Hispanic Borrowers Research Articles

Assessing the Relative Progressivity of the Biden Administration's Federal Student Loan Forgiveness Proposal

Abstract We quantify the total stock of balances eligible for the Biden Administration's 2022 student loan forgiveness proposal and examine which groups would have benefited most. Up to $442 billion in loans were eligible. Those who would have benefited most were younger, had lower credit scores, and lived in lower- and middle-income neighborhoods. We also find that Black and Hispanic borrowers would have disproportionately benefited from the proposal. We then compare the distribution of beneficiaries for the proposed policy to several alternative hypothetical forgiveness proposals and three existing tax credits. The additional forgiveness for Pell Grant recipients increased the progressivity of the policy at a cost of $129 billion. Reducing the income eligibility criterion in half from the proposal would have reduced the cost by nearly $100 billion and made the policy more progressive. Compared with existing tax credits, the announced forgiveness policy is less progressive than the Earned Income Tax Credit but more progressive than the 2019 Child Tax Credit and higher education tax credits. We conclude with a discussion of how each policy lever affects the progressivity of loan cancellation to help inform future policy.

Racial disparities in debt collection

This paper documents that Black and Hispanic borrowers are 52% more likely to experience a debt collection judgment compared to their counterparts, controlling for socioeconomic variables including income, credit scores, delinquent debt balances, and other relevant credit characteristics. Statistical discrimination mechanisms such as spatially targeting collection efforts based on the likelihood that an attorney represents the defendant or that the defendant will contest the debt in court do not explain the racial gap in judgments. We find support that the judgment gap is partially driven by taste-based discrimination, as evidenced by minorities having less 90-day past due debt balances than non-minority borrowers when controlling for model covariates. Furthermore, the disparity primarily affects non-delinquent borrowers, indicating higher levels of creditor discretion in initiating judgment proceedings. A back-of-the-envelope calculation suggests that the racial wealth gap explains at most 48% of the racial disparity in judgments.

Mortgage Loan Costs: Magnitude and Drivers of Variation

This article uses national data disclosed as part of the Home Mortgage Disclosure Act (HMDA) to examine variations in loan costs based on type of loan, borrower, purpose (purchase, improvement, or refinance), and neighborhood characteristics. Loan costs are generally higher for nonconventional conforming loans with higher levels of credit risks (loans with higher combined loan-to-value, higher debt-to-income ratios, and for investment properties). This implies that product and borrower risk impact loan costs. However, borrower characteristics such as income and race/ethnicity are also associated with differences in loan costs even after controlling for loan characteristics, location, and lender fixed effects. Total loan costs are higher both in dollar terms and as a share of the loan amount for Black borrowers and Hispanic borrowers, and total loan costs represent a higher share of the loan amount for lower income borrowers. These disparities are larger in neighborhoods with higher levels of lender concentration and implicit racial bias. These findings suggest that in addition to access to mortgages and interest rates, loan costs can represent a barrier for access to homeownership with a disparate impact for Black and Hispanic borrowers, which contributes to perpetuate the homeownership gap.

Mortgage prepayment, race, and monetary policy

Black and Hispanic homeowners pay significantly higher mortgage interest rates than white and Asian homeowners. We show that the main reason is that white and Asian borrowers are much more likely to exploit periods of falling interest rates by refinancing their mortgages or moving. Black and Hispanic borrowers face challenges refinancing because, on average, they have lower credit scores, equity and income. But even holding those factors constant, Black and Hispanic borrowers refinance less, suggesting that other factors are at play. Because they are more likely to exploit lower interest rates, white borrowers benefit more from monetary expansions. Policies that reduce barriers to refinancing for minority borrowers and alternative mortgage contract designs can reduce racial mortgage pricing inequality.

Predictably Unequal? The Effects of Machine Learning on Credit Markets

ABSTRACTInnovations in statistical technology in functions including credit‐screening have raised concerns about distributional impacts across categories such as race. Theoretically, distributional effects of better statistical technology can come from greater flexibility to uncover structural relationships or from triangulation of otherwise excluded characteristics. Using data on U.S. mortgages, we predict default using traditional and machine learning models. We find that Black and Hispanic borrowers are disproportionately less likely to gain from the introduction of machine learning. In a simple equilibrium credit market model, machine learning increases disparity in rates between and within groups, with these changes attributable primarily to greater flexibility.

Potential Changes to the FHA COVID-19 Modification Options to Keep More Borrowers in Their Homes

Millions of homeowners are having difficulty affording their monthly mortgage payments because of the COVID-19 pandemic. The most vulnerable group of borrowers is concentrated within the Federal Housing Administration (FHA) program, with over 900,000 borrowers who are more than 90 days delinquent. Research provides clear evidence that immediate and substantial payment reduction is the most effective mortgage default prevention tool available. This paper suggests several changes to the FHA COVID-19 Home Retention Options that FHA should consider to provide more borrowers with deeper payment reductions, many at no cost to the Mutual Mortgage Insurance Fund, that would provide borrowers in need of financial assistance with greater eligibility as well as more substantial payment reductions that help them retain their home and avoid foreclosure. We estimate the incremental payment relief and resulting reduction in foreclosures that would be created by each of our proposed changes, and demonstrate how our suggestions would increase the availability of mortgage modifications for borrowers with lower incomes and higher debt-to-income ratios, particularly Black and Hispanic borrowers.

The Impact of FinTech on Discrimination in Mortgage Lending

The mortgage market has historically been plagued by racial discrimination, and recent data show ongoing disparities in the terms offered to minority borrowers by traditional lenders. The mortgage market has changed rapidly in the past decade, however, due to the rise of technology-based (FinTech) lenders. In this paper, I show that FinTech lenders show little to no gap in the terms provided to Black and Hispanic borrowers after adjusting for GSE credit-risk pricing determinants and loan size. This fact is shown using proprietary data on borrowers to better study racial bias and FinTech loans. The paper further shows that, in a matched analysis of observationally similar Black and Hispanic and non-Black or Hispanic borrowers, FinTech lenders provide statistically indistinguishable terms to the two groups. This stands in sharp contrast to the large discrepancies found under identical tests for traditional lenders. This matched analysis, wherein borrowers with similar characteristics such as income and age are compared, is supported by an analysis of preference and shopping heterogeneity in the National Survey of Mortgage Originations. Finally, I show that FinTech penetration in a region had consequences on legacy lender terms as well. Greater FinTech penetration in a zip code is associated with smaller discrepancies even among legacy lenders.

Racial Differences in Mortgage Refinancing, Distress, and Housing Wealth Accumulation during COVID-19

The COVID-19 pandemic exacerbated racial disparities in U.S. mortgage markets. Black, Hispanic, and Asian borrowers were significantly more likely than white borrowers to miss payments due to financial distress, and significantly less likely to refinance to take advantage of the large decline in interest rates spurred by the Federal Reserve’s large-scale mortgage-backed security (MBS) purchase program. The wide-scale forbearance program, introduced by the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, provided approximately equal payment relief to all distressed borrowers, as forbearance rates conditional on nonpayment status were roughly equal across racial/ethnic groups. However, Black and Hispanic borrowers were significantly less likely to exit forbearance and resume making payments relative to their Asian and white counterparts. Persistent differences in the ability to catch up on missed payments could worsen the already large disparity in home ownership rates across racial and ethnic groups. While the pandemic caused widespread distress in mortgage markets, strong house price appreciation in recent years, particularly in 2020, means that foreclosure risk is lower for past-due borrowers now as compared with the aftermath of the Global Financial Crisis and Great Recession. Furthermore, borrowers who have missed payments have significantly higher credit scores now than those who were distressed in the 2007–2010 period, largely due to the widespread availability of forbearance for federally backed mortgages.

Mortgage characteristics and the racial incidence of default

Previous research has shown that relative to White borrowers, Black and Hispanic borrowers taking out mortgages at the height of the early-2000s housing boom experienced significantly higher delinquency rates. In this paper we attempt to gain a better understanding of the factors that gave rise to these racial differences in mortgage delinquency. Using a database of nearly 3 million mortgages originated between 2005 and 2009, we find that minority borrowers were significantly more likely to have mortgages with high-risk contract characteristics, such as prepayment penalties, payment resets, and terms that limit principal paydown. While much of the racial variation in the prevalence of these characteristics can be explained by common measures of borrower creditworthiness, we also provide evidence that even after conditioning on a rich set of borrower controls, minority borrowers were more likely to have several high-risk mortgage characteristics. Results from mortgage default models and a decomposition exercise show that the concentration of minority borrowers in such loans elevated default rates for Black and Hispanic borrowers by 2 and 4 percentage points, respectively, relative to the default rate for White borrowers. The totality of our results suggest that exotic loan characteristics acted as mortgage default accelerants for many minority homeowners that experienced significant income and equity shocks during the Great Recession.

Stuck in Subprime? Examining the Barriers to Refinancing Mortgage Debt

Despite falling interest rates and federal policy intervention, many borrowers who could financially gain from refinancing have not done so. We investigate the rates at which, relative to prime borrowers, subprime borrowers seek and take out refinance loans, conditional on not experiencing mortgage default. We find that starting in 2009, subprime borrowers are about half as likely as prime borrowers to refinance, although they still shop for mortgage credit, indicating their interest in refinancing. This disparity is driven in part by the tightened credit environment postfinancial crisis, and the fact that many subprime borrowers were ineligible for the Home Affordable Refinance Program (HARP). In addition, we find that refinance rates have been significantly lower for black and Hispanic borrowers, even after controlling for borrower credit status. We argue that these barriers to refinancing for subprime borrowers have long-term implications for social stratification and wealth building.

What Drives Racial and Ethnic Differences in High-Cost Mortgages? The Role of High-Risk Lenders

This paper examines racial and ethnic differences in high-cost mortgage lending in seven diverse metropolitan areas from 2004 to 2007. Controlling for credit score and other risk factors, African American and Hispanic borrowers are 103% and 78% more likely to receive high-cost mortgages for home purchases. A large part of the increase is attributable to sorting across lenders (55%-65%), and this, in turn, can be largely accounted for by the lender’s ex post foreclosure risk. The remaining within-lender differences are also concentrated in high-risk lenders, revealing the central role of these institutions in explaining market-wide racial and ethnic differences. Received December, 17 2014; editorial decision January 20, 2017 by Editor Philip Strahan.

Mortgage Characteristics and the Racial Incidence of Default

Previous research has shown that relative to White borrowers, Black and Hispanic borrowers taking out mortgages at the height of the early-2000s housing boom experienced significantly higher delinquency rates. In this paper we attempt to gain a better understanding of the mechanisms that gave rise to these racial differences in mortgage delinquency. Using a database of nearly 9 million mortgages originated between 2005 and 2009, we find that minority borrowers were significantly more likely to have mortgages with high-risk contract characteristics, such as prepayment penalties, variable interest rates, balloon structures, and negative amortization periods. Results from mortgage default models and a decomposition exercise show that the concentration of minority buyers in such loans explains a significant fraction of the difference in default rates between racial groups. The totality of our results suggest that exotic loan characteristics acted as mortgage default accelerants for many minority homeowners that experienced significant income and equity shocks during the Great Recession.

Mortgage Supply and Housing Rents

We show that, especially since 2011, systemically important U.S. banks have increased their propensity to deny mortgage applications, particularly among FHA loan applicants and black and Hispanic borrowers. Tighter mortgage standards have increased demand for rental housing and led to higher rents, depressed homeownership rates, greater construction of multifamily housing, and lower rental vacancies. These effects are stronger in MSAs with barriers to using online lending platforms, such as age and internet accessibility, and where regulations inhibit competition among alternative lenders.

The Homeownership Experience of Minorities During the Great Recession

It has been argued that during the Great Recession, wealth losses were more concentrated for college-educated Black and Hispanic families than for White and Asian college-educated families and their non-college-educated Black and Hispanic peers. This article explores the extent to which the homeownership experience for families who purchased homes between 2004 and 2008 is a potentially important factor in explaining this finding. During the housing boom, the increase in homeownership for Blacks and Hispanics was very similar, but the second group had a smaller decline. Despite these differences, the Great Recession was far more destructive for these minorities regardless of income. Logit regressions show that underwriting standards and loan structure explain a significant amount of the non-White?White gap in foreclosures. However, geographic concentration was most significant in explaining the gap for Hispanic borrowers. Despite accounting for these factors, sizable gaps in the likelihood of foreclosure remain between Blacks and Hispanics relative to Whites.

Differential Access to Capital from Financial Institutions by Minority Entrepreneurs

This paper examines if Minority small business borrowers have the same access to loans from financial institutions as similar White borrowers. Using matching methods, we find that African-American borrowers are rejected at a higher rate (17-33% higher) than similar risk White-owned firms. We find that the impact of unobservable variables has to be greater than 50%-60% the impact of observable variables to show no discrimination. This bound seems to be a high number given that we have controlled for a comprehensive list of borrower credit risk variables that include their actual credit score and wealth. If the effect of the unoberservable variables is less than this bound, then we have found a casual impact of discrimination for African-American borrowers. No such differential effect is found for Hispanic borrowers. Lumping both races together can give misleading results. Finding higher credit risks, higher rejection rates and equal expected losses for African-American-owned firms is consistent with the statistical or information-based theory of discrimination.

Borrowers from a different shore: Asian outcomes in the U.S. mortgage market

Even though Asians are now the largest minority group participating in United States mortgage markets, research on differences in underwriting and pricing outcomes in mortgages typically focuses on the outcomes of African American and Hispanic borrowers. One explanation for the lack of attention on Asian outcomes follows from the perceived relative economic prosperity of this minority group, which may lead to the belief that they are less in need of consumer protection or policy support. While simple group averages of economic characteristics support this belief, documented heterogeneity of Asian experiences suggests that the use of other measures may be needed to account for the varied outcomes of Asians in the U.S. housing markets. Using a unique proprietary source of lender data, we examine these Asian outcomes. We find that Asians face challenges in mortgage markets in ways that may be unique as compared to other minority groups. For example, while an examination of unadjusted average denial rates indicates favorable outcomes for Asians compared to other minority groups, we find that after accounting for loan and borrower characteristics, Asians have denial rates as high as other minority groups.

Hispanic brokers and borrowers: The effect of language affinity on the price of home mortgages

Our study focuses on whether mortgage prices for Hispanic borrowers in areas of limited English fluency depend on the broker's ethnicity. While we find that Hispanic borrowers in areas where the majority of Hispanics are not fluent in English pay higher prices overall, mortgage prices are lower if the loans are originated by Hispanic brokers relative to non-Hispanic white brokers. This effect is found only in fixed-rate mortgage loans and for low/no-documentation loans. Nevertheless, our results cannot be easily explained by different levels of market competition or borrower characteristics. Our results are consistent with other empirical studies that find that language barriers carry additional costs. We note that our conclusions may be affected by the accuracy of our proxy measurements of English and Spanish fluency.

Where Have All the Loans Gone? The Impact of Credit Availability on Mortgage Volume

The total number of purchase mortgages originated in 2012 is considerably less than half of peak levels and is down 44% from 2001 levels. The authors estimate that a large portion of the drop—as many as 1.2 million loans in 2012 alone—can be attributed to low credit availability and find that African-American and Hispanic borrowers have been disproportionately affected by the credit box tightening. An overly tight credit box means fewer individuals will become homeowners at exactly the point in the housing cycle when it is advantageous to do so, depriving these individuals of the chance to build wealth. It also means the housing market will recover more slowly, because there is a more limited pool of potential buyers for each home. Ultimately, it hinders the economy through fewer new home sales and less spending on furnishings, landscaping, renovations, and other consumer spending that goes along with home purchases. <b>TOPICS:</b>MBS and residential mortgage loans, legal/regulatory/public policy

Differential Access to and Pricing of Home Mortgages: 2004 through 2009

This article documents trends and drivers of the residential mortgage market during the years 2004 through 2009, specifically focusing on the access to and pricing of mortgages originated by African‐American and Hispanic borrowers, and by borrowers living in low‐income and minority communities. Our analysis relies on a rich set of proprietary data that allow more expanded insights than can be obtained from the Home Mortgage Disclosure Act (HMDA) alone. We show that access to mortgage credit increased between 2004 and 2006 for the borrowers we focus on in our study and declined dramatically thereafter. Trends in access to credit were driven primarily by the changing credit mix of mortgage applicants and secondarily by the replacement of the Federal Housing Administration (FHA) for subprime as the dominant mode of nonprime originations and tighter underwriting standards. Throughout our entire period of study, these borrowers also consistently paid higher prices for their mortgages; however, the extent of this differential varied considerably over time and across groups. These pricing trends were driven primarily by changes in the FHA and subprime shares as well as by the market's increasingly aggressive pricing of credit risk.

Analyzing Determinants of Foreclosure of Middle-Income Borrowers of Color in the Atlanta, GA Metropolitan Area

Foreclosures have disproportionately affected borrowers and communities of color. Many studies have concentrated on the nation and specific metropolitan areas, but few academic studies have focused on Atlanta. Using a merged data set consisting of Home Mortgage Disclosure Act (HMDA), U.S. Census, and Lender Processing Services (LPS) data and utilizing a logistic regression model, we analyze the likelihood of foreclosure in the Atlanta, GA metropolitan area. We find that African American borrowers are 52 percent and Hispanic borrowers 159 percent more likely to go into foreclosure, controlling for key financial variables. We also find that African American middle-income borrowers are 35 percent more likely to go into foreclosure. Moreover, we find that exotic mortgage products, such as balloon mortgages, adjustable rate mortgages (ARMs) and mortgages with a prepayment penalty have a higher likelihood of foreclosure than standard 30-year fixed rate mortgages.