Racial Discrepancy in Mortgage Interest Rates

Abstract

Existing research on racial discrimination in mortgage lending has overwhelmingly focused on whether black applicants are more likely to be denied for credit than comparable white applicants. This study investigates whether the approved black applicants are likely charged higher interest rates than their white counterparts. Using data from three waves of the U.S. Survey of Consumer Finance, our results suggest that black borrowers on average pay about 29 basis points more than comparable white borrowers. We also find that rate disparity mainly occurs to young borrowers with low education as well as those borrowers whose income and credit disqualify them for prime lending rates. Furthermore, among borrowers in the higher rate groups, black women seem to receive much more disparate treatment than black men. We conclude that, while the racial disparity in mortgage rates is widespread between black and white borrowers, it is the more financially vulnerable black women who suffer the most.

Racial Differences in the Returns to Financial Literacy Education

“…For the average American, home equity is their largest asset and greatest determinant of wealth accumulation and intergenerational wealth and the black household's ability to accumulate home equity is severely limited due to their home values. Additionally, research has found that blacks pay more for mortgage loans, auto loans, and other goods and services (e.g., Black, Boehm, and DeGennaro ; Cheng, Lin, and Liu ; Clarke, Roy, and Courchane ; Munnell et al ; Wheeler and Olson ). Relative to white borrowers, blacks are more likely to be denied a mortgage (Wheeler and Olson ) and if approved, blacks receive interest rates on mortgages that are 29 basis points higher (Cheng, Lin, and Liu ).…”

“…2 For the average American, home equity is their largest asset and greatest determinant of wealth accumulation and intergenerational wealth and the black household's ability to accumulate home equity is severely limited due to their home values. Additionally, research has found that blacks pay more for mortgage loans, auto loans, and other goods and services (e.g., Black, Boehm, and DeGennaro 2003;Cheng, Lin, and Liu 2015;Clarke, Roy, and Courchane 2009;Munnell 2. Practices such as redlining-denial of services and/or increased pricing based on the racial composition of an area-continue to attribute to homeownership disparities.…”

“…Wheeler and Olson 2015). Relative to white borrowers, blacks are more likely to be denied a mortgage (Wheeler and Olson 2015) and if approved, blacks receive interest rates on mortgages that are 29 basis points higher (Cheng, Lin, and Liu 2015).…”

Supportive and mitigating factors associated with financial resiliency and distress

“…Non-White and Hispanic respondents report significantly lower net worth compared to non-Hispanic White respondents. This finding may be related to discrimination in credit markets (see Cheng, Lin, & Liu, 2015; Oliver & Shapiro, Thorne, 2007), which can impact access to mortgages and homeownership before and after bankruptcy. The amount of time since filing for bankruptcy protection is unrelated to an individual's financial well-being following bankruptcy (see the full model results).…”

Household Access to Mortgages in the UK

“…For instance, Black and Hispanic households are more likely to be rejected and offered less attractive terms for mortgages than Whites (Black et al 1978;\Munnell et al 1996;Ross and Yinger 1999). Non-Whites pay more for their mortgages even when factors such as income levels, property dates and the age of buyer are controlled for (Oliver and Shapiro 1997;Courchane and Nickerson 1997;Crawford and Rosenblatt 1999;Black et al 2003;Cheng et al 2015). Although these higher rates may be counteracted with more favourable terms, such as longer low rate lock-ins (Crawford and Rosenblatt 1999).…”