US Mortgage Market Research Articles

Racial Disparities in the US Mortgage Market

We study racial disparities in the US mortgage market. Using new data from Hurtado and Sakong (2024), we present three findings. First, we document access disparities between minority and otherwise-identical White borrowers even within the same bank and with the same loan officer. In contrast, cost disparities are nearly zero. Second, the use of automated underwriting algorithms is associated with smaller access disparities but slightly larger cost disparities. Third, individual factors such as loan officers' race and whether borrowers' race is observed at application do not seem to matter much.

Paying Too Much? Borrower Sophistication and Overpayment in the US Mortgage Market

Paying Too Much? Borrower Sophistication and Overpayment in the US Mortgage Market

Advantageous selection with intermediaries: a study of GSE‐securitized mortgage loans

AbstractThis research studies the effects of mortgage subsidies and asymmetric information in the US mortgage market. I exploit discontinuities in interest rates generated by pricing rules and find patterns consistent with advantageous selection. I estimate an industry model that highlights the relationship between mortgage subsidies, intermediary lenders' incentives, and borrowers' advantageous selection. The model shows that mortgage subsidies enable advantageous selection, creating a deadweight loss of $7.90 billion. The counterfactual analysis reveals that pricing borrowers' private information eliminates advantageous selection only if mortgages are not subsidized. Without the mortgage subsidy, pricing borrowers' private information improves efficiency by $728.58 million.

Algorithmic Fairness

This article reviews the recent literature on algorithmic fairness, with a particular emphasis on credit scoring. We discuss human versus machine bias, bias measurement, group versus individual fairness, and a collection of fairness metrics. We then apply these metrics to the US mortgage market, analyzing Home Mortgage Disclosure Act data on mortgage applications between 2009 and 2015. We find evidence of group imbalance in the dataset for both gender and (especially) minority status, which can lead to poorer estimation/prediction for female/minority applicants. Loan applicants are handled mostly fairly across both groups and individuals, though we find that some local male (nonminority) neighbors of otherwise similar rejected female (minority) applicants were granted loans, something that warrants further study. Finally, modern machine learning techniques substantially outperform logistic regression (the industry standard), though at the cost of being substantially harder to explain to denied applicants, regulators, or the courts.

Bowling alone, buying alone: The decline of co-borrowers in the US mortgage market

This paper documents stylized and empirical facts associated with co-borrowers in the US mortgage market since the early 1990s. The share of mortgages with a co-borrower has declined dramatically across different income and demographic groups. We show that this decline, despite being a universal phenomenon across the US, evinces significant regional heterogeneity which contributes to the divergence in local mortgage markets outcomes. Regions with a lower co-borrower share have higher mortgage default rates. Further, in an event of an adverse shock, regions with a low share of mortgages with a co-borrower experience persistently lower house price growth, and lower purchase and refinance mortgage growth.

The use of digital footprints in the US mortgage market

AbstractWe study the rise of digital footprint (DF) users in the U.S. residential mortgage market. The proportion of lenders that use a borrower's DF has witnessed remarkable growth from 6% in 2013 to 34% in 2018 in a short span – according to our analysis. We show that the use of DFs can significantly reduce a lender's overall risk and that the use of DFs can result in considerable societal benefits, by reducing the overall discriminatory forces. In sum, we provide evidence that the informational advantage associated with using a borrower's DF far outweighs that of existing traditional lending methods.

Financiarización y crisis del mercado hipotecario de viviendas nuevas para los trabajadores en México

Este trabajo tiene por objetivo analizar la organización y transformación institucional del sector financiero hipotecario en México. Para ello se realiza un análisis sobre el número y montos de inversión y circulación, tanto de créditos hipotecarios como de Bonos Respaldados por Hipotecas (BORHs). A partir de la crisis financiera global originada en el mercado hipotecario estadounidense, paradójicamente, se ha venido fomentado el crecimiento de la propiedad hipotecaria en México a través de su financiarización. Este proceso se ha llevado a cabo mediante el incremento acelerado de la participación en el mercado de BORHs por parte de instituciones públicas de financiamiento de vivienda; en contraste con el repliegue de entidades financieras privadas e instituciones bancarias. Al incremento en la emisión de bonos y el otorgamiento de créditos hipotecarios, corresponde también un incremento en la cantidad de viviendas deshabitadas; indicio de una crisis provocada por la sobreproducción de viviendas.

Political Voice and (Mortgage) Market Participation: Evidence from Minority Disenfranchisement

This paper documents the link between political voice and economic decision-making. Combining the repeal of Section 5 of the Voting Rights Act as a shock to the enfranchisement of black Americans with granular data on the US mortgage market, we document a 14% decline in mortgage origination for black Americans. This is driven by their self-selection out of the mortgage market rather than a change in denial rate. Additionally, we observe a flight of black demand to black lenders, indicating an increase in racial homophily. Our results indicate that disenfranchisement reduces demand directly by increasing uncertainty, violence, and borrowing constraints and indirectly by increasing the threat of rejection.

Bowling Alone, Buying Alone: The Decline of Co-borrowers in the US Mortgage Market

Using the universe of mortgage applications data in the US, we document that since the early 1990s there was a significant decline in the share of mortgages with a co-borrower. The decline, despite being a universal phenomenon across the US, evinced significant spatial heterogeneity and contributed to the divergence in economic outcomes across different regions. We show that the presence of a co-borrower reduces the mortgage default probability by more than 50 percent for both prime and subprime mortgages and those regions that had a lower co-borrower share prior to the financial crisis experienced higher mortgage default rates over the period 2007-2010. Further, a lower co-borrower share at the local level was related to persistently lower house price growth, refinancing growth and mortgage credit growth.

The Impact of Treasury Yields on US Presidential Approval, 1960–2010

ABSTRACT The ‘power of bond markets’ is a widely assumed and poorly understood feature of the global economy. We demonstrate that even in a bond market as stable as the United States this influence is considerable. In this article, we scrutinise a particularly direct influence, the impact of US Treasury yields on presidential approval rates. Our empirical analysis from 1961 to 2010 demonstrates that rising/falling bond yields lead to a decline/increase in approval rates. We show that this impact is mediated via the US mortgage market. The stronger the rise in mortgage rates, the stronger the influence of Treasury yields on presidential approval. We then outline the broader possible political impacts of this, particularly given foreign and domestic central bank ownership of US Treasuries.

Paying Too Much? Price Dispersion in the US Mortgage Market

Using administrative data on mortgage rates that borrowers obtain and on rates that lenders could provide for the same loan, we find that many homebuyers significantly overpay for their mortgage, particularly those least likely to be financially savvy. For example, one quarter of government-insured borrowers, who tend to be lower-income first-time homebuyers, pay at least 45 basis points more than their median available rate—equivalent to an upfront payment (in points) of $5,400 for a typical loan. We further document considerable dispersion in the interest rates that identical borrowers get, even from the same lender and loan officer, suggesting important roles for shopping and negotiation. Across time, we find that overpayment tends to decrease as market rates rise and, using new survey data, provide direct evidence that borrowers shop more when market rates are higher, suggesting that behavioral forces affect search effort. More generally, we use the survey data to demonstrate that a significant amount of the mortgage rate variation across consumers can indeed be traced to heterogeneity in financial knowledge and shopping behavior.

Missing the Mark: Mortgage Valuation Accuracy and Credit Modeling

In 2008, the US mortgage market collapsed under a lack of transparency, incorrect pricing, and underestimated risk. Price indexes, however, could help investment managers monitor assets that are heterogeneous or infrequently traded. Responding to needs for better valuation approaches, we created new localized house price indexes and evaluated their ability to predict transaction prices and mortgage performance. We show where and when valuation errors occur and how to avoid them. Our work has a broader application than mortgage valuation for analysts or investors valuing alternative assets—namely, using the most granular indexes yields positive but diminishing modeling gains when submarket trends exist.

Utilizing Digital Tools for the Surveillance of the US Mortgage Market

The US mortgage market is of paramount economic and financial importance. While the causes of the Global Financial Crisis (GFC) remain a subject of vigorous debate, lax lending standards and opacity surrounding innovations in securitization are often cited as central issues. A decade following the Global Financial Crisis, we have demonstrated that digital tools have been developed in the mortgage space that have the potential to allow investors to form a clear view of the investment risks and opportunities, and policymakers to design regulations with a complete view of the behavior of all participants: borrowers, underwriters, servicers and investors. While big data tools have been around for an extended period, it is only recently that advanced techniques have come to the market that allow for more cost-effective analysis. The latest enhancement is the application of AI to this data to unify the information across disparate data sets. We have seen demonstrations of the power of these techniques in analyzing business models for financial institutions, and for informing policymakers about the implications of their decisions across broad categories of actors in this market. Looking ahead, the analysis performed here can be extended by matching loans across time as well as between different data sets, and through applications to different markets and countries.

Modeling the Dependence between PD and LGD

In the current Basel framework, the A-IRB formula, used by banks or other financial institutions to compute their Regulatory Capital to hedge Credit Risk, completely neglects any possible dependence between Probability of Default and Loss Given Default. This happens since it uses a stressed version of the first parameter only, which is computed according to a mathematical model (ASRF), while for the latter is simply requested a parameter which can\properly describe a downturn period. Therefore the main goal of this thesis is to investigate a possible correlation between these two parameters and, eventually, propose a new formula to compute the Regulatory Capital which could incorporate this potential relationship. Hence, in order to achieve this goal, we first estimate both parameters, developing a well known statistical tool (Survival Analysis) and confirming (or even improving) the results of some previous studies which claim that this approach is actually suitable for the modelling of both quantities, clearly with a different meaning of the results which have to be properly interpreted. In a second phase we study the common behavior of these two risk parameters and present a completely new application in Credit Risk of a Bivariate Non Central Beta distribution, starting from empirical evidences of positive correlation. This approach is not only absolutely new in this field, but it also suggests a new methodology to stress both the parameters and to compute the Unexpected Losses. Consequently, it allows to obtain a new model for the Regulatory Capital of a bank and any other financial institutions, which actually takes into account any possible dependence between Probability of Default and Loss Given Default. The empirical analysis to test the proposed model is performed on public data coming from the US mortgage market, published by Freddie Mac. We obviously acknowledge that our solution is only a small step towards a long and hard path, therefore we encourage and recommend further research in this direction, since we believe that this could really lead to a more conscientious modelling of the Regulatory Capital for Credit Risk and, hence, to safer markets.

Banking Competition and Shrouded Attributes: Evidence from the US Mortgage Market

We document that increased competition leads banks to reduce initial rates offered on adjustable-rate mortgages (ARMs) to attract borrowers but increase interest rates after the rate reset and thereby exploit consumer inattention in pricing terms. Consistent with theoretical predictions, we find that banks shroud more with naive borrowers or less financially sophisticated borrowers, who are more subject to behavioral bias. Although competition reduces firm profits and benefits consumers due to price reduction, the effect is small, since firms respond to competition by increasing add-on prices and loans have lower default rates and delayed prepayments since deregulation.

Regional Redistribution through the US Mortgage Market

Regional shocks are an important feature of the US economy. Households' ability to self-insure against these shocks depends on how they affect local interest rates. In the United States, most borrowing occurs through the mortgage market and is influenced by the presence of government-sponsored enterprises (GSE). We establish that despite large regional variation in predictable default risk, GSE mortgage rates for otherwise identical loans do not vary spatially. In contrast, the private market does set interest rates which vary with local risk. We use a spatial model of collateralized borrowing to show that the national interest rate policy substantially affects welfare by redistributing resources across regions. (JEL E32, E43, G21, G28, L32, R11, R31)

Banking Competition and Shrouded Attributes: Evidence from the US Mortgage Market

Banking Competition and Shrouded Attributes: Evidence from the US Mortgage Market

Shaky Ground: What Investors Can Learn from the Strange Saga of Fannie and Freddie

Many observers believe that the policies of Fannie Mae and Freddie Mac led to the financial crisis of 2008–2009, and many would like to remove them from the US mortgage market. Although Fannie and Freddie were not blameless, their policies were less destructive than those of private lenders. Unless the US housing market is thoroughly reformed, Fannie and Freddie will remain essential to its existence.

The economic crisis and company management: influences and consequences

The tourism industry has been considerably affected by the global economic crisis over the most recent years, with its roots identified in the US mortgage market segment. This crisis has caused fluctuations in the markets across all industries, triggering uncertainty in nearly every businessperson in the Czech Republic. By their nature, tourist services are non-essential products, used by customers to satisfy their needs only. Thus, in those times of uncertainty, customers tend to cut down on these services to a certain minimum level. This fact manifested itself during the crisis in 2007–2012. The article presents the impact of the global crisis on the tourism industry, in particular, on accommodation providers in the Olomouc region. The aim of the article was to explore the impact of this crisis on management of group accommodation facilities. The introductory chapter discusses the theoretical aspect of the economic crisis and its relations with company management, as well as the impact of the crisis on provision of accommodation services in the reference period across the nation. Following this, hypotheses are established, to be subsequently assessed by means of the primary research run as the questionnaire poll in the Olomouc region. The article focuses essentially on a change of managers in accommodation facilities, other measures taken by managers during the crisis, and the consequences of these measures.

The Effect of Foreclosure Regulation: Evidence for the US Mortgage Market at State Level

Do laws to protect borrowers curb foreclosures? This question is addressed by analysing the impact of foreclosure laws on default rates at state level in the US mortgage market. Using panel data techniques, we find a statistically significant effect of regulation on the different stages of the foreclosure process. More precisely, we analyse the effect of regulation on 60-day delinquencies and foreclosure starts, with a focus on three protective elements commonly found in state foreclosure laws, namely requiring a judicial process, granting a redemption period and banning a deficiency judgment. We find that, whereas protective states exhibit, on average, lower 60-day delinquency rates, more protection does not ultimately bring about lower foreclosure rates. Lenders seem to ration credit to mitigate costly protective laws, thereby reducing delinquency rates; but this effect is overshadowed by a moral hazard problem since, once borrowers are delinquent, they have incentives to take advantage of the protection due to the lower costs of foreclosure. We also find that the recent housing market crisis has exacerbated that behaviour. Finally, we show that lengthening the foreclosure process is no cure for the foreclosure crisis.