"We find that the relaxation of borrowing constraints dominates early in the life of the mortgage," the authors state, "but default rates become larger than for principal-repayment mortgages late in the life of the mortgage due to the considerably higher probability of negative home equity."
Defaults tend to occur when a home enters a negative equity state, which is usually caused by several factors, including home price declines in a low inflation environment and large mortgage balances with little money down at the time of origination. However, after looking at mortgage default trends in other countries as well, Campbell and Cocco found that there is a variable lag time to when negative equity hits and the borrower stops making payments.
And with FHA 3.5% down payment loans being very popular.
Read it allPutting little down at the time of origination greatly increases the probability of default, the report concluded, with that probability increasing even more for loans with LTV ratios in excess of 90%.