The Rest of the Story
The American Enterprise Institute’s Housing Center released a special briefing: “The Rest of the Story The AEI Housing Center’s Critique of ‘How We Investigated Racial Disparities in Federal Mortgage Data.‘” The call reports on the Housing Center’s analysis of and critiques of a widely-circulated report by The Markup/Associated Press: “How We Investigated Racial Disparities in Federal Mortgage Data“ (2018).
- A recent The Markup/Associated Press (AP) analysis found that decline rates, after controlling for 17 independent variables, are higher for the protected classes than for Whites.
- However, as we have pointed out for home valuations and appraiser bias*, these arguments alleging systemic racism do not hold up to close scrutiny.
- The Markup’s analysis did not include applicant credit scores, which are highly predictive of defaults. It also ignores lending outcomes – the other half of the story.
- We address these issues by incorporating credit scores and evaluating risk-adjusted default rates by race and ethnicity. This allows us to evaluate lending outcomes, not just lending inputs.
- We find that risk-adjusted default rates are higher for protected classes than for Whites by a statistically significant amount.
- Given data limitations on denials, especially lack of credit score, it is impossible to calculate risk-adjusted decline rates for protected and non-protected class applicants. However, because we found that loans to protected class borrowers have higher risk-adjusted default rates than for Whites, this indicates lenders are extending more lenient underwriting to protected class borrowers than would otherwise be justified based on risk characteristics. Thus, one may infer that risk-adjusted decline rates, if calculable, would be lower for protected class applicants than for Whites, the opposite of the finding by The Markup/AP.