“The Color of Money” revisited: Racial lending patterns in Atlanta's neighborhoods

Abstract

In 1988, the Atlanta Journal‐Constitution published “The Color of Money,” an influential series examining mortgage redlining in Atlanta. The articles documented wide lending disparities between white and black neighborhoods of similar income levels. Given sweeping changes in housing finance since 1988, we seek to determine whether Atlanta's racial geographic disparities in mortgage lending have changed.

Analysis of 1992 to 1996 Home Mortgage Disclosure Act data reveals slight improvement. Atlanta's depository lenders made 4.2 times as many conventional home purchase loans per owner‐occupied unit to middle‐income white neighborhoods as they did to middle‐income black neighborhoods; a decade earlier, this ratio was 5.2. Nondepositories post lower ratios, particularly for Federal Housing Administration‐insured loans, but this market segment raises concerns because of potential abuses. By the indicator of most enduring theoretical and policy interest—conventional home purchase lending by depositories—the patterns that aroused concern a decade ago are still evident today.     

Real Denial Rates: A New Tool to Look at Who Is Receiving Mortgage Credit

ABSTRACT

The observed mortgage denial rate (ODR), calculated from Home Mortgage Disclosure Act (HMDA) data, is often used to measure mortgage credit availability, but it does not account for shifts in applicants’ credit profiles. In this article, we develop an additional tool, which we call the real denial rate (RDR), as a way to account for credit differences and hence more consistently measure denial rates and mortgage credit accessibility. We match HMDA data with CoreLogic proprietary data to obtain both borrower demographic information (e.g., income and race and ethnicity) and mortgage credit characteristics (e.g., loan-to-value ratios, debt-to-income ratios, and credit scores). We account for shifts in applicants’ credit profiles by considering only the denial rate of low-credit-profile applicants. Our RDR results show that conventional mortgages have higher denial rates than government mortgages do, racial and ethnic differences are smaller than the ODR indicates but are not eliminated, and small-dollar mortgages have higher RDRs, particularly in the government loan channel.     

Home mortgage lending by applicant race: Do HMDA figures provide a distorted picture?

Abstract

The Home Mortgage Disclosure Act of 1975 (HMDA) was designed to further fair access to mortgage credit and requires lenders to report such information as location, loan amount, income, and race and sex for each application. However, race is missing in a significant proportion of applications taken by mail or phone. Given the widespread use of HMDA data by lenders, community groups, researchers, and regulators and the importance of mortgage lending as a public policy issue, the strengths and shortcomings of these data must be clearly understood.

The main findings are that reported approval rates by race are significantly overstated for refinance and home improvement loans, while home purchase loans are little affected. A review of trends in how race is reported and in the technology of mortgage lending indicates that missing data on race will become a bigger and bigger problem in the near future.     

The resurgence of denial rates for home loans: an examination of disparate effects on groups of applicants in the upper Midwest

Mortgage application denial rates have increased since 2002, but it is unclear to what extent this increase in denials has differentially affected “non-traditional” mortgage applicants that do not resemble “traditional” white, non-Hispanic opposite-sex couple applicants. This article uses augmented Home Mortgage Disclosure Act (HMDA) data to investigate disparities in denial rates between traditional and non-traditional mortgage applicants between 2004 and 2008 in the Federal Reserve Bank's ninth district. We find evidence that lenders became more cautious in lending decisions between 2004 and 2008, treating applicants with the same incomes and requested loan amounts differently over time. After accounting for a variety of loan, applicant, lender, and environmental characteristics, we find that many “non-traditional” applicant groups across the ninth district experienced persistently higher mortgage application denial rates when compared to white, non-Hispanic opposite-sex couples. In some cases, the gap in the mortgage application denial rates between non-traditional and traditional applicants has actually increased over time.     

Segregation and the Geography of Creditworthiness: Racial Inequality in a Recovered Mortgage Market

The subprime boom and subsequent foreclosure crisis highlighted risk associated with pursuit of the American Dream of homeownership. People of color and those living in segregated areas were particularly harmed by the dramatic rise and fall of the housing market. Almost a decade after the economy’s collapse, questions remain about racial and spatial disparities in access to mortgage credit. I leverage Home Mortgage Disclosure Act data to explore mortgage application outcomes in 2014. Well into the economy’s recovery, minority borrowers remained at a disadvantage in the mortgage approval process. Whereas 71% of White applicants were approved for home loans, approval rates were lower for Asians (68%), Latinos (63%), and Blacks (54%). Black and Latino borrowers were also significantly more likely to receive higher cost loans than Whites, a practice that has accelerated since the foreclosure crisis. Results suggest that segregation exacerbated racial disparities as lenders funneled expensive credit into isolated minority communities. Furthermore, the differences between White and minority outcomes were largest in census tracts where subprime lending was common in 2006 and foreclosures accumulated during the Great Recession. Together, these findings indicate how spatially organized markets have racialized consequences in a highly segregated society.     

Transit supportive home loans: Theory,application, and prospects for smart growth

Abstract

This article discusses mortgage lending programs aimed at lower‐income buyers looking to purchase homes in compact, transit‐accessible neighborhoods. Unlike traditional lending formulas, the transit supportive home loans consider the transportation cost savings from living in transit‐friendly neighborhoods and applies these savings to a larger mortgage calculation. However, little has been published positioning the concept against the broader goals of smart growth, describing the application of the product, or commenting on its prospects.

The first part of this article therefore draws heavily from the literature on smart growth to present the theoretical foundations of the transit supportive home loans and how they address growth management program goals. The second part describes the application of the concept, and the third examines the prospects for this tool and briefly comments on circumstances likely to bedevil its widespread adoption or overall impact.     

The ongoing experiment with “regulation from below”: Expanded reporting requirements for HMDA and CRA

Abstract

The Home Mortgage Disclosure Act (HMDA) and Community Reinvestment Act (CRA) were enacted in the 1970s to curb redlining, the discriminatory lending practice whereby financial institutions refuse to make mortgage loans to certain neighborhoods based on the racial composition of those areas or the age of their housing stock. HMDA and CRA implicitly sanctioned an important role for local citizen monitors, whose “regulation from below,” as it has been termed, was believed to be needed to augment the formal enforcement apparatus. In 1989, Congress amended both of these laws by expanding publicly available information on the lending practices of financial institutions. The paper reviews the early experiences with the new requirements and suggests some of the factors likely to determine whether grassroots organizations seek further reforms.

While the use of “de facto” bank examiners succeeded more than many knowledgeable observers expected, it remains to be seen whether community‐based watchdogs can keep pace with the rapidly changing environment for CRA and for banking in general. As for the 1989 amendments to the Acts, it is still too early to determine the full impact of these changes on community lending.     

Preventive servicing is good for business and affordable homeownership policy

Abstract

This article documents the growing importance of preventive servicing—business practices that emphasize early intervention in delinquency and default management practices that also help financially troubled borrowers avoid foreclosure. We suggest that the loan servicing side of the affordable housing delivery system may be underappreciated and undercapitalized.

We use a database of more than 28,000 affordable housing loans to test several preventive servicing‐related propositions and find that after we control for loan and borrower characteristics, the likelihood that a delinquent mortgagor within this universe will ultimately default varies significantly across servicers. This suggests that loan servicing is an important factor in determining whether low‐ and moderate‐income borrowers who fall behind in their mortgage payments will end up losing their homes through foreclosure. It also suggests a need for policy makers to incorporate preventive servicing into affordable homeownership programs.     

Residential mortgage foreclosure and neighborhood change

Abstract

We use New Orleans as a case study to explore residential mortgage foreclosure as one mechanism linking prior black population and changes in employment levels with changes in aggregate income, housing tenure, vacancy rates, and black population size. Mortgage foreclosure data are merged with 1980 and 1990 census data aggregated at the block group level.

Structural equation modeling results indicate that both economic change and prior racial composition are associated with reductions in median block group incomes. Racial transition and loss of employment and income also increased foreclosure rates. Economic change and prior racial composition together impact neighborhoods through their effects on income and foreclosure rates, which in turn differentially affect vacancy rates, the change in black population, and the housing tenure status of residents. The differential effects of these variables point to the persistence of a dual housing market for blacks and whites in New Orleans.     

Temporary Loan Limits as a Natural Experiment in Federal Housing Administration Insurance

The Economic Stimulus Act of 2008 dramatically but temporarily increased the mortgage loan amount eligible for insurance through the Federal Housing Administration (FHA). We use the implementation and expiration of these loan limits as a source of exogenous variation in the availability of FHA insurance to measure the impact on the overall mortgage market and conventional lending. We find that the introduction of higher loan limits increased the number of loan originations, but that the expiration of those loan limits roughly 6 years later did not significantly decrease affected loan originations. The substitution between loan products and small net impact on the overall mortgage market when the ESA loan limits expired may be explained by the return of a stronger conventional lending industry than existed during the housing crisis.     

Racial Dynamics of Subprime Mortgage Lending at the Peak

Subprime mortgage lending in the early 2000s was a leading cause of the Great Recession. From 2003 to 2006, subprime loans jumped from 7.6% of the mortgage market to 20.1%, with black and Latino borrowers receiving a disproportionate share. This article leveraged the Home Mortgage Disclosure Act data and multinomial regression to model home-purchase mortgage lending in 2006, the peak of the housing boom. The findings expose a complicated story of race and income. Consistent with previous research, blacks and Latinos were more likely and Asians less likely to receive subprime loans than whites were. Income was positively associated with receipt of subprime loans for minorities, whereas the opposite was true for whites. When expensive (jumbo) loans were excluded from the sample, regressions found an even stronger, positive association between income and subprime likelihood for minorities, supporting the theory that wealthier minorities were targeted for subprime loans when they could have qualified for prime loans. This finding also provides another example of an aspect of American life in which minorities are unable to leverage higher class position in the same way as whites are. Contrary to previous research, model estimates did not find that borrowers paid a penalty (in increased likelihood of subprime outcome) for buying homes in minority communities.     

Policy incentives and the extension of mortgage credit: Increasing market discipline for subprime lending

The lax underwriting in non‐prime mortgage markets is widely perceived as one cause of the recent difficulties in the housing market. Policymakers are currently considering moves such as enforcing more careful underwriting to provide additional discipline to mortgage markets. This research explores the possibility of another approach to supplement or replace some of these efforts, namely the use of policy to create incentives for Fannie Mae and Freddie Mac (together, the GSEs) to help “check” behavior in non‐prime markets. The hypothesis is that the GSE Act affordable housing goals have increased GSE focus on targeted loan purchases, which in turn has led prime market lenders to compete more aggressively for borrowers on the margin between prime and subprime credit quality. As a consequence, these marginal borrowers will be more inclined to take prime mortgages rather than higher‐cost subprime loans. We test this hypothesis and find empirical support for it. We observe a negative relationship between the growth in GSE market share and the growth in subprime market share over time, and find that the impact of the GSEs on subprime lending tends to be stronger in high‐minority neighborhoods, where subprime lending has been concentrated and growing the fastest. Simulations show that a 10 percent increase in GSE market share (for example, from 20 to 22 percent) can cause 45,000 borrowers using prime instead of subprime loans a cost savings of about $1.7 billion. These results suggest that the GSEs, regardless of their postconservatorship form, should continue to devote attention to serving underserved populations and suggest that significant welfare benefits will accrue. © 2009 by the Association for Public Policy Analysis and Management.     

Islands of decay in seas of renewal: Housing policy and the resurgence of gentrification

Abstract

For many observers, the recession of the early 1990s signaled the end of what Berry called islands of renewal in seas of decay. In the past decade, however, shifts in mortgage finance have intersected with developments in assisted housing to alter the links between gentrification and housing policy. In this article, we use field observation, Home Mortgage Disclosure Act data, and HOPE VI plans to analyze the resurgence of gentrification in eight U.S. cities.

Between 1992 and 1997, gentrified neighborhoods attracted conventional homepurchase mortgage capital at a rate that grew at more than 2.3 times the suburban rate. Logit models confirm that mortgage capital favors gentrified neighborhoods even after controlling for applicant and loan characteristics, suggesting a new relationship between mortgage lending and neighborhood change. In some cities, gentrification has surrounded islands of decay and poverty with landscapes of renewal     

Does homeownership counseling affect the prepayment and default behavior of affordable mortgage borrowers?

The lack of industrywide data on homeownership education and counseling (HEC) programs has severely limited evaluation. In particular, very little evidence exists on the relationship between HEC completion and loan prepayment, an outcome of interest to both mortgage lenders and consumer advocates. Where mortgage prepayment directly influences the sustainability of affordable mortgage products, it also reflects the ability of underserved borrowers to access lower‐cost credit through refinancing. This study uses a uniquely rich data set to examine the impact of HEC completion on prepayment and defaultamongborrowers receivingHECfrom a variety of providers across 42 states. The loans, originated between 1999 and 2003, are observed through the first quarter of 2006, a period in which strong housing appreciation and decreasing interest rates generated substantial refinancing activity. Using a competing risks model of mortgage prepayment and default, we find that HEC programs based on classroom instruction and individual counseling improve a borrower's exercise of the mortgage prepayment option, but that programs based on home study or telephone counseling did not affect borrower behavior. Counseling shows no effect on default propensities. © 2008 by the Association for Public Policy Analysis and Management.     

Environmental Justice and Green‐Technology Adoption

This paper presents an analysis of an environmental justice (EJ) program adopted by the South Coast Air Quality Management District (SCAQMD) as a part of its regulation to phase out a toxic chemical used by dry cleaners. SCAQMD provided financial incentives to switch early and gave establishments in EJ neighborhoods priority in applying for grants. Despite this pro‐EJ policy, available data show that dry cleaners in low‐income, predominantly minority, and EJ‐designated areas were less likely to be an early adopter of green technologies, and this finding holds even after accounting for firm and market characteristics. Dry cleaners in disadvantaged neighborhoods were also less likely to receive a grant to switch technology despite the district's effort to set aside half of the funding for applicants from EJ areas.     

The potential and limitations of mortgage innovation in fostering homeownership in the United States

Abstract

This article presents an empirical analysis of mortgage innovation as a vehicle to enable renters, especially those from traditionally underserved populations, to realize home‐ownership. It examines the financial and underwriting criteria of a typology of mortgage products, from those adhering to historical standards to some of today's most liberal loans, and develops synthetic models to account for all direct purchase costs. These models are calibrated using 1995 data on renter demographic and financial characteristics from the Survey of Income and Program Participation.

Compared with historical mortgages, today's more innovative loans increase the number of renters who could hypothetically qualify for homeownership by at least a million and expand potential home‐buying capacity by $300 billion. Certain policies could greatly expand the potential gains. Nevertheless, even the most aggressive innovations can play only a limited role in efforts to deliver the material benefits of homeownership to underserved populations.     

Originating lender localness and mortgage sustainability: an evaluation of delinquency and foreclosure in Indiana's mortgage revenue bond program

Originating lenders play a vital role in selecting and preparing borrowers for homeownership, directly and through partnerships with community entities. While previous research demonstrates the importance of originating lenders for mortgage access to low- and moderate-income borrowers, this analysis evaluates the influence of the originating lender, and in particular the localness of the lender, on mortgage sustainability (reduced delinquency and foreclosure). Employing data on more than 5,000 low- and moderate-income borrowers participating in Indiana's Mortgage Revenue Bond (MRB) program from 2004–2006, this analysis finds that the localness of the originating lender is significantly predictive of mortgage sustainability. After controlling for borrower, mortgage, and market characteristics, an increase in the localness of the lender is associated with a decrease in the probability of delinquency and foreclosure, particularly for higher risk (lower credit score) borrowers participating in the MRB program.     

The facts of lending discrimination cannot be argued away by examining default rates

Abstract

This article argues that interracial differentials in mortgage default rates are an unreliable indicator of racial discrimination in mortgage markets.

First, minority applicants may be approved at nondiscriminatory institutions and thereby end up in the pool of mortgagors, even though they were first discriminated against at other institutions. Second, even with no mortgage discrimination, the expected default risk of minority mortgagors overall is probably higher than that of white mortgagors overall. Thus, even if discrimination eliminated some of the riskier minority applicants, it is not necessarily true that the default rate of minority mortgagors will be lower than that of whites.