Credit Risk, Regulatory Costs and Lending Discrimination in Efficient Residential Mortgage Markets (original) (raw)

Discrimination in the Credit and Housing Markets: Findings and Challenges

Handbook on the Economics of Discrimination, 2006

Economics all too seldom provides straightforward guidelines for designing and analyzing statistical materials on subjects of great social importance. Since the economic theory of discrimination does provide a simple approach, it is too bad that studies of whether banks discriminate in mortgage lending have not utilized these insights.-Gary Becker (1993, P. 18) Eventually, even the definition of discrimination comes to mean different things to blacks and whites.-Derrick Bell (1980, P. 658)

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.

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.

Property Risk, Foreclosure Costs and Rational Lending Discrimination

International Finance and Banking

Observations of significant differences in access to credit, loan terms and the volume of lending between demographically distinct groups of borrowers are often interpreted as evidence of potential ethnic, racial or gender discrimination by lenders. The competitive structure of credit markets and the accuracy of measuring individual credit risk render extant models of lending discrimination based on assumptions of credit market inefficiencies, such as adverse selection, increasingly implausible. In stark contrast to existing models of demographic discrimination, we consider a model of mortgage lending in an economy having complete markets, common knowledge and arbitrage-free pricing. Market equilibria in this classical environment may exhibit discrimination even when borrowers, who are distinguished only by observable demographic traits, share an identical measure of individual credit risk. Relatively costlier loan terms, a higher frequency of loan denials, or a complete rationing o...

A Reconsideration of Discrimination in Mortgage Underwriting with Data from a National Mortgage Bank

Discrimination in Financial Services, 1997

This paper, analyzing over 12,000 conventional and FHA/VA loan applications to a national mortgage lender in the 1989±1990 period, argues that mortgage denials occur only in a minority of cases, where the borrower has not learned the lender's underwriting rules in advance. Widespread borrower foreknowledge of such rules is demonstrated by a discriminant ®nding that 9 of 10 borrowers``correctly'' choose whether to apply under FHA vs. conventional programs, based on ®nancial and equity characteristics. This contrasts with the far lower ability of econometric models to identify approval/denial outcomes. It is revealing that denials on the basis of credit problems, the only important information generally not available until post application, account for most racial/ ethnic differences and borrower education affects the probability of approval of government insured loans more than loan to value. Contrary to common assumptions, race differences in FHA/VA lending are at least as pronounced as in conventional lending; and outcomes for Asians, correctly measured, diverge as much from outcomes for whites, as do outcomes for Hispanics and African American.

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.