Showing posts with label mortgage. Show all posts
Showing posts with label mortgage. Show all posts

April 4, 2013

Foreclosures on 2005 Vintage Mortgages by Ethnicity

Here's a graph created by Dr. Carolina Reid of the Federal Reserve Bank of San Francisco tracking foreclosure rates over time on mortgages originated in 2005. This is for the 50 largest metro areas, so it's reasonably representative of the bulk of the mortgage dollars in the U.S.

In thinking about the Great Recession and foreclosures, we need to conceptually distinguish between later foreclosures caused by the recession versus earlier foreclosures that, more than any other single factor in the U.S., caused the recession. (Obviously, the recession had multiple causes, which can be analyzed on multiple levels, just as World War I can be said to be caused (at the specific level) by both the assassination of the Archduke or (at an abstract level) the system of Great Power rivalries. But for historical events as important as the Great War and the Great Recession, it's worth taking the trouble to analyze multiple causes at multiple levels. The mortgage meltdown may not have been the ultimate cause of the recent economic unpleasantness, but it deserves close analysis, just as the assassination of the Archduke, the stock market crash of 1929, and the bombing of Pearl Harbor deserve the attention paid to them.)

The foreclosures rates in this graph are for January of each year. Keep in mind that foreclosures lag defaults by some number of months. 

Some recent history: The subprime crisis was first noticed in February 2007 with the failure of subprime lender New Century Financial in Orange County. So, the first two data points, 2006 and 2007, are both before subprime blew up. The Great Recession itself did not become a certainty until mid-September 2008, and unemployment rose in the wake of those memorable fall 2008 events. Not surprisingly, broad unemployment caused numerous foreclosures. 

But, what's of more interest in figuring out cause and effect are the foreclosures that happened before the country fell into a general recession. This study of 2005 vintage mortgages offers some interesting clues. Here's Reid's map of foreclosures as of January 2007:
As you can see, foreclosures were centered around Greater Detroit

Not surprisingly, in those first two years, while the price of houses was still high, blacks had the highest foreclosure rates. The financial cost of these mortgages defaults was low, however, because home prices in the Great Lakes area are not particularly high.

But, by 35 months later, at the end of 2010, the landscape was dominated by the red of the Sand States of California (the Big Kahuna of real estate values), Arizona, Nevada, and Florida, all of which had above-average priced-homes (California exceptionally so):
As the top graph demonstrates and the second map implies, the Hispanic rate skyrocketed between January 2007 and January 2009. By January 2009, the Hispanic foreclosure rate (about 6%) was roughly three times the white rate (about 2% rate), and the Hispanic rate was now significantly higher than the black rate. The Hispanic foreclosure rate accelerated from January 2009 to January 2010 (roughly the second map), reaching about 10.5%, before its rate of growth moderated from January 2010 to 2011.

More than any other ethnic group, Hispanics blew up and then popped the bubble.

Interestingly, the Asian rate grew sharply over the course of 2009, almost catching up to the black rate. The white foreclosure rate lagged the other ethnicities rates, finally closing some of the gap by January 2011, suggesting that white borrowers tended to be less cause than victim of the recession.

The more I look at the recent studies, the more I keep coming back to my initial reaction: Diversity, in the multiple meanings we assign that term, played a major role in the Recent Economic Unpleasantness. You might think that knowing this would be relevant to immigration policy, but that just shows you are a bad person.

April 2, 2013

Mortgage mania: "The past is never dead. It's not even past."

Lately, I've been posting summaries of academic research into the true nature of the mortgage meltdown of a half decade ago. I realize that sounds like ancient history of no relevance, but from today's Washington Post:
Obama administration pushes banks to make home loans to people with weaker credit 
By Zachary A. Goldfarb, Updated: Tuesday, April 2, 5:48 PM 
The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place. ...
In response, administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default. 
Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default. 
Officials are also encouraging lenders to use more subjective judgment in determining whether to offer a loan and are seeking to make it easier for people who owe more than their properties are worth to refinance at today’s low interest rates, among other steps. ...
“If you were going to tell people in low-income and moderate-income communities and communities of color there was a housing recovery, they would look at you as if you had two heads,” said John Taylor, president of the National Community Reinvestment Coalition, a nonprofit housing organization. “It is very difficult for people of low and moderate incomes to refinance or buy homes.”
“If the only people who can get a loan have near-perfect credit and are putting down 25 percent, you’re leaving out of the market an entire population of creditworthy folks, which constrains demand and slows the recovery,” said Jim Parrot, who until January was the senior adviser on housing for the White House’s National Economic Council.
The effort to provide more certainty to banks is just one of several policies the administration is undertaking. The FHA is also urging lenders to take what officials call “compensating factors” into account and use more subjective judgment when deciding whether to make a loan — such as looking at a borrower’s overall savings. 
“My view is that there are lots of creditworthy borrowers that are below 720 or 700 -- all the way down the credit score spectrum,” Galante said. “It’s important you look at the totality of that borrower’s ability to pay.”

It sounds like we need to know what actually happened in the 2000s.

Bankrupt Stockton: Was the mortgage meltdown a government-sponsored affinity scam?

With the city of Stockton, CA in the news as its municipal bankruptcy winds its way through the courts, I was struck by this 2010 San Francisco Federal Reserve paper on the kitchen table dynamics of how so many people in Stockton and Oakland wound up with mortgages they couldn't afford. One short answer: minorities trusted co-ethnic mortgage brokers to treat them fairly out of racial solidarity.
Sought or Sold? Social Embeddedness and Consumer Decisions in the Mortgage Market 
Carolina Reid,  
Federal Reserve Bank of San Francisco 
Working Paper, December 2010

Stockton is a Central Valley exurb of the San Francisco Bay Area. In the 2000s, new developments went up all over Stockton, but then around 2007, it became one of the foreclosure sore spots of the country, helping set off the Great Recession of 2008.

My theory of the mortgage meltdown has been that it was inextricably tied up with “diversity.”

But, what do I mean by “diversity?” I use the word to signify:

- a demographic reality;
- an ideology or attitude (“Diversity is our strength,” as Dan Quayle said);
- government, activist, corporate, and media projects intended to operationalize that ideology and intimidate skeptics into silence;
- and to signify what many, from the highest to the lowest in our society, view as a get-rich-quick opportunity.

Dr. Reid's little study of mortgagees in Stockton and Oakland is important for understanding the Who? Whom? aspects of the Minority Mortgage Meltdown. 

Since almost nobody in our culture publicly dissents from Diversity, or really even notices anymore how much it keeps us from noticing what is in front of our noses, we are left with only two ideologies:

Double Down on Diversity
v.
Libertarianism

The Randians have the problem that while a lot of government programs exacerbated the mortgage meltdown, good old hog-stomping greed played a huge role as well.

The Double Down on Diversity conventional wisdom about how the problem is, as always, Rich Old White Men blocks us from noticing that the Rich Old White Men who were up to their elbows in this debacle (e.g., Angelo Mozilo, George W. Bush) were outspoken enthusiasts for Double Down on Diversity themselves. Indeed, the Double Down on Diversity view prevents us from noticing the High-Low coalition in which elites use designated victim groups as mascots to get more of what they want, even though it is central to understanding the way of the world in the 21st Century.

If we drop both sets of ideological blinders, one thing we notice is that an overlooked aspect of the fiasco was the role of minority mortgage brokers in putting their co-ethnics into terrible loans. This isn't a huge aspect to the story, but it's an enlightening one.

Since 1968, the government had built a system based around the notion that the problem was white people denying loans to people of color. Over time, the more optimistic and/or aggressive industry participants became true believers. There had been a big push over the years to diversify the mortgage broker profession, both from the government for diversity reasons and from private interests for profit-seeking reasons. It seemed a happy illustration of the virtues of MultiCulti Capitalism.

Not surprisingly, with everybody -- regulators and regulatees -- in vociferous public agreement that the solution was to Double Down on Diversity – hire more minority mortgage brokers so minorities can get more mortgages – the real problem turned out to be the opposite: the minority mortgage brokers pocketed big commissions putting minorities who should never have gotten a mortgage at all into a mortgage, and pocketed bigger commissions by putting creditworthy minorities who should have gotten a prime interest mortgage into a higher commission subprime one. 

Dr. Reid's paper is based on interviews with 33 people in Stockton and 47 in Oakland. In this little study, 66 of the 80 homebuyers were nonwhite. Interestingly, 84% of the respondents enjoyed the services of a mortgage broker of the same race/ethnicity as themselves.
The anecdotes also provide insight into why so many borrowers ended up in loans that they could not afford over the long term, and why borrowers with prime credits cores—particularly among Hispanic and Black borrowers—received a subprime loan. Did borrowers actively “seek” out subprime loans, or were they “sold” loans by unscrupulous brokers and lenders?
In the interviews, three key themes related to social embeddedness emerged. ... social networks to help them identify mortgage brokers and lenders, and particularly for the immigrant and African‐American respondents, revealed a strong preference for brokers who were part of the local community [i.e., racial community, not geographical community). This preference was driven by perceptions that outsiders would not treat them fairly, and that a broker who “understood” their situation would be more likely to result in a positive outcome.

Keep in mind here that “positive outcome” to most of these minority borrowers means getting your hands on the front door key, and “treat them fairly” means letting them get a house, not making sure it’s a mortgage they can afford. Reid provides numerous examples of get rich quick greed among her interviewees. A lot of people in Stockton and Oakland figured they'd flip the house for big money right away, so few read their contracts, even if they were literate in English.
The shared identity that borrowers felt with their brokers, coupled with the broker’s perceived expertise about the mortgage process, led borrowers to trust their advice and not seek external validation of the information provided. As I show using the quantitative data, this led to mortgage outcome sthat were not necessarily in their best economic interest.  
One of the strong themes that emerged from the interviews was the extent to which respondents of color expressed their desire to work with a broker from their own community or background, and that they turned to friends and family members to identify a broker or lender that had a history of serving other families in the community.  
In, numerous interviews, borrowers said that they turned to their social networks and relations in the neighborhood to identify a local mortgage broker who would be willing to “work with someone like me.” Part of this was driven by a lack of trust in traditional lenders, and several respondents in Oakland noted a historical distrust of banks in the community. 

By lack of trust, they mean, I suspect, resentment that banks in the community didn’t trust them to pay back loans. Of course, that it turned out the the bad old banks were right about them won't make them like the bad old banks more.
….Empirical research studies, however, have revealed that during the subprime boom, yield spread premiums coupled with a push for a greater volume of loan originations provided a financial incentive for brokers to work against the interests of the borrower(e.g. Ernst, Bocia and Li 2008). In addition, since there was no statutory employer‐employee relationship between lending institutions and brokers, there were few legal protections to ensure that brokers provide borrowers with fair and balanced information. This aligns with the “trust” that social relations engender. … 
In both Stockton and Oakland, respondents did not seem to be aware of the potential for perverse incentives on the part of brokers, and instead trusted them fully to actin their best interests.

… The quantitative data, however, shows that the decision to “trust” a broker often worked against the best financial interests of the borrower, especially for minority borrowers. Research has shown that regardless of their FICO score, Blacks and Hispanics were much more likely to receive a high‐cost loan, especially when that loan was facilitated by a mortgage broker. This hold strue even when we control for other factors, such as local housing and mortgage market conditions, fico score, and loan to value and debt to income ratio. 
Indeed, in a multivariate model that controls for the majority of underwriting variables, we find that origination by a mortgage broker has a large statistically significant effect on the likelihood of getting a high cost loan for certain borrowers, and that this effect is greater for Hispanics and Blacks. (Figure 5) The marginal effect of using a broker is 22 percent for Hispanics, and 18 percent for Blacks. While it may not seem like an extremely large effect, it is approximately equivalent to a 200 point decrease in a borrower’s FICO score. In contrast, white borrowers who used the services of a mortgage broker were 4 percent less likely to get a high cost loan, suggesting that in their case, on average, brokers helped them to navigate a better mortgage product based on their risk characteristics. 
So, were these loans “sold” or “sought”? While certainly not conclusive, the interviews suggest both are true. First, mortgage brokers in Oakland and Stockton were specifically targeting their services to borrowers with lower FICO scores, and much of the marketing focused on reaching borrowers with poor credit records. (Figure 6) Second, borrowers with lower credit scores actively sought out mortgage brokers who they had heard would help them wade through the paperwork and get a mortgage approved. What was less clear from the interviews was whether or not brokers had intentionally duped borrowers into taking on irresponsible loan products.

In Reid's sample, four of her 80 interviewees were also mortgage brokers themselves. They all felt fine about what they did, and few of her other minority interviewees blasted their brokers. Most felt pretty warmly about their brokers still. The affinity part of affinity fraud really works.

Affinity scams in which people are duped into trusting that a promoter has their best interests in heart because he's a fellow whatever are sadly common. Affinity fraud and Ponzi schemes (which the Housing Bubble was a variant of) frequently go together.

Yet, I'm not sure if anybody has previously pointed out how the government, media, activist, and social pressure to diversify the mortgage industry turned places like Stockton into a government-endorsed affinity fraud Ponzi scheme?

Minority Mortgage Meltdown in Prince George's County

Since 1975, the federal government has been collecting data to make sure that minorities get enough mortgages, but nobody set up a system to see if minorities were paying back their mortgages. Thus, when the mortgage market collapsed in 2007-08, there wasn't much data readily available on who was defaulting on their loans. I started pointing out in 2007 that the circumstantial evidence pointed to this being heavily "diversity-driven." After all, the government and the media had been making a huge effort to keep minorities from getting too few mortgages, so the most likely mistake was they had gotten too many.

Slowly, academic studies are emerging of who exactly defaulted, and it turns out ... I was right. For example:
Analyzing Foreclosures Among High-income Black/African American and Hispanic/Latino Borrowers in Prince George’s County, Maryland 
Katrin B. Anacker, James H. Carr, and Archana Pradhan 
Abstract 
Although Prince George’s County, Maryland, is the wealthiest Black/African American county in the nation, the national foreclosure crisis has had a profound effect on it. Using a merged data set consisting of Home Mortgage Disclosure Act (HMDA), U.S. Census, and Lender Processing Services (LPS) data and utilizing a logistic regression model, we analyzed the likelihood of foreclosure in Prince George’s County in the Washington, DC metropolitan area. We found that the borrowers in Black/African American neighborhoods with high-income were 42% more likely and Hispanic/Latino neighborhoods with high income were 159% more likely than the borrowers in non-Hispanic White neighborhoods to go into foreclosure, controlling for key demographic, socioeconomic, and financial variables.

These race differences are after they statistically adjust the heck out of everything. I think it's also useful to highlight the raw foreclosure rates in Prince George's County, Maryland:

White: 1.91% (372 foreclosures)
Hispanic: 6.42% (3.4X the white rate, 1,091 foreclosures)
Black: 3.62% (1.9X the white rate, 4,219 foreclosures)

That's a lot of Hispanic foreclosures for a county famous for its black population.

One thing to keep in mind about these studies is that the national racial gaps might turn out to be even bigger than the regional ones because the studies are typically done of places with a lot of foreclosures, which tend to be pretty vibrant. I haven't seen anybody yet do a study of defaults in, say, the Dakotas.

Minority Mortgage Meltdown in Atlanta Metropolis

Here's another paper on the role of diversity in the mortgage meltdown:
Analyzing Determinants of Foreclosure of Middle-Income Borrowers of Color in the Atlanta, GA Metropolitan Area 
Katrin B. Anacker
George Mason University - School of Public Policy 
James H. Carr
Federal National Mortgage Association (Fannie Mae) 
Archana Pradhan
National Community Reinvestment Coalition (NCRC) 
July 14, 2012
GMU School of Public Policy Research Paper No. 2013-01  
Abstract:    
Foreclosures have disproportionately affected borrowers and communities of color. Many studies have concentrated on the nation and specific metropolitan areas, but few academic studies have focused on Atlanta. Using a merged data set consisting of Home Mortgage Disclosure Act (HMDA), U.S. Census, and Lender Processing Services (LPS) data and utilizing a logistic regression model, we analyze the likelihood of foreclosure in the Atlanta, GA metropolitan area. We find that African American borrowers are 52 percent and Hispanic borrowers 159 percent more likely to go into foreclosure, controlling for key financial variables. We also find that African American middle-income borrowers are 35 percent more likely to go into foreclosure. Moreover, we find that exotic mortgage products, such as balloon mortgages, adjustable rate mortgages (ARMs) and mortgages with a prepayment penalty have a higher likelihood of foreclosure than standard 30-year fixed rate mortgages.

The raw, unadjusted results for the large Atlanta metropolitan area are that foreclosure percentages were:

White: 1.74% (5,692 homes in foreclosure)
Hispanic: 4.65% (2.7X white rate -- 395 homes in foreclosure)
Black: 5.82%  (3.3X white rate - 8,271 homes in foreclosure)

March 29, 2013

Hispanics delinquent on mortgages 4.7 times as often as whites

Going on a half dozen years after the mortgage meltdown that began in 2007, the evidence continues to trickle in about the key role of diversity in the disaster. Granted, there's very little demand for hard-headed analyses. Here, for example, is a paper finished in 2011 that has, according to Google, been cited once:
Mortgage Default by 2009: Effects of Race, Ethnicity and Economic Standing During the Boom Years  
Heather Luea
Vanderbilt University  
Adam Reichenberger
Bureau of Labor Statistics  
Tracy Turner
Kansas State University 
Abstract: This paper examines the determinants of 2009 mortgage delinquency by race and ethnicity using new household-level data on mortgage distress from the Panel Study of Income Dynamics. Controlling for homeowner and loan characteristics as well as residence in a nonrecourse state, we find startling differences in mortgage delinquency rates that cannot be explained by observables. The unexplained black/white gap corresponds to a 44% higher likelihood that black homeowners will be delinquent on their mortgages relative to non-Hispanic white homeowners. The unexplained difference in Hispanic mortgage delinquency relative to non-Hispanic white homeowners is even greater, at double the black/white delinquency gap.

... The economic decline that began in 2007 was preceded by nearly two decades of government-aided, rapidly rising homeownership rates among minority households (Bostic and Lee, 2007). Given this and the severity of the recent economic crisis, it is important to understand the extent to which minority households have weathered the crisis as well as non-Hispanic white households, all else equal. Indeed, the recent and historical role played by the US government and nonprofit agencies in boosting access to homeownership by underrepresented groups makes understanding these groups’ outcomes particularly relevant.4 
Footnote 4: As recently as June 2002, President Bush announced a goal of closing the homeownership gap for minority households by 5.5 million households by the end of 2010 through innovatiosn such as zero-down-payment loans. That administration's efforts followed more than a decade of housing market interventions, including President Clinton’s National Homeownership Strategy, a trillion dollar commitment by Fannie Mae, the Campaign for Homeownership of the Neighborhood Reinvestment Corporation, and expanded lending to low-income and minority households in part as a result of the implications of the Community Reinvestment Act (Turner and Smith, 2009). 
... As a preview of our findings, we find that black and Hispanic households that own their housing in 2005 are significantly more likely to become delinquent on their home loans by 2009 than non-Hispanic white homeowners. We find an unconditional, weighted likelihood of delinquency of 11.3%, 16% and 3.4% for black, Hispanic, and non-Hispanic white homeowners, respectively, making black homeowners 7.9 and Hispanic homeowners 12.6 percentage points more likely to be delinquent than non-Hispanic white homeowners. 

Let's break those delinquency-by-2009 rates out:

Whites: 3.4%
Blacks: 11.3% (3.3X the white rate)
Hispanics: 16.0% (4.7X the white rate)

The sample sizes of 2005 homeowers in the PSID are not huge: 2344 for whites, 810 for blacks and 263 for Hispanics (the number of Hispanics in a long-running longitudinal study naturally lags behind their number in the population). Also this study design excludes the 2006-07 vintage of new mortgages, which were the bottom of the barrel. However:
While the sample size of the PSID may be considered small compared to loan-based samples (for example, in the 2009 survey, there are roughly 8,000 households), the PSID has a number of advantages over larger samples that are either not household-based or not longitudinal. First, importantly, the unit of observation is the household, and the PSID collects extensive household-level data on employment, income, wealth, and housing costs and characteristics. In 2009, for the first time in the history of the PSID, survey respondents were also asked questions regarding mortgage delinquency and foreclosure, making this a dataset well suited for our study. Second, the PSID is a longitudinal dataset following families from as early as 1968 to present. Using the PSID, we have borrower and loan characteristics overtime, which to our knowledge are data not available in any other single dataset. Third, once sample weights are applied, the PSID is a nationally representative sample of the US population.

Statistically adjusting for all the info in the PSID, it turns out that there are still substantial racial gaps in staying current on mortgages:
Conditioning on extensive borrower and particularly loan characteristics reduces the race and ethnicity gaps in mortgage sustainability considerably, but does not entirely eliminate these gaps. In the full specification, we find that black and Hispanic homeowners remain 1.5 and 3 percentage points more likely to be delinquent than non Hispanic white homeowners, respectively. These unexplained effects are  large relative to the underlying mortgage delinquency rate of 3.4% for non-Hispanic white households.

In other words, statistically adjusting for everything they can come up with (e.g., income), there are still unexplained racial gaps:

Whites: 3.4%
Blacks: 4.9% (1.44X the white rate even after adjustment)
Hispanics: 6.4% (1.88X the white rate after adjustment)

In many ways, the first set of numbers is the more important. As the population shifts from whites to Hispanics, the delinquency rate would tend to get worse. 

But the second table can help explain why money-hungry but politically true-believing lenders like Angelo Mozilo of Countrywide could mess up so badly. You are not allowed to use race/ethnicity in credit modeling, but it turns out that race/ethnicity still matters a lot even in cases where the facts you are allowed to look at are all the same. During the 1990s, Mozilo became convinced that it was sheer racism to worry that Hispanics could default at higher rates than the model predicts.
We find startling differences by race and ethnicity in mortgage delinquency rates that cannot be fully explained by observables ...
The homeownership rates of black and Hispanic households have been and remain substantially below that of non-Hispanic white households. That certain groups experience low homeownership rates is cause for concern particularly to the extent that these gaps are involuntary and in light of the possibility that homeownership generates private and community benefits (i.e., Turner and Luea, 2009; Haurin, Dietz, and Weinberg, 2002). Belief in the positive externalities of homeownership has motivated substantial efforts in the past two decades to boost the homeownership attainment of underrepresented groups, and these efforts have generated relative gains in minority homeownership (Bostic and Lee, 2007). Evidence is mounting that the Great Recession has adversely impacted minorities to a greater extent than non-Hispanic white households. It is likely that the economically disadvantaged households that are losing their homes are some of the same households propelled into homeownership through federal assistance to begin with. If there is a silver lining, it may be that, according to recent work by Molloy and Shan (2011), post-foreclosure households on average do not end up in either less desirable neighborhoods or more crowded living conditions than what they experienced as homeowners. Determining the extent to which housing policy may have fueled the 2009 differential delinquency rates by minority status and why, and whether these households are nonetheless better off for their homeownership stint, would be valuable information for future policy design.

This might also be valuable information for current immigration policy design.

September 3, 2009

Crucial new mortgage study: "Liar's Loan?"

Here are excerpts from an important new paper on the causes of the Mortgage Meltdown, "Liar's Loan?" by three academic economists from Columbia, Indiana, and Yale. They obtained records on 721,767 mortgages handed out from January 2004 to February 2008 (including deliquencies up through January 2009) by a big, very aggressive national mortgage bank. The economists managed to match most of them up with ethnicity info from the Home Mortgage Disclosure Act database.

They don't say who the bank is (or, more likely, was) but it septupled the number of mortgages it gave out from the first half of 2004 to the second half of 2006. It gave out a lower percentage of subprime loans than the national average, but it did specialize in low-documentation (liar loans) mortgages.

The results aren't terribly surprising. Low-document (i.e., liar loans) have higher delinquency rates than full document loans, and loans originated by local mortgage brokers who sold them to the bank did worse than the loans originated by the bank itself. The model, therefore, is one of predatory securitizing from the ground up.

The usual ethnic differences in delinquency are observed:
"In the full sample, the ranking of delinquency rates by race/ethnicity is as follows: white (24.7%), Asian (27.1%), black (37.4%), and Hispanic (40.2%)."

That's not as great as the huge ethnic differences (3.3x for blacks vs. whites, 2.5x for Hispanics, and 1.6x for Asians) seen even in credit score and income-adjusted foreclosure rates from the state of California in the San Francisco Fed study by Laderman and Reid. (I've filed a Freedom of Information Act request to get the crucial raw data for California from the SF Fed).

The narrower delinquency rates seen in this one bank study are not surprising, since the bank was more or less pursuing a certain class of borrowers (i.e., iffy ones).
Liar’s Loan?

Effects of Origination Channel and Information Falsification on Mortgage Delinquency

Wei Jiang, Ashlyn Aiko Nelson, Edward Vytlacil

This Draft: August 2009

ABSTRACT This paper presents a comprehensive predictive model of mortgage delinquency using a unique dataset from a major national mortgage bank containing all of its loan origination information from 2004 to 2008. Our analysis highlights two major agency problems underlying the mortgage crisis: an agency problem between the bank and mortgage brokers that results in lower quality broker-originated loans, and an agency problem between banks and borrowers that results in information falsification by borrowers of low-documentation loans--known in the industry as Alt-A or “liars’ loans”--especially when originated through a broker. We also document significant differences in loan performance by race/ethnicity that cannot be explained by observable risk factors or loan pricing.

...The crisis that started from the mortgage market quickly spread to other financial markets and throughout the economy...

We use the experience of a major national mortgage bank to uncover the determinants of the mortgage crisis and the evolution of the crisis at a micro level.... Loans issued by the bank since the beginning of 2004 reached a cumulative delinquency rate of 28% by early 2009; approximately half of these delinquent loans were in the state of short sale or foreclosure. Finally, the borrowers and properties underlying the bank’s loans during our sample period have fair representations in all 50 states. Therefore, lessons from this particular bank have general implications for the national mortgage market. The proprietary data set represents the most comprehensive, detailed, and disaggregated data set in the mortgage loan literature. Our data set consists of all 721,767 loans that the bank originated between January 2004 and February 2008. ...

We provide evidence of borrower information falsification at both individual variable and aggregate levels. ...

Finally, we document significantly higher delinquency rates among Hispanic and black borrowers. The differences in delinquency rates--4 to 11 percentage points higher for Hispanics and 3 to 4 percentage points higher for blacks, relative to white borrowers--are not explained by the full set of individual risk factors collected at loan origination, or by differences in loan pricing. Our analysis--which includes far more detailed data than that used in prior research on the relationship between race/ethnicity and credit-- does not support a finding of discrimination, whereby minorities are subjected to higher lending standards or higher pricing for given financial products. Rather, the findings suggest that systematic differences between white and minority borrowers--such as information and experience disparities resulting from a lack of prior home buying experience or exposure to mainstream financial institutions--may explain these delinquency differences. ....

The housing boom welcomed many first-time homebuyers to the mortgage market. In early 2004, only 7.6% of borrowers in the sample were first-time homebuyers, a figure that climbed to 18.1% by late 2006. As the housing market collapsed and lenders tightened standards, the percent of first-timers fell to 12.7% by the end of 2007. During the sample period, black and Hispanic borrowers gained a significantly higher share of new loan originations. In early 2004, they represented 4.5% and 7.5% of the borrower population, respectively; by early 2007, the percentages were 8.9% and 23.3%. More strikingly, the proportion of blacks and Hispanics who were first-time borrowers increased from 10.3% in early 2004 to more than 25% in late 2006. The national mortgage market experienced a similar increase during the same period in the percentage of first-time homebuyers and the expansion of credit to minority households, who were disproportionately first-time homebuyers. According to national HMDA data on home purchase loans,8 6.6% (10.8%) of borrowers were black (Hispanic) in 2004; the numbers increased to 8.7% (14.4%) in 2006.

The graph in Figure 3 in the report shows that early 2007 vintage loans had radically higher delinquency rates than early 2004 loans: 31% of the early 2007 loans were delinquent by early 2009 compared to 12% of early 2004 loans. One reason was the lower prices in 2004 than in 2005-2007; another was that the bank was scraping deeper and deeper into the bottom of the barrel, dragging up ever more dubious borrowers.
... Column 1 of Table 4 Panel A indicates that the following variables predict a higher likelihood that a borrower will obtain a loan from a broker rather than from the bank: high debt level, original purchase (as opposed to refinance), first lien, first-time owner, owner-occupied, low income, low credit score, female borrower, minority borrower, young borrower, short employment tenure, and self-employed. All non-white racial groups favor the Broker channel in comparison to whites. Most of these characteristics (except perhaps the first-lien and self-employed variables) are associated, on average, with lower financial sophistication, less experience with mortgages, and lower credit quality. This relation calls attention to the issue of irresponsible lending--lending without due regard to ability to pay, to poorly informed borrowers--as analyzed by Bond, Musto, and Yilmaz (2008) and Inderst (2006).

The government spent years telling the mortgage industry to diversify its broker forces. When it finally did, that just greased the skids for Spanish-speaking and black mortgage brokers to dredge up bad borrowers who didn't have a clue what they were getting themselves talked into by their co-ethnics.

The variables that predict choosing a low-doc loan have the following contrasts with those that predict choosing a broker. First, borrowers with low loan-to-value (LTV) ratios but high loan size are more likely to choose low documentation. Second, first-time owners and those purchasing owner occupied properties are less likely to choose low documentation. Third, borrowers with high income and credit scores tend to choose low documentation. Fourth, black borrowers do not appear disproportionately in low documentation loans, while Hispanic and Asian borrowers do.

An examination of credit scores by race reveals that average credit scores are highest among Asian and white borrowers, and lowest among Hispanic and black borrowers. Hispanic borrowers who obtain loans directly from the bank have credit scores that are comparable to those of white borrowers, but those who obtain loans through a broker have credit scores that are on average 2-5 points lower. Black borrowers have average credit scores that are 14-27 points lower than white borrower credit scores, across all subsamples.

Remember, this is just for borrowers from this dubious bank, not for the overall population.
Section V offers a more detailed analysis of these race/ethnicity effects. Last, the time trend of credit scores, as shown by the year dummy variable coefficients, is informative; while Bank loans saw steady improvement in credit scores over time from 2004-2008, credit scores for Broker loans deteriorated from 2004-2007, and only recovered in 2008. The findings provide evidence that the bank pursued a growth strategy which relied on penetrating marginal borrowers through the broker channel.

A "Don't Tell Us, We Don't Want to Know" relationship between the bank and the mortgage brokers.

V. “The Color of Credit:” Race/Ethnicity and Loan Performance There is a large body of research dedicated to exploring disparate impact on minorities in credit markets and in the mortgage market in particular. A common challenge in this line of research is distinguishing between the effects of disparate impact and discrimination, because most researchers pursuing this question do not have access to the full set of variables to predict loan pricing and performance (see Ross and Yinger (2002) for a full analysis of challenges in identifying racial discrimination in the mortgage market). As an example, the landmark Boston Fed Study (Munnell, Tootell, Browne, and McEneaney (1996)) found that race strongly predicted loan approval among applicants even after controlling for a long list of personal characteristics and individual risk factors, though their estimated race effects were smaller than those found in earlier studies employing a smaller set of control variables. Yet their study did not include other important covariates--such as credit score--which strongly predict loan performance, and did not have information on ex post loan performance. Thus, the study was unable to conclude whether the disparate loan approval rates across race resulted from legitimate economic considerations or from discrimination.

Our findings complement this line of prior research by including additional covariates and by relating loan performance to race/ethnicity. In the full sample, the ranking of delinquency rates by race/ethnicity is as follows: white (24.7%), Asian (27.1%), black (37.4%), and Hispanic (40.2%). Controlling for observable characteristics, the black-white (2.8 to 5.2 percentage points) and Hispanic-white (5.9 to 8.3 percentage points) differences are statistically significant at the 1% level in all four subsamples, while the Asian-White differences (-1.1 to 1.1 percentage points) are not significant even at the 10% level. Notably, the difference in the delinquency rates between white and black/Hispanic borrowers is more than 50% higher in the Broker subsamples than in the Bank subsamples.

It would be very interesting to track delinquency rates by the race of the broker.
We must also control for loan pricing in order to attribute these delinquency differences to race/ethnicity. If certain racial/ethnic groups pay higher interest rates conditional on other characteristics, then the heavier payment burden could cause higher delinquency. Such a concern is warranted by prior research on consumer financing. Charles, Hurst, and Stephens (2008) show that blacks pay significantly higher rates when financing a new car, in large part because blacks are more likely to use more expensive financing companies. Similarly, Ravina (2008) finds that black borrowers in an online lending market pay rates that are over 100 basis points higher than comparably risky white borrowers. Much of the difference can be attributed to favorable interest rates obtained in same-race lender-borrower pairings and the underrepresentation of black lenders. In the context of mortgage lending, price differences could occur by pricing a given product differently for borrowers from different demographic groups, but more likely occurs through steering uninformed borrowers into more costly products, such as subprime loans, when more attractive products are available; or through aggressive negotiation strategies used by brokers to enhance their fees and commissions (known in the industry as yield spread premiums).

We find no evidence that black or Hispanic borrowers pay higher initial or current interest rates on bank-originated loans, conditional on observable individual risk factors. However, among broker originated loans, black borrowers appear to pay higher rates, on the order of 10-16 basis points, while there is no clear evidence that Hispanic borrowers are subject to higher loan pricing. While the coefficients on Black are significant and positive in the Broker subsamples, the magnitudes are much lower than those documented in other credit markets (e.g., Charles, Hurst, and Stephens (2008) and Ravina (2009)). The estimated gender effect is insignificant throughout, both in terms of loan pricing and loan performance. Our results are closer to findings in Haughwout, Mayer, and Tracy (2009) that there is no adverse pricing by race, ethnicity, or gender in either the initial rate or the reset margin based on a sample of subprime loans originated between 2004 and 2006.

Our data suggest that loan pricing is an unlikely explanation for the higher delinquency rates observed among black and Hispanic borrowers. Black borrowers exhibit higher delinquency rates relative to white borrowers, even for bank-originated loans for which we find no evidence of unfavorable pricing. The average (median) unpaid balance on loans among black borrowers is $185,000 ($150,000). Thus, the estimated black-white difference in interest rate among broker-originated loans--10-16 basis points-- amounts to an additional monthly payment of $15-$25 (or $13-$20) using the mean (or median) balance. It is unlikely that such a difference could be pivotal in loan delinquency.

Moreover, Hispanic borrowers exhibit the highest delinquency rates in our sample among all demographic groups, although there is no evidence that they face unfavorable interest rates in comparison to other groups.

Previous work sheds light on the unobserved risk factors that are correlated with race/ethnicity variables. First, blacks and Hispanics have lower savings rates on average than whites of similar age, education and income (Blau and Graham (1990), Charles, Hurst, and Roussanov (2007)). As a result, they accumulate less wealth (often difficult to measure), making them more vulnerable to adverse economic shocks. Second, minorities are less likely to have family or relatives who can help when they have trouble meeting their mortgage payments (Yinger, 1995).

Third, Guiso, Sapienza, and Zingales (2009) offer an interesting explanation for the highest delinquency rates observed among Hispanic borrowers. Based on survey data, the authors find that Hispanics are much less likely (between 18 and 27 percentage points) than blacks or whites to feel morally or socially obligated to continue paying their mortgages when the equity value is significantly below zero.

Wow. Don't tell the SPLC or they'll come after Wei Jiang, Ashlyn Aiko Nelson, Edward Vytlacil with pitchforks.
Historically, policymakers and researchers concerned with mortgage lending discrimination have focused on two key issues: unequal access to credit (i.e., disparities in loan approvals and denials) and pricing disparities. While we do not examine differences in mortgage approvals by race, our analysis suggests that the housing boom fueled a rapid expansion of credit among Hispanic and black borrowers. Moreover, the share of first-time borrowers among black and Hispanic households grew from 10% in early 2004 to 25% in late 2006. In addition, we find little evidence of pricing discrimination as a cause for loan delinquency.

Taken together, the findings suggest that market dynamics and credit expansionary practices during the sample period may have alleviated some of the inequalities in credit access and pricing. Yet the ex post loan performance data suggests that such credit expansion was achieved largely through lowered lending standards, particularly among brokers originating low-documentation loans. The persistence of Hispanic and black race effects in the delinquency models raises further questions, including whether such borrowers were well-informed about the mortgage process and possessed the requisite experience and knowledge to continue making their mortgage payments in full and on time.

In other words, the government finally got what it had been asking for, and got it good and hard.
Our analysis raises the question of why this major mortgage bank—as well as other market players—allowed such deterioration in borrower and loan quality to persist before tightening its lending standards. A plausible explanation is that the expansion of the secondary mortgage market and the ease of loan securitization weakened the bank’s incentive to screen borrowers by allowing the bank to offload risk.

Predatory securitizing.