Is There Discrimination in Mortgage Pricing? The Case of Overages

40 Pages Posted: 25 Jan 2015

See all articles by Harold A. Black

Harold A. Black

University of Tennessee, Knoxville - Department of Finance

Thomas P. Boehm

University of Tennessee, Knoxville - Department of Finance

Ramon P. DeGennaro

University of Tennessee, Knoxville - Department of Finance

Date Written: November 2001

Abstract

We conduct an empirical investigation to explain observed differentials in mortgage overage pricing. Our analysis makes several contributions. First, we study an area of mortgage pricing that is little understood by consumers and has received little scrutiny in the literature. Second, we consider the impact of the market power of individual loan officers on overages paid by borrowers, particularly minorities. Third, we include a number of borrower and lender characteristics not available in previous analysis.

Importantly, we introduce a new direct measure of the market power of individual loan officers. We also incorporate the interactive effects of loan officer market power and the race of the borrower in determining the rate of the mortgage loan. Through the use of these new variables and employing proprietary data from different branches of a nationwide mortgage lending institution, we conclude that the market power of the lender and the bargaining or negotiating ability of the borrower are important determinants of overages. We find that overages paid by minorities who purchase homes are larger than those paid by whites. Our evidence suggests that this is due to differences in the pools of borrowers rather than to racial discrimination. Indeed, tests show that the pool of refinancings is more homogeneous across races than the pool for purchases, and we find no differences by race for refinancings. We conclude that a more effective way to eliminate racial differences in overages is to pursue policies designed to increase the ability of minorities to bargain more effectively rather than to enact additional antidiscrimination laws.

Keywords: discrimination, lending, minority, overages, race

JEL Classification: G18, G21, G28, G38

Suggested Citation

Black, Harold A. and Boehm, Thomas P. and DeGennaro, Ramon P., Is There Discrimination in Mortgage Pricing? The Case of Overages (November 2001). FRB Atlanta Working Paper Series No. 2001-4a, Available at SSRN: https://ssrn.com/abstract=2491123 or http://dx.doi.org/10.2139/ssrn.2491123

Harold A. Black

University of Tennessee, Knoxville - Department of Finance ( email )

Knoxville, TN 37996
United States
423-974-1721 (Phone)
423-974-1716 (Fax)

Thomas P. Boehm

University of Tennessee, Knoxville - Department of Finance ( email )

Knoxville, TN 37996
United States
615-974-3216 (Phone)
615-974-1716 (Fax)

Ramon P. DeGennaro (Contact Author)

University of Tennessee, Knoxville - Department of Finance ( email )

423 Stokely Management Center
Knoxville, TN 37996
United States
865-974-1726 (Phone)
865-974-1716 (Fax)

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