Abstract

http://ssrn.com/abstract=626281
 
 

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Residential-Mortgage Lending Discrimination and Lender-Risk-Compensating Policies


Henry Buist


Fannie Mae

Peter Linneman


University of Pennsylvania - Real Estate Department

Isaac F. Megbolugbe


Federal National Mortgage Association (Fannie Mae) - Office of Housing Research


Real Estate Economics, Vol. 27, No. 4, December 1999

Abstract:     
The Boston Federal Reserve study (Munnell et al. 1996) concluded that illegal discrimination is a statistically significant contributor to the observed gap between white and minority residential-mortgage rejection rates. The Boston study speculated that discrimination arises because lenders do not equally apply risk compensation or mitigation policies for imperfect loans. Using the same 1990 Boston loan application data, our study specifically examines the relation between compensating policies and discrimination. Since compensating policies are encouraged by secondary-mortgage-market sale guidelines, we model both the lender's origination decision and its loan sale decision. Using a rule-based artificial-intelligence technique applied to each lender, we infer compensating policies (rules) that equally apply to all races and explain lending decisions. A minority-race indicator loses its statistical significance when an indicator of compensating-policy violations appears in the loan acceptreject equation. This result reflects the fact that the risk levels of marginal minority loans tend to be more extreme than those of marginal white loans. However, the result does not necessarily reject the existence of discrimination. Equally applied policies may be empirically indistinguishable from unfairly applied policies. In addition, equally applied policies may fail the adverse-impact doctrine if they do not serve a business necessity (such as profits). The industry's move away from discretionary, rule-based decisions to mortgage scoring answers the need for a decision framework that rigorously uses loan performance to evaluate all loan applicants fairly.

Keywords: Mortgage lending discrimination, risk compensation

JEL Classification: G21

Accepted Paper Series


Not Available For Download

Date posted: December 4, 2004  

Suggested Citation

Buist, Henry and Linneman, Peter and Megbolugbe, Isaac F., Residential-Mortgage Lending Discrimination and Lender-Risk-Compensating Policies. Real Estate Economics, Vol. 27, No. 4, December 1999. Available at SSRN: http://ssrn.com/abstract=626281

Contact Information

Henry Buist (Contact Author)
Fannie Mae ( email )
3900 Wisconsin Avenue
Washington, DC 20016
United States
202-752-3483 (Phone)
Peter D. Linneman
University of Pennsylvania - Real Estate Department ( email )
Philadelphia, PA 19104-6330
United States

Isaac F. Megbolugbe
Federal National Mortgage Association (Fannie Mae) - Office of Housing Research ( email )
4000 Wisconsin Ave. NW
Washington, DC 20016
United States
202-274-5065 (Phone)
202-274-8111 (Fax)
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