Academic journal article Economic Commentary (Cleveland)

Discrimination in Mortgage Lending: What Have We Learned?

Academic journal article Economic Commentary (Cleveland)

Discrimination in Mortgage Lending: What Have We Learned?

Article excerpt

It has now been nearly four years since researchers at the Federal Reserve Bank of Boston released their groundbreaking study on residential mortgage lending patterns in that city.l Their findings showed that black and Hispanic applicants were over 50 percent more likely to be denied a mortgage loan than whites, even after taking into account many factors relevant to the credit-granting decision. In the end, they concluded that this disparity was the result of taste-based discrimination (bigotry) on the part of lenders active in the area.

In the intervening years, much effort has gone into dissecting the Boston researchers' analysis, both to replicate their results and to explain how such discrimination could persist in a market so many view as being highly competitive. With the final version of this paper recently published in one of the most respected academic journals in the economics profession, we can now look back on the debate over the presence of discrimination in mortgage lending to see what we have learned.2

* Origin of the Debate

In 1975, the Home Mortgage Disclosure Act (HMDA) was passed with the goal of providing a better understanding of the extent of redlining-the alleged practice of denying loans solely because of the location of the property being mortgaged. At the time, the Act required covered lenders to disclose only the geographic distribution of their residential mortgage loans. Although these data did show that substantially fewer mortgage loans were originated in census tracts with a high proportion of minorities, they did not (and were not intended to) provide evidence of discrimination against individual applicants.

In 1989, Congress expanded HMDA to require lenders to report key information about each mortgage application received, including the applicant's income, race, and gender, and the disposition of the application. The initial release of these data fueled new controversy, since black and Hispanic applicants (but not Asians) were shown to have a much higher denial rate than whites. For example, in 1995 (the most recent year for which data are available), 40.5 percent of black and 29.5 percent of Hispanic mortgage applicants were denied, compared with 20.6 percent of white applicants.

Despite these provocative disparities, the HMDA data alone are inadequate to draw any meaningful conclusions about the presence of discrimination in the nation's mortgage markets. After all, key underwriting factors, including an applicant's credit history, debt burden, loanto-value ratio, liquid assets, and employment history, are not included in the data. As it turns out, most of these factors are correlated with race, making it impossible to determine whether minorities are more likely to be turned down because they are less creditworthy on average or because lenders discriminate.3

* The Boston Fed Study

In 1992, researchers at the Federal Reserve Bank of Boston (Munnell et al.) began an ambitious effort to augment the HMDA data by collecting additional information believed to be relevant to the credit-granting decision. Using 1990 HMDA data for lending institutions in the Boston Metropolitan Statistical Area, they worked with examiners, bankers, and other experts to develop a list of additional variables that lenders use to determine an applicant's creditworthiness, with the goal of better isolating the effect of race on an applicant's chance of being approved for a loan.

As expected, their analysis showed that much of the difference in denial rates across races is due to the fact that black and Hispanic loan applicants have, on average, less wealth, higher loan-to-value ratios (smaller down payments), and more credit blemishes than their white counterparts. Nonetheless, even after controlling for these factors, the Boston researchers concluded that minority applicants were over 50 percent more likely to be denied a loan than whites: "... …

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