Mortgage Characteristics and the Racial Incidence of Default

Abstract

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.

Keywords: Inequality, Mortgage Choice, Foreclosure, Mortgage Delinquency