Performance of Low-Income and Minority Mortgages

This paper analyses the performance of low-income and minority loans (LIMLs) from a large sample of fixed-rate mortgages purchased by Freddie Mac in the 1990s. Our focus is on both default and prepayment behavior, especially prepayment. Prepayment is complicated because from a performance standpoint it matters whether a loan is prepaid after rates have fallen (taking advantage of the borrower’s call option) or when rates are the same or have risen. Loans that prepay less rapidly when rates fall (i.e., when the option is “in the money”) are more valuable to investors, but loans that prepay rapidly otherwise are less valuable…