The Pricing of Home Mortgage Loans to Minority Borrowers: How Much of the APR Differential Can We Explain?

The public releases of the 2004 and 2005 HMDA data have engendered a lively debate over the pricing of mortgage credit and its implications regarding the treatment of minority mortgage borrowers. This research uses aggregated proprietary data provided by lenders and an endogenous switching regression model to estimate the probability of taking out a subprime mortgage, and annual percentage rate (APR) conditional on getting either a subprime or prime mortgage. The findings reveal that up to 90% of the African American APR gap, and 85% of the Hispanic APR gap, is attributable to observable differences in underwriting, costing, and market factors that appropriately explain mortgage pricing differentials. Although any potential discrimination is problematic and should be addressed, the analysis suggests that little of the aggregate differences in APRs paid by minority and non-minority borrowers are appropriately attributed to differential treatment.