Mortgage lending, sample selection and default

Traditional models of mortgage default suffer from sample-selection bias be cause they do not control for the loan approval process. This paper estimat es a sample-selection-corrected default model using the 1990 Boston Federal Reserve loan application sample and the 1992 Federal Housing Authority (FH A) foreclosure sample. A single-equation FHA default model appears to suffe r from substantial selection bias, but the bias primarily arises from the o mission of credit history and other variables that are only in the applicat ion sample. Therefore, default models that contain detailed information on applicants may not suffer from substantial selection bias. Finally, a test for prejudice-based discrimination is developed and conducted, but the find ings are inconclusive.