Risks and Incentives in Underserved Mortgage Markets

Subsidized loans may help increase home ownership in low income neighborhoods with positive social benefits; however, there are risks and costs to the homeowners themselves. Home ownership increases incentives to maintain property and neighborhood, as well as decreasing the outflow of rents from low-income zones. These benefits however are not costless to participants. With a mortgage comes the possibility of a default, the financial demands of maintenance, the reduction in alternate investment opportunities, an increased exposure to fluctuations in local economic conditions, and a drastic reduction in the liquidity of personal wealth. In this paper, we examine the role of the owner-occupied house in the asset allocation decision of a family living in an area characterized as a low income neighborhood. We find that the current subsidies are likely to be too low relative to the costs. In particular, the tax law makes home ownership relatively less attractive to low-income families. This may explain a lack of home ownership and, thus, mortgage lending in low-income neighborhoods.