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Is there discrimination in mortgage pricing? the case of overages

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  • Harold A. Black
  • Thomas P. Boehm
  • Ramon P. DeGennaro

Abstract

We conduct an empirical investigation to explain observed differentials in mortgage overage pricing. Our analysis makes several contributions. First, we study an area of mortgage pricing that is little understood by consumers and has received little scrutiny in the literature. Second, we consider the impact of the market power of individual loan officers on overages paid by borrowers, particularly minorities. Third, we include a number of borrower and lender characteristics not available in previous analysis. ; Importantly, we introduce a new direct measure of the market power of individual loan officers. We also incorporate the interactive effects of loan officer market power and the race of the borrower in determining the rate of the mortgage loan. Through the use of these new variables and employing proprietary data from different branches of a nationwide mortgage lending institution, we conclude that the market power of the lender and the bargaining or negotiating ability of the borrower are important determinants of overages. We find that overages paid by minorities who purchase homes are larger than those paid by whites. Our evidence suggests that this is due to differences in the pools of borrowers rather than to racial discrimination. Indeed, tests show that the pool of refinancings is more homogeneous across races than the pool for purchases, and we find no differences by race for refinancings. We conclude that a more effective way to eliminate racial differences in overages is to pursue policies designed to increase the ability of minorities to bargain more effectively rather than to enact additional antidiscrimination laws.

Suggested Citation

  • Harold A. Black & Thomas P. Boehm & Ramon P. DeGennaro, 2001. "Is there discrimination in mortgage pricing? the case of overages," FRB Atlanta Working Paper 2001-4, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2001-4
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    1. James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters,in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 475-492 National Bureau of Economic Research, Inc.
    2. David Horne, 1997. "Mortgage Lending, Race, and Model Specification," Journal of Financial Services Research, Springer;Western Finance Association, vol. 11(1), pages 43-68, February.
    3. Ayres, Ian & Siegelman, Peter, 1995. "Race and Gender Discrimination in Bargaining for a New Car," American Economic Review, American Economic Association, vol. 85(3), pages 304-321, June.
    4. Stanley D. Longhofer, 1996. "Discrimination in mortgage lending: what have we learned?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Aug.
    5. Harold A. Black & Thomas P. Boehm & Ramon P. DeGennaro, 1999. "Overages in mortgage pricing," Proceedings 651, Federal Reserve Bank of Chicago.
    6. Crawford, Gordon W & Rosenblatt, Eric, 1999. "Differences in the Cost of Mortgage Credit Implications for Discrimination," The Journal of Real Estate Finance and Economics, Springer, vol. 19(2), pages 147-159, September.
    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.
    8. Black, Harold & Schweitzer, Robert L & Mandell, Lewis, 1978. "Discrimination in Mortgage Lending," American Economic Review, American Economic Association, vol. 68(2), pages 186-191, May.
    9. Eric Rosenblatt, 1997. "A Reconsideration Of Discrimination In Mortgage Underwriting With Data From A National Mortgage Bank," Journal of Financial Services Research, Springer;Western Finance Association, vol. 11(1), pages 109-131, February.
    10. Paul S. Calem & Michael J. Stutzer, 1995. "The simple analytics of observed discrimination in credit markets," Working Papers 95-7, Federal Reserve Bank of Philadelphia.
    11. Calem Paul & Stutzer Michael, 1995. "The Simple Analytics of Observed Discrimination in Credit Markets," Journal of Financial Intermediation, Elsevier, vol. 4(3), pages 189-212, July.
    12. Marsha Courchane & David Nickerson, 1997. "Discrimination Resulting from Overage Practices," Journal of Financial Services Research, Springer;Western Finance Association, vol. 11(1), pages 133-151, February.
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    Cited by:

    1. James Kau & Donald Keenan & Henry Munneke, 2012. "Racial Discrimination and Mortgage Lending," The Journal of Real Estate Finance and Economics, Springer, vol. 45(2), pages 289-304, August.
    2. Solomon Y. Deku & Alper Kara & Phil Molyneux, 2014. "Access to Consumer Credit in the UK," Working Papers 14004, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    3. Yan Zhang, 2013. "Fair Lending Analysis of Mortgage Pricing: Does Underwriting Matter?," The Journal of Real Estate Finance and Economics, Springer, vol. 46(1), pages 131-151, January.
    4. Diaz-Serrano, Luis & Raya, Josep M., 2014. "Mortgages, immigrants and discrimination: An analysis of the interest rates in Spain," Regional Science and Urban Economics, Elsevier, vol. 45(C), pages 22-32.
    5. Diaz-Serrano, Luis & Raya, Josep M., 2011. "Is there Discriminatory Mortgage Pricing against Immigrants in the Spanish Lending Market?," IZA Discussion Papers 5578, Institute for the Study of Labor (IZA).
    6. repec:kap:jfsres:v:52:y:2017:i:3:d:10.1007_s10693-016-0246-1 is not listed on IDEAS
    7. Cerqueiro, Geraldo & Degryse, Hans & Ongena, Steven, 2011. "Rules versus discretion in loan rate setting," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 503-529, October.
    8. Patrick Bayer & Fernando Ferreira & Stephen L. Ross, 2014. "Race, Ethnicity and High-Cost Mortgage Lending," NBER Working Papers 20762, National Bureau of Economic Research, Inc.
    9. Patrick Bayer & Fernando Ferreira & Stephen L. Ross, 2016. "What Drives Racial and Ethnic Differences in High Cost Mortgages? The Role of High Risk Lenders," Working Papers 2016-005, Human Capital and Economic Opportunity Working Group.
    10. Robert B. Avery & Kenneth P. Brevoort & Glenn Canner, 2012. "Does Credit Scoring Produce a Disparate Impact?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 40, pages 65-114, December.
    11. Díaz Serrano, Lluís & Raya, Josep Maria, 2011. "Is there Descriminatory Mortgage Pricing against Immigrants in the Spanish Lending Market?," Working Papers 2072/151811, Universitat Rovira i Virgili, Department of Economics.
    12. Su, Qing, 2015. "Determinants of mortgage pricing: A quantile regression analysisAuthor-Name: Al-Bahrani, Abdullah," Journal of Housing Economics, Elsevier, vol. 30(C), pages 77-85.
    13. Harold Black & Thomas Boehm & Ramon DeGennaro, 2004. "Is discretionary pricing discretionary?: The case of overages in mortgage lending," The Review of Black Political Economy, Springer;National Economic Association, vol. 31(4), pages 59-68, June.
    14. Ping Cheng & Zhenguo Lin & Yingchun Liu, 2015. "Racial Discrepancy in Mortgage Interest Rates," The Journal of Real Estate Finance and Economics, Springer, vol. 51(1), pages 101-120, July.

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    Keywords

    Discrimination in mortgage loans ; Mortgages;

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