February 13, 2004

Automated Underwriting: Friend or Foe to Low-Mod Households and Neighborhoods?

Susan Wharton Gates, Cindy Waldron, Peter Zorn

BABC 04-13: Automated underwriting (AU) systems have become a tool of choice in mortgage lending decisions. While AU provides significant benefits to mortgage originators and investors, some question AU’s impact on the access to credit for underserved populations. In this paper, we use information from Freddie Mac’s Loan Prospector® (LP) automated underwriting system to assess the impact of AU on low- and moderate-income households and neighborhoods. Our evidence supports the view that AU improves access for these populations in the homeownership process. In particular, we find evidence that higher usage of AU/LP is associated with higher mortgage application accept rates for low- and moderate-income households and neighborhoods. For AU to reach its full potential in underserved markets, however, implementation challenges need to be addressed. These include issues related to nontraditional credit and the prevalence of unbanked consumers in low- and moderate-income communities…

Category: Working Papers

Read More About: Housing Markets & Conditions, Homeownership, Affordability