Overages, Mortgage Pricing and Race (original) (raw)

Is there discrimination in mortgage pricing? The case of overages

Journal of Banking & Finance, 2003

We conduct an empirical investigation to explain observed differentials in mortgage overage pricing. Our analysis makes several contributions. First, we study an area of mortgage pricing that is little understood by consumers and has received little scrutiny in the literature. Second, we consider the impact of the market power of individual loan officers on overages paid by borrowers, particularly minorities. Third, we include a number of borrower and lender characteristics not available in previous analysis.

An Unintended Consequence of Mortgage Financing Regulation – a Racial Disparity

The Journal of Real Estate Finance and Economics, 2018

This study investigates whether mortgage financing regulation unintentionally leads to minorities paying a higher loan contract rate under a risk-based pricing system. We provide evidence that minority borrowers prepay less frequently than comparable non-minority borrowers and thus have lower termination risk. Racially neutral lending policies prohibit the lender from considering this reduced termination risk, resulting in a disparate impact from the overstatement of a minority borrower's termination risk. While we find little evidence of a rate differential among borrowers under the current regulatory structure, results show minorities pay a higher rate when the variation in termination risk is recognized.

Preferential Treatment in Financial Contracts: Does Broker Race Affect Mortgage Prices?

SSRN Electronic Journal, 2018

We test for preferential treatment in mortgage contracts using a novel dataset that allows us to observe the race and ethnicity of both parties to the contract. We find that minorities pay more in fees than similarly qualified whites when obtaining a loan through the same white broker. Critically, we find that the premium paid by minorities depends on the race of the broker. We also examine recent policy changes regarding broker compensation rules that may reduce these price disparities, but may also limit access to credit for minorities.

Mortgage Prepayment, Race, and Monetary Policy

SSRN Electronic Journal, 2020

Over the period 2005 to 2020, Black borrowers with mortgages insured by Fannie Mae or Freddie Mac paid interest rates that were almost 50 basis points higher than those paid by non-Hispanic white borrowers. We show that the main reason is that non-Hispanic white borrowers are much more likely to exploit periods of falling interest rates by refinancing their mortgages or moving. Black and Hispanic white borrowers face challenges refinancing because, on average, they have lower credit scores, equity, and income. But even holding those factors constant, Black and Hispanic white borrowers refinance less, suggesting that other social factors are at play. Because they are more likely to exploit lower interest rates, white borrowers benefit more from monetary expansions. Policies that reduce barriers to refinancing for minority borrowers and alternative mortgage contract designs that more directly pass through interest rate declines to borrowers can reduce racial mortgage pricing inequality.

Racial Discrimination and Mortgage Lending

The Journal of Real Estate Finance and Economics, 2011

Looking at a sample of conventional fixed-rate mortgages, this paper examines whether lending practices are consistent with the competitive hypothesis that the racial and ethnic composition of the borrower's neighborhood affects the contract rate charged only to the extent that these characteristics objectively influence the probability of the loan defaulting or prepaying. Our results, however, reject this hypothesis, showing instead that borrowers in predominantly black neighborhoods pay a significantly higher contract rate than is consistent with evidence of their behavior.

Mortgage Lending and Race: Is Discrimination Still a Factor?

Environment and Planning A: Economy and Space, 1996

The significance of race in mortgage lending has emerged as a major public policy issue and focus of scholarly research in the United States. In this paper the experiences of black and Latino mortgage loan applicants in a large midwestern metropolitan area are examined by means of a database on the disposition of individual mortgage loan applications that is now available. It is found that, after controlling for income, age of housing, housing value, and occupancy status, black applicants and applicants from predominantly black communities are less likely to have their loan applications approved than are white applicants or applicants from predominantly white areas. Although no disparities were associated with Latino applicants, those applicants from predominantly Latino communities were less likely to be approved than were others. Specific research and policy recommendations are offered to develop a further understanding of the racial implications of the mortgage market and for red...

The Influence of Race in Residential Mortgage Closings

Journal of Real Estate Research

This study examines how applicants identified as Asian, Black or Hispanic differ in mortgage closing outcomes compared to the remaining applicants. First, the findings show that minority applicants are somewhat less likely to close a loan for purchase, but equally likely to close a loan for refinance. A more important question this study addresses is whether minority borrowers have less efficient closing outcomes. The findings show no statistical difference between minority and non-minority applicants. This indicates that originators do not demonstrate a ''taste for discrimination'' by basing their loan approval for minorities on whether the loan can be profitably sold. I n t r o d u c t i o n LaCour-Little (1999) presents a comprehensive review of the substantial body of literature addressing whether minorities experience racial discrimination in obtaining mortgages. The gist of the standard argument is that if mortgages made to minorities are more profitable at the margin than mortgages made to nonminorities, minorities are experiencing economic discrimination. A number of studies lend support to one side, while another set of studies lend support to the other. Some of these papers address the denial rate of minority mortgage applications, while others address other issues such as default rates, and losses on defaulted loans made to minority borrowers. The studies show that minorities are more often denied financing-the questions revolve around whether this is due to racial prejudices (i.e., non economic factors), or due to minority applicants having lower credit ratings, incomes or other factors. This study takes a different tack than has thus far been addressed in the literature. It assesses how minority status affects mortgage loan closing outcome. First it addresses whether a minority is less likely to close on a locked loan application. Given that minority applications are more often denied, it follows that one would expect to see a lower closing rate. The more substantial contribution of this study is to assess whether minorities have less economically efficient closing outcomes. This issue is important, as one potential for economic discrimination, ceteris paribus, would be to show a tendency to deny minority applications if interest

Differences in the Cost of Mortgage Credit Implications for Discrimination

Journal of Real Estate Finance and Economics, 1999

This paper estimates the mortgage interest rate differences paid by Asian, Hispanic, and African±American borrowers to a national home mortgage lender in the years 1988±1989. Controlling for differences in market rates, rate lock protection, and borrower risk factors, conventional loan interest rates are almost perfectly race-neutral. The single deviation from race-neutrality is that when interest rates fall during the borrower's rate-lock period, only African±American borrowers are unable to capture a share of this decline. Government (FHA and VA) credit models show small premia paid by African±American borrowers of about $1.80 per month on average. In government lending, Hispanic borrowers alone are unable to capture rate declines occurring during the borrower's rate-lock period.

The Performance of Low Income and Minority Mortgages

2007

This article analyzes the performance of low-income and minority mortgages (LIMMs) from a large sample of fixed-rate conventional conforming mortgages. We find that low-income borrowers are less likely to prepay when it is optimal, whereas black and Hispanic borrowers prepay more slowly than other borrowers, regardless of the option's value. After controlling for equity, credit history and some other variables, LIMMs default slightly more frequently and have about the same loss severity as other loans. Our results suggest that, for most yield curve situations, differences in LIMM prepayment behavior have little effect on pricing.

Collateral Risk and Demographic Discrimination in Mortgage Market Equilibria

2017

Observations of significant differences in loan terms between demographically distinct groups of borrowers are often interpreted as evidence of ethnic, racial or gender discrimination by lenders. We consider, in stark contrast to existing models of demographic discrimination, a model of mortgage lending in an economy having complete markets, common knowledge and arbitragefree pricing. Market equilibria in this classical environment may exhibit discriminatory loan pricing by lenders even when borrowers, distinguished only by differences in an observable demographic trait, share identical measures of individual credit risk. Such pricing will be observed if these traits are directly correlated with certain features of the property securing a mortgage loan which, while omitted from standard statistical underwriting and regulatory review procedures, reduce the value of the collateral to the lender in case of foreclosure. When loans are secured by such properties and both lenders and borr...