An Unintended Consequence of Mortgage Financing Regulation - A Racial Disparity

Journal of Real Estate Finance and Economics, November 2019, Volume 59, Issue 4, pp 549–588

Posted: 5 Dec 2019 Last revised: 27 May 2020

See all articles by James B. Kau

James B. Kau

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Lu Fang

Florida International University

Henry J. Munneke

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: November 21, 2019

Abstract

This study investigates whether mortgage financing regulation unintentionally leads to minorities paying a higher loan contract rate under a risk-based pricing system. We provide evidence that minority borrowers prepay less frequently than comparable non-minority borrowers and thus have lower termination risk. Racially neutral lending policies prohibit the lender from considering this reduced termination risk, resulting in a disparate impact from the overstatement of a minority borrower's and thus have lower termination risk. While we find little evidence of a rate differential among borrowers under the current regulatory structure, results show minorities pay a higher rate when the variation in termination risk is recognized.

Keywords: Mortgage discrimination; Prepayment; Default; Regulation

JEL Classification: G21, G28, J15, R20

Suggested Citation

Kau, James B. and Fang, Lu and Munneke, Henry J., An Unintended Consequence of Mortgage Financing Regulation - A Racial Disparity (November 21, 2019). Journal of Real Estate Finance and Economics, November 2019, Volume 59, Issue 4, pp 549–588, Available at SSRN: https://ssrn.com/abstract=3491360

James B. Kau

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
706-542-9110 (Phone)
706-542-4295 (Fax)

Lu Fang (Contact Author)

Florida International University ( email )

Miami, FL
United States

Henry J. Munneke

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
(706) 542-0496 (Phone)
(706) 542-4295 (Fax)

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