Mortgage underwriting overlooks homeowner's biggest risk: concentration

Mortgage underwriting meticulously assesses borrower risk through credit scores, debt-to-income ratios, and property valuations, but largely overlooks the concentration risk inherent in a homeowner's investment in a single property. This concentration can lead to financial catastrophe for homeowners if their property's value declines substantially, impacting their equity, mobility, and ability to refinance. Research using Freddie Mac mortgages from 1999-2020 indicated that conventionally structured mortgages had modeled expected credit losses of 29-30 basis points, while a modeled diversified zero-down structure showed significantly lower expected losses of 5-6 basis points. This suggests that reducing homeowner concentration risk could also decrease mortgage credit risk. The current industry focus on affordability often exacerbates leverage without addressing this fundamental investment risk. A proposed diversification mechanism would protect homeowners from severe underperformance of their individual property relative to a diversified housing benchmark, offering a more sustainable path to homeownership.