Various studies provide evidence of racial and ethnic disparities in residential mortgage lending, and show that minorities face a higher probability of being denied a mortgage and a higher cost of capital when they are approved for one. In “Racial Disparities in Mortgage Lending: New Evidence Based on Processing Time,” Bin Wei and Feng Zhao investigate a dimension about which very little is known, the time to process a loan application. Delays in processing applications can introduce unnecessary uncertainty into the process of purchasing a home or refinancing an existing mortgage loan.
Using HMDA data from 2001 through 2006, the authors find that loan applications by Black borrowers take longer to process than applications by White, Hispanic, or Asian borrowers. In fact, including lender fixed effects widens the racial gap, doubling the gap between Black and White borrowers from 1.8 days to 3.4 days. This is an important result because it implies differential treatment of minority and White borrowers by the same lender. The gap is especially large on loans sold to GSEs (government-sponsored enterprises), being as large as 7.2 days over the 2001–03 period. In contrast, loans sold to private-label securitizers often required little to no documentation and were processed almost a day faster when the borrower was Black.
Relative to the population, Black borrowers are underrepresented in the GSE sample and overrepresented in the private-label securitization sample, which contains loans that were processed more quickly and subsequently experienced higher default rates. One implication of the results is that an important reason for Black borrowers taking on nonstandard loans was the difficulty they had in obtaining GSE-eligible loans.
Spotlight by Uday Rajan
Photos courtesy of Bin Wei and Feng Zhao