A RECONSIDERATION OF DISCRIMINATION IN MORTGAGE UNDERWRITING WITH DATA FROM A NATIONAL MORTGAGE BANK

This paper, analyzing over 12,000 conventional and FHA/VA loan applica tions to a national mortgage lender in the 1989-1990 period, argues th at mortgage denials occur only in a minority of cases, where the borro wer has not learned the lender's underwriting rules in advance. Widesp read borrower foreknowledge of such rules is demonstrated by a discrim inant finding that 9 of 10 borrowers ''correctly'' choose whether to a pply under FHA vs. conventional programs, based on financial and equit y characteristics. This contrasts with the far lower ability of econom etric models to identify approval/denial outcomes. It is revealing tha t denials on the basis of credit problems, the only important informat ion generally not available until post application, account for most r acial/ethnic differences and borrower education affects the probabilit y of approval of government insured loans more than loan to value. Con trary to common assumptions, race differences in FHA/VA lending are at least as pronounced as in conventional lending; and outcomes for Asia ns, correctly measured, diverge as much from outcomes for whites, as d o outcomes for Hispanics and African American.