Uncovering racial disparities in mortgage markets
Discrimination can take many forms, and a Penn State researcher along with his coauthors are finding new ways to uncover it.
Brent Ambrose, Jason and Julie Borrelli Faculty Chair in Real Estate in the Smeal College of Business at Penn State and director of the Penn State Institute for Real Estate Studies, recently collaborated on a research project to better understand pricing disparities in mortgage contracts.
The paper — “Does Borrower and Broker Race Affect the Cost of Mortgage Credit?” — has been accepted for publication in the Review of Financial Studies.
Ambrose and his coauthors studied both the race and ethnicity of brokers and borrowers that took part in obtaining a mortgage to see if brokers were potentially charging different fees to different borrowers.
“It’s a complicated contract, and the fees are often hidden, so we wanted to look at how brokers charge fees because many of these fees aren’t obvious to the borrower,” Ambrose said. “It would be quite easy for a broker to charge different fees for the same product to different borrowers.”
However, what makes this research particularly innovative was a complex set of data that Ambrose acquired through the Institute for Real Estate Studies. The institute used funding from the Penn State Real Estate Advisory Board to buy the data, which makes this research a direct result of alumni engagement.
“We realized we had really unique data here where we could actually map brokers’ names to their race or ethnicity,” Ambrose said.
Results of the research showed that African Americans, Hispanics, and Asians pay between three and five percent more in fees than similarly qualified whites when obtaining a loan through a white broker. A key innovation of the research, though, is showing that the premium paid by minorities depends on the race of the broker.
“Our results clearly indicate that not only does borrower race matter, but broker race is important as well when looking at fees paid by borrowers,” Ambrose said.
James Conklin, associate professor of real estate at the University of Georgia, and Luis Lopez, assistant professor of real estate at the University of Illinois at Chicago, collaborated with Ambrose on the research.
“Understanding the causes and consequences of racial disparities in mortgage markets is a topic of first order importance,” Conklin said. “I believe our analysis documents interesting subtleties in this area, and I’m just glad that we were able to contribute to this important field of research.”
Conklin received his doctorate in business administration from Penn State in 2014, and Lopez received his doctorate in business administration from Penn State in 2019.
“I am thrilled that our research is forthcoming in the Review of Financial Studies, which is one of the top three academic journals in finance,” Lopez said. “It is timely and demonstrates the growing importance that academia is giving to rigorous discussions about race and discrimination.”
“For me, the results of this research just point out the need for more thoughtful education,” Ambrose said. “I’m not convinced that this is overt racism on the part of brokers, but it might be some hidden biases that people are unaware of, and if we can raise awareness of that issue, we can then hope for people to think about it and correct it.”
Ambrose also points out that policy makers have a part in ending this type of discrimination.
“It’s important that policy makers realize that there is a role for further scrutiny in the mortgage industry to try to bring more transparency to it,” he said. “If we can design mechanisms or a way of allowing people to have true price transparency, that would go a long way toward eliminating these types of findings.”
“Yet," Lopez added, "policy makers need to be careful because simply putting a cap on fees that brokers collect as compensation, for example, could have the unintended consequence of reducing the availability of mortgage credit for minorities."
Ambrose, Conklin and Lopez hope to take on similar research in the near future using the same type of methodology to study if gender plays a role for borrowers while obtaining a mortgage.
In addition to the Institute for Real Estate Studies, this research was supported by the University of Georgia's Terry-Sanford research award and the 2018 American Real Estate Society (ARES) Best Paper Award in Real Estate Finance, sponsored by Real Capital Analytics.