Financial transformation and portfolio reallocation: impacts on house mortgage finance in the USA

Abstract

This study examines the US house mortgage finance in the context of the financial transformation of the entire credit market. It finds that the nation's credit market shifted away from less creditworthy borrowers under the macroeconomic dislocation and financial stress of the 1970s and 1980s, and returned to these borrowers amid the favourable macroeconomic conditions and a transformed financial industry during the 1990s. This pattern is generally confirmed by a simple simulation, in that gaps in the growth of ability to finance between the white/higher‐income family and the African American/lower‐income family widened during the 1970s' and 1980s' economic expansion, and narrowed during the 1990s' economic expansion. The simulation model also shows the interplay between two dimensions of the portfolio factors, mortgage interest rates and family income. During the 1970s and 1980s, disadvantages in mortgage interest rates for white/higher‐income families were more than compensated for by their advantage in terms of income over African American/lower‐income families. During the 1990s, the African American advantage in income growth was further aided by advantage in mortgage interest rates for the African American/lower‐income family over the white/higher‐income family.