Mortgage Lending, Race, and Model Specification

This study examines the role of race in home mortgage lending by investigating the sensitivity of race estimates to variations in model specification. I compare parameter estimates based on a statistical model utilized by the Federal Reserve Bank of Boston, using a subset of the data that corresponds to FDIC-supervised institutions, with estimates obtained from several alternative variations specified to reflect information obtained from reviews of the mortgage loan application files. Estimates of the race effect are shown to be highly sensitive to the assumptions that underlie the model; minor modifications in model specification are sufficient to eliminate the race effect. The empirical results suggest that the statistical models used to evaluate the impact of race in mortgage lending may not provide reliable information about lending bias.     

Under-specified Models and Detection of Discrimination: A Case Study of Mortgage Lending

This study examines how omitted variables affect underwriting models the OCC estimates during fair lending examinations. The purpose is to assess the effects of omitted variable bias common to most studies of discrimination in mortgage lending. The results show omitted variables have an important impact on both the estimate of the effect of race and on the identification of outliers for review. Further, there appears to be no consistent patterns to the direction of these impacts. This suggests that it is inappropriate to make generalizations concerning the direction of bias based on assumptions about correlations between omitted variables and race.     

Risk versus Demographics in Subprime Mortgage Lending: Evidence from Three Connecticut Cities

This paper analyzes patterns in subprime residential mortgage lending using 2006 Home Mortgage Act Disclosure data for the cities of Bridgeport, New Haven and Waterbury, Connecticut. The analysis applies models presented in earlier research and has the objective of assessing the relative importance of demographic versus risk factors in subprime mortgage lending decisions. Regression equations are estimated for census tracts and individual borrowers and include demographic variables and property risk measures. The results find race and ethnicity to be significant determinants of subprime lending in the borrower equations that include the full set of risk measures. Neighborhood educational levels are found to have an inverse and often significant association with subprime mortgage loans. Property risk measures present mixed results regarding their significance in subprime lending, suggesting that risk may have played less of a role in loan originations in 2006 than it did in earlier studies.     

Mortgage Loans to Nonoccupants as an Indicator of Racial Redlining

Where racial redlining prevents potential residents of a neighborhood from obtaining mortgage loans, a greater number of houses will be sold to investors and a greter number of residents will rent homes owned by such investors. It may be possible, therefore, to measure the extent of redlining by using HMDA data on loans made to nonoccupants. This study models the flow of mortgage credit to nonoccupants in nine MSAs, using traditional economic and demographic variables and variables describing the racial composition of the neighborhood. The percentage of the census tract population that is black has a small but statistically significant coefficient in Los Angeles, Chicago, and Nashville, and the Hispanic population variable is statistically significant in Los Angeles, Chicago, Boston, and Albuquerque. The model explains a high percentage of the variation in mortgage lending to nonoccupants across census tracts and is robust with respect to alternative formulations of the dependent va riable, and the independent variables have the hypothesized signs.     

Are Minorities or Minority Neighborhoods More Likely to Get Low Appraisals?

We empirically examine the role of appraisal in the residential mortgage lending process—in particular, the incidence, consequences, and determinants of appraisal below contract purchase price. Using the Boston Federal Reserve Study data set, we find that, as expected, low appraised value significantly increases the probability of mortgage loan application rejection. We find no evidence that low appraised value is related to census tract racial composition, an important finding given the history of the appraisal industry; however, low appraised value is related to proxies for neighborhood quality. Moreover, properties securing adjustable rate mortgages, condominiums, and properties purchased by African American buyers show an increased probability of low appraisal, though the race effect result is highly sensitive to model specification.     

Banks’ lending behavior and monetary policy: evidence from Sweden

The main purpose of this paper is to investigate the aggregate data about bank loans which may hide significant information about the monetary transmission mechanism. This study, by disaggregating bank loans data and using the relevant interest rates in Sweden, investigates the behaviour of banks after a monetary policy tightening. By using an unrestricted VAR model and impulse response analysis, our results show that a shock on the policy rate affects the main components of the banks’ loan portfolios differently. Initially, banks do not reduce lending to firms and households and they present a sluggish reaction concerning the relevant interest rates. On the contrary, they reduce lending to mortgage credit institutions significantly since real estate lending can be considered as a risky long-term investment. Moreover mortgage credit institutions reduce lending for housing purposes to non-bank public. This reduction is mainly driven by flexible rate loans and loans secured on tenant owned apartments. Consequently, theses actions have a significant effect on real economic activity, by amplifying the initial shock from the tightening monetary policy. The latter result provides evidence of the bank lending channel in Sweden working via mortgage lending and could be very important for policy makers.     

Beyond the Transaction: Banks and Mortgage Default of Low‐Income Homebuyers

We evaluate the effects of the lending institution and soft information on mortgage loan performance for low‐income homebuyers. We find that even after controlling for the propensity of a borrower to get a loan from a local bank based on observable characteristics, those who receive a loan from a local bank branch are significantly less likely to become delinquent or default than other bank or nonbank borrowers, consistent with an unobserved information effect. These effects are most pronounced for loans originated to borrowers with marginal credit, where soft information may have a stronger effect. These findings support previous research on information‐driven lending, and provide additional explanation for observed differences in mortgage loan performance between bank and nonbank lenders.     

Borrower and neighborhood racial and income characteristics and financial institution mortgage application screening

Disparities in mortgage lending patterns between minority and nonminority neighborhoods have refocused attention on the Community Reinvestment Act (CRA), a statute designed to encourage lending by financial institutions to nearby lower income neighborhoods. Geographic disparities may derive from discrimination, neighborhood and borrower attributes, as well as regulation itself. This article examines possible spatial impacts of the CRA. Tests for differential lender screening across regulated and nonregulated institutions in five metropolitan areas provide no consistent findings of regulatory effects. The article also tests whether lower income and minority applicants are more likely to be accepted when they apply for loans in lower income and minority neighborhoods. Using data for Boston, evidence is found for concentration effects that may result from institutional factors, information economies, or regulation.     

Do Black-Owned Banks Discriminate against Black Borrowers?

Black-owned and white-owned banks are studied to test for lending discrimination based on applicant's race. Using single-equation models the rndings suggest that black-owned banks may utilize applicant race in the mortgage granting decision. The result holds in a naive HMDA model and in an enhanced HMDA model with bank-specirc, demographic, and neighborhood characteristics added.     

The Economic Effects of Legal Restrictions on High-Cost Mortgages

We analyze the effects of state predatory mortgage lending laws, which have been a model for recent changes in the United States federal legislation enacted to regulate the mortgage contract terms common in higher-risk mortgage market segments. Using the Rothschild-Stiglitz approach to model credit markets under asymmetric information, legal restrictions are shown to reduce the use and attractiveness of mortgage credit. Consistent with model predictions, empirical results indicate that originations of regulated high-cost mortgages were significantly less than predicted in states with more restrictive laws. The differences between predicted and actual originations of high-cost mortgages in states with less restrictive laws were not significant. These differences were also not significant for non-high-cost originations across all states. Thus, credit regulation was differentially associated with reduction in originations of high-cost mortgages, and non-high-cost lending did not consistently expand in areas where high-cost mortgages were restricted.     

Borrower Self-Selection,Underwriting Costs,and Subprime Mortgage Credit Supply

In the U.S., households participate in two very different types of credit markets. Personal lending is characterized by continuous risk-based pricing in which lenders offer households a continuous distribution of borrowing possibilities based on estimates of their creditworthiness. This contrasts sharply with mortgage markets where lenders specialize in specific risk categories of borrowers and mortgage supply is stepwise linear. The contrast between continuous lending for personal loans and discrete lending by specialized lenders for mortgage credit has led to concerns regarding the efficiency and equity of mortgage lending. This paper sheds both theoretical and empirical light on the differences in the two credit markets. The theory section demonstrates why, in a perfectly competitive credit market where all lenders have the same underwriting technology, mortgage credit supply curves are stepwise linear and lenders specialize in prime or subprime lending. The empirical section then provides evidence that borrowers are being effectively sorted based on risk characteristics by the market.     

Economic Consequences of Transparency Regulation: Evidence from Bank Mortgage Lending

We examine the economic consequences of a rule designed to improve consumers' understanding of mortgage information. The 2015 TILA-RESPA Integrated Disclosures rule (TRID) simplifies the mortgage disclosures provided to consumers. As a consequence, TRID-affected mortgages become a less attractive investment opportunity to banks. Our main results document that mortgage applications affected by TRID are less likely to be approved following the rule's effective date. We find evidence consistent with both a decrease in consumers' information processing costs and an increase in banks' secondary market frictions, providing insight into the potential channels through which this reduction in mortgage credit operates. We also find that banks partially compensate for reduced mortgage lending by increasing small business lending, and that fintechs absorb mortgage demand in areas with reduced mortgage lending by banks. Our study documents real actions that firms take in response to disclosure transparency regulation and contributes to the literature on the economic consequences of such regulation.     

Asymmetric information and price competition in small business lending

This paper examines the relationship between bank lending rates and their cost of funds in New Zealand. Our results show that on average mortgage rates respond more quickly to changes in the cost of funds than base business lending rates. We also find an asymmetry in the initial (short-run) response of banks to changes in funding costs; in particular, our results show banks adjust mortgage rates downwards faster than upwards. The speed to which lending rates revert back to their equilibrium relationship with funding costs varies across the lending markets. We find the adjustment speed is faster when mortgage rates are below equilibrium, whereas it is slower when business lending rates are above long-run levels in relation to funding costs. Our analysis suggests that banks prefer the plain-vanilla type of lending such as mortgages in comparison to small business lending consistent with asymmetric information associated with business loans.     

Introduction: New directions in Information and Screening in Real Estate Finance

Conclusion The evidence presented in this special issue supports the view that preexisting information held by mortgage lenders plays an important role in mortgage approvals. This argues for mortgage lending programs that make efficient use of lender information, and it supports the importance of local financial intermediaries for lending. It also suggests that mortgage finance is an important element in turning transitory shocks into persistent ones that shape macroeconomic and regional business cycles.This Journal has from its inception, with the publication of a seminal article on information and incentives on mortgage contract terms by Dunn and Spart (1988), pushed forward the frontier of knowledge on information issues in real estate finance. This special issue presents empirical evidence on the importance of this aspect of mortgages.     

Political influence and banks: Evidence from mortgage lending

We show that banks expand mortgage lending in the home states of Senate Banking Committee chairs, and the effect is more pronounced in counties where the incumbent senator faces a competitive re-election race. Banks strategically target politically active borrowers. Consequently, banks’ profitability increases after favoring the incumbent politicians’ constituents, but they suffer a deterioration in mortgage asset quality in the long run. Our findings imply that political power could distort private capital allocation beyond conventional political contribution channels.     

Mortgage timing

We study how the term structure of interest rates relates to mortgage choice at both household and aggregate levels. A simple utility framework of mortgage choice points to the long-term bond risk premium as distinct from the yield spread and the long yield as a theoretical determinant of mortgage choice: when the bond risk premium is high, fixed-rate mortgage payments are high, making adjustable-rate mortgages more attractive. We confirm empirically that the bulk of the time variation in both aggregate and loan-level mortgage choice can be explained by time variation in the bond risk premium, whether bond risk premia are measured using forecasters’ data, a vector autoregressive (VAR) term structure model, or a simple household decision rule based on adaptive expectations. The household decision rule moves in lock-step with mortgage choice, lending credibility to a theory of strategic mortgage timing by households.     

Current Wealth,Housing Purchase,and Private Housing Loan Demand in Japan

Japanese households accumulate wealth for down payments at a high rate. Therefore, current wealth plays an important role in home acquisition as well as public loans whose direct mortgage lending is a strong support for home purchasers. We estimate the wealth effect on private mortgage debt as well as housing consumption by applying a model where mortgage-debt demand is derived from house-purchase decisions and is determined jointly with housing consumption. We use a simultaneous equation Tobit estimation method. Wealth effects on private mortgage debt, likelihood of borrowing, and housing consumption are not elastic. On the other hand, a change in housing consumption affects the likelihood of borrowing elastically much more than the private mortgage amount of borrowers. Housing and private mortgage markets fluctuate very closely with the number of participants in the mortgage market. Therefore, the number of housing starts is linked strongly to the private mortgage market.     

Economic policy uncertainty and cross-border lending

Banks increase cross-border syndicated lending when domestic economic policy uncertainty is high, after controlling for credit demand at the borrower country or country-industry levels. The credit migration effects are strongest for banks with diverse income and when banks face fiercer competition. Using elections as a source of plausibly exogenous variation which positively affects political uncertainty, we provide causal evidence on the effects of political uncertainty on cross-border lending. In countries with exogenous election timings, banks increase cross-border lending during the election period, especially when elections are closely fought. Compared to the extant literature, which extensively documents the negative effect of uncertainty on real investment, our findings show that uncertainty affects investments in financial assets differently.     

Sentiment volatility and bank lending behavior

Using a panel of commercial, co-operative and savings banks from G7 countries, we investigate whether the changes in sentiment and its volatility affect banks' lending behavior. We show that the changes in economic agents' sentiment and its volatility affect bank lending negatively, while the impact sizes differ across indicators. We also examine volatility effects on banks' loan growth as uncertainty reaches excessive levels. We highlight the role that several bank-specific variables play on bank lending and discuss to what extent uncertainty effects are transmitted on credit growth through them.     

Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects

This paper examines the broader effects of the US financial crisis on global lending to retail customers. In particular we examine retail bank lending in Germany using a unique data set of German savings banks during the period 2006 through 2008 for which we have the universe of loan applications and loans granted. Our experimental setting allows us to distinguish between savings banks affected by the US financial crisis through their holdings in Landesbanken with substantial subprime exposure and unaffected savings banks. The data enable us to distinguish between demand and supply side effects of bank lending and find that the US financial crisis induced a contraction in the supply of retail lending in Germany. While demand for loans goes down, it is not substantially different for the affected and nonaffected banks. More important, we find evidence of a significant supply side effect in that the affected banks reject substantially more loan applications than nonaffected banks. This result is particularly strong for smaller and more liquidity-constrained banks as well as for mortgage as compared with consumer loans. We also find that bank-depositor relationships help mitigate these supply side effects.