A RECONSIDERATION OF DISCRIMINATION IN MORTGAGE UNDERWRITING WITH DATA FROM A NATIONAL MORTGAGE BANK

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 finding that 9 of 10 borrowers correctly choose whether to apply under FHA vs. conventional programs, based on financial 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 a re 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.