Mortgage Discrimination and FHA Loan PerformanceAbstractThis article seeks to evaluate discrimination in home mortgage originations by examining the performance of mortgage loan portfolios. This approach follows from the theoretical foundations of the economics of discrimination (Becker, 1971). The basic premise is that biased lenders will require higher expected profits for loans to minority borrowers and hold minority applicants to underwriting standards in excess of those required for other applicants. Thus discrimination results in lower expected default costs for loans originated for marginally qualified nonminority borrowers. This study employs a rich FHA data set, comprising a large number of individual loan records, to evaluate the performance of mortgage borrowers. Results of the analysis fail to find evidence of better performance on loans granted to minority borrowers. Indeed, black borrowers are found, all else being equal, to exhibit a higher likelihood of mortgage default than other borrowers. These findings argue against allegations of substantial levels of bias in mortgage lending.Mortgage Discrimination and FHA Loan Performance (*.pdf, 95 KB)
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