Not all banks are created equal and the location of a bank is key to explaining why there are high default rates in one area but not another, says researcher Stephanie Moulton at Ohio State University.
Moulton's research finds that delinquency and foreclosure rates are significantly lower for high risk borrowers (those with credit scores below 660) when they get their mortgage from a local lender. Home owners receiving a mortgage from a local lender were less likely to default on their loans than those who borrowed from a more distant bank or mortgage company, Moulton found.
The door you walk into when you're looking for a loan matters a lot, says Moulton. Local banks seem to offer some protection to home buyers, particularly those with low incomes who may be seen as risky borrowers.
So what makes local banks such a better choice? Moulton says local lenders tend to place more weight on factors beside credit score alone in determining if you meet the standards for a loan. For example, they take into account such criteria as how long you've been working with your current employer and whether you make regular deposits in a savings account. They also are more likely to have a continuing relationship with the borrower, such as through checking and saving accounts, Moulton notes.
This kind of information may give a more complete picture of whether a person can really afford a mortgage, particularly for higher-risk borrowers, Moulton says.
She says the findings suggest that policies for affordable homeownership need to expand their focus.
A lot of policies concentrate on the loan itself, and that's definitely important. But for higher-risk, lower-income borrowers, mortgage institutions also matter quite a bit, she said. These borrowers need to work with lenders that will properly evaluate their application and give them support after they receive the mortgage.
Source: Some Banks Help Keep Mortgage Holders Out of Default, Studies Find, The Ohio State University (2011)