC, USA

    Eric Rosenblatt

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  1. Franklin Carroll
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  2. Nuno Mota
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Correspondence to Nuno Mota.

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Appendix

Appendix

Table 9 Adjusted LTV Model Results by Acquisition Year (Dependent Variable is Indicator of 90 + Days Delinquent in 1st 24 Mths.)
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Carroll, F., Mota, N., Wu, W. et al. Seller Contributions and Mortgage Performance. J Real Estate Finan Econ (2023). https://doi.org/10.1007/s11146-023-09968-7

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