Mechanisms of Racial and Ethnic Wealth-Building Inequality in U.S. Government-Sponsored Mortgage Finance from 1983-2013

Prior research has revealed racial and ethnic inequalities in access to traditional prime mortgage lending, with Black and Hispanic households being more likely than White and Asian households to be denied a loan, or to receive a subprime loan rather than a prime loan. However, less is known about racial and ethnic inequalities within the traditional prime mortgage market, which is often heralded as a key tool for closing wealth gaps. Using American Housing Survey data, this paper measures the extent to which the traditional mortgage market created divergent wealth-building trajectories (measured as the cost and rate of building equity through mortgage amortization) for White, Black, Hispanic, and Asian borrowers from 1983-2013, and analyzes the changing mechanisms driving this inequality.

After measuring racial and ethnic inequalities in wealth-building trajectories within the traditional market by year from 1983-2013, this paper tests whether these inequalities are attributable to: (1) differential sorting by race and ethnicity between government-home-purchase, conventional-conforming-home-purchase, government-refinance, and conventional-conforming-refinance submarkets; (2) incorporation of new underwriting techniques within individual submarkets; or (3) inequalities net of underwriting controls within individual submarkets. This paper finds evidence that: (1) throughout the 1990s and 2000s, submarket segmentation within the traditional market contributed to wealth-building inequalities, with Black and Hispanic mortgage recipients being less likely to receive (lower-cost) conventional-conforming mortgages, especially during periods with the most favorable amortization trajectories; (2) during periods of market expansion to minority borrowers, racial and ethnic inequalities persisted within the conventional-conforming markets, net of underwriting controls, likely due to mortgage-product differentiation; and (3) during periods of market contraction to minority borrowers, risk-management techniques contributed to inequality, with property-associated underwriting criteria accounting for a significant portion of Hispanic-household disadvantage, and wealth- and income-associated underwriting criteria accounting for a significant portion of Black-household disadvantage. This paper concludes with theoretical and policy implications.