Housing cost burden ratios have been used by government and private entities in the U.S. for a century or more. Government entities have used them for two broad purposes:
a) to determine the number of households that qualify for public rent or mortgage assistance in localities, states and the country, and
b) to determine the amount of financial help that would (or should) be distributed to such households.
Private sector institutions in the mortgage industry have generally used cost burden ratios to assess borrower risk for home mortgage loans, and if the borrower qualifies, to determine loan amounts. The ongoing U.S. housing market meltdown—driven quite significantly by mortgage defaults of households with financially unsustainable loans—provides good cause for examining the utility and efficacy of these ratios for assessing mortgage default risk. This study employs a mixed-methods research design using simple qualitative and quantitative methods on data from the Consumer Bankruptcy project.
The qualitative component uses a Boolean analysis framework in comparing information on a few households—half with high housing cost burdens and half with low cost burdens—and explores differences in household monthly expenditure patterns between them. The quantitative segment of the study uses multiple logistic regression analysis to explore a few basic yet broad questions such as:
- What were housing cost burdens (measured by front-end and back-end ratios) of the households in the dataset at a) loan origination and b) at bankruptcy filing? Do high housing cost burdens correlate in statistically significant ways with one or more reasons provided for bankruptcy filing?
- Did the housing cost burdens (front-end and back-end ratios) vary at origination or bankruptcy filing in statistically significant ways by:
a) age of head of household,
b) race of head of household,
c) household size,
d) household type—single parent or dual parent,
e) household income,
f) total household assets,
g) type of loan—original purchase or refinance,
h) loan term—fixed rate or adjustable and
i) type of house—single family detached, condominium/townhouse or mobile/manufactured home?
Findings of this study have significant implications for public and private sector responses to the current housing market meltdown in the short term, and improve measurement and understanding of the nation’s housing affordability crisis in the long term.