Academic journal article The Journal of Real Estate Research

The Influence of Race in Residential Mortgage Closings

Academic journal article The Journal of Real Estate Research

The Influence of Race in Residential Mortgage Closings

Article excerpt

Abstract 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.

Introduction

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 rates rise, but be more likely to accept them if interest rates fall. Under such an environment, minorities would have less efficient closing outcomes.

Upon application for a residential mortgage, the potential borrower is typically offered the opportunity to lock in a current interest rate for the proposed loan. While this lock opportunity need not be taken at the time of application, all applications must lock before closing, as the paperwork has to be prepared for a known loan contract. Loan lock periods vary, with 45 and 60 days being the most common in this data set. After locking, the application becomes part of the "mortgage pipeline."

There are several reasons for a locked application not closing. One reason, of course, is that the applicant may be denied the loan either because the appraisal of the property does not support the loan, or the income, employment or credit history does not meet the lenders standards. Another reason is that the processing of the documents may not be completed during the lock period, as it may be difficult to complete all the necessary verifications during that window.' Other reasons include that the applicant may decide to not close because he or she discovers defects in the property or title. Also some personal situation may occur during the application period such as change of job or illness so that the applicant may simply choose not to complete the transaction. Closing or fallout for reasons mentioned thus far do not appear interest rate related. Another reason for an applicant to not close a loan is that interest rates may have declined since the lock date, so it is no longer in the applicant's best interest to close and the applicant chooses to "fall out. …

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