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The Pricing of Home Mortgage Loans to Minority Borrowers: How Much of the APR Differential Can We Explain?

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  • Marsha J. Courchane

    (Vice President, Litigation and Applied Economics, CRA International)

Abstract

The public releases of the 2004 and 2005 HMDA data have engendered a lively debate over the pricing of mortgage credit and its implications regarding the treatment of minority mortgage borrowers. This research uses aggregated proprietary data provided by lenders and an endogenous switching regression model to estimate the probability of taking out a subprime mortgage, and annual percentage rate (APR) conditional on getting either a subprime or prime mortgage. The findings reveal that up to 90% of the African American APR gap, and 85% of the Hispanic APR gap, is attributable to observable differences in underwriting, costing, and market factors that appropriately explain mortgage pricing differentials. Although any potential discrimination is problematic and should be addressed, the analysis suggests that little of the aggregate differences in APRs paid by minority and non-minority borrowers are appropriately attributed to differential treatment.

Suggested Citation

  • Marsha J. Courchane, 2007. "The Pricing of Home Mortgage Loans to Minority Borrowers: How Much of the APR Differential Can We Explain?," Journal of Real Estate Research, American Real Estate Society, vol. 29(4), pages 399-440.
    • Handle: RePEc:jre:issued:v:29:n:4:2007:p:399-440
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    References listed on IDEAS

    as
    1. Marsha J. Courchane & Brian J. Surette & Peter M. Zorn, 2004. "Subprime Borrowers: Mortgage Transitions and Outcomes," The Journal of Real Estate Finance and Economics, Springer, vol. 29(4), pages 365-392, December.
    2. Stephen L. Ross & John Yinger, 2002. "The Color of Credit: Mortgage Discrimination, Research Methodology, and Fair-Lending Enforcement," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182289, December.
    3. Michael Lokshin & Zurab Sajaia, 2004. "Maximum likelihood estimation of endogenous switching regression models," Stata Journal, StataCorp LP, vol. 4(3), pages 282-289, September.
    4. Robert F. Phillips & Robert P. Trost & Anthony M.J. Yezer, 1994. "Bias in estimates of discrimination and default in mortgage lending: the effects of simultaneity and self-selection," Proceedings, Federal Reserve Bank of Philadelphia, pages 197-222.
    5. Jim Berkovec & Peter Zorn, 1996. "How Complete is HMDA? HMDA Coverage of Freddie Mac Purchases," Journal of Real Estate Research, American Real Estate Society, vol. 11(1), pages 39-56.
    6. Robert B. Avery & Kenneth P. Brevoort & Glenn B. Canner, 2006. "Higher-priced home lending and the 2005 HMDA data," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), vol. 92(Sep), pages 123-166, September.
    7. Pennington-Cross, Anthony, 2003. "Credit History and the Performance of Prime and Nonprime Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 27(3), pages 279-301, November.
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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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