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Can studies of application denials and mortgage defaults uncover taste-based discrimination?

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Geoffrey M. B. Tootell

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Abstract

Several articles in the popular press have asserted that a simple comparison of average mortgage default rates for white and minority applicants is necessary and sufficient to uncover discrimination in mortgage lending. The fallacy of this assertion has been examined in Peterson (1981), Tootell (1993), and Yinger (1993). These papers show that a failure to account for the financial characteristics of each application or loan makes a simple comparison of average rates meaningless. However, recent empirical work on discrimination in mortgage lending has examined both application denial and mortgage default rates conditional on the strength of each application, not average rates for whites and minorities. This paper assesses the information about discrimination contained in these conditional rates. It is found that the debate over denial versus defaults is misdirected; examining denials is a marginally better method to uncover discrimination. Much of the apparent debate was really over the potential importance of omitted variables.

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Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 96-10.

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Date of creation: 1996
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Handle: RePEc:fip:fedbwp:96-10

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Keywords: Mortgages ; Discrimination in mortgage loans;

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References listed on IDEAS
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  1. Joe Peek & Eric S. Rosengren, 1995. "Bank regulatory agreements and real estate lending," Working Papers 95-2, Federal Reserve Bank of Boston. [Downloadable!]
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  2. Joe Peek & Eric S. Rosengren, 1995. "Banks and the availability of small business loans," Working Papers 95-1, Federal Reserve Bank of Boston. [Downloadable!]
  3. Phelps, Edmund S, 1972. "The Statistical Theory of Racism and Sexism," American Economic Review, American Economic Association, vol. 62(4), pages 659-61, September. [Downloadable!] (restricted)
  4. Ferguson, Michael F & Peters, Stephen R, 1995. " What Constitutes Evidence of Discrimination in Lending?," Journal of Finance, American Finance Association, vol. 50(2), pages 739-48, June. [Downloadable!] (restricted)
  5. Christopher J. Mayer & Katerina V. Simons, 1994. "Reverse Mortgages and the Liquidity of Housing Wealth," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(2), pages 235-255. [Downloadable!] (restricted)
  6. Jeffrey C. Fuhrer, 1995. "The [un]importance of forward-looking behavior in price specifications," Working Papers 95-6, Federal Reserve Bank of Boston. [Downloadable!]
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  7. Munnell, Alicia H. & Geoffrey M. B. Tootell & Lynn E. Browne & James McEneaney, 1996. "Mortgage Lending in Boston: Interpreting HMDA Data," American Economic Review, American Economic Association, vol. 86(1), pages 25-53, March.
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  8. Ashenfelter, Orley & Hannan, Timothy, 1986. "Sex Discrimination and Product Market Competition: The Case of the Banking Industry," The Quarterly Journal of Economics, MIT Press, vol. 101(1), pages 149-73, February. [Downloadable!] (restricted)
  9. Joe Peek & Eric S. Rosengren, 1995. "Small business credit availability: how important is size of lender?," Working Papers 95-5, Federal Reserve Bank of Boston. [Downloadable!]
  10. Geoffrey M.B. Tootell, 1992. "Back to the future: monetary policy and the twin deficits," Working Papers 92-1, Federal Reserve Bank of Boston. [Downloadable!]
  11. Joe Peek & Eric S. Rosengren, 1993. "Bank Real Estate And The New England Capital Crunch," Boston College Working Papers in Economics 246, Boston College Department of Economics.
  12. Lundberg, Shelly J & Startz, Richard, 1983. "Private Discrimination and Social Intervention in Competitive Labor Markets," American Economic Review, American Economic Association, vol. 73(3), pages 340-47, June. [Downloadable!] (restricted)
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  13. Eric S. Rosengren & Katerina Simons, 1994. "Failed Bank Resolution and the Collateral Crunch: The Advantages of Adopting Transferable Puts," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(1), pages 135-147. [Downloadable!] (restricted)
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  14. Robert B. Avery & Patricia E. Beeson & Mark S. Sniderman, 1992. "Cross-lender variation in home mortgage lending," Working Paper 9219, Federal Reserve Bank of Cleveland. [Downloadable!]
  15. Joe Peek & James A. Wilcox, 1991. "The measurement and determinants of single-family house prices," Working Papers 91-7, Federal Reserve Bank of Boston. [Downloadable!]
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  16. Rosengren, Eric S, 1993. " Defaults of Original Issue High-Yield Convertible Bonds," Journal of Finance, American Finance Association, vol. 48(1), pages 345-62, March. [Downloadable!] (restricted)
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  17. Klein, Michael W. & Rosengren, Eric, 1994. "The real exchange rate and foreign direct investment in the United States : Relative wealth vs. relative wage effects," Journal of International Economics, Elsevier, vol. 36(3-4), pages 373-389, May. [Downloadable!] (restricted)
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  18. Karl E. Case & Christopher J. Mayer, 1995. "Housing Price Dynamics Within a Metropolitan Area," NBER Working Papers 5182, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Joe Peek & Eric Rosengren, 1993. "Bank regulation and the credit crunch," Working Papers 93-2, Federal Reserve Bank of Boston. [Downloadable!]
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