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Bias in Estimates of Discrimination and Default in Mortgage Lending: The Effects of Simultaneity and Self-Selection

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Author Info
Yezer, Anthony M J
Phillips, Robert F
Trost, Robert P

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Abstract

The common practices of estimating single-equation models of mortgage rejection to test for discrimination in mortgage markets or single-equation ex ante mortgage default equations to validate underwriting criteria produce biased and inconsistent parameter estimates. This is due to problems of simultaneous equations bias which arise because, in a world of imperfect information, mortgage terms are not exogenous to the rejection or default decision. In addition, mortgage default estimates are also subject to selection bias. Monte Carlo experiments are used to study the nature and extent of likely bias in single-equation estimation results. We find that rejection equation estimates indicate discrimination when none exists and that estimated coefficients of mortgage terms, such as the loan-to-value ratio, are also subject to significant bias in both rejection and default equations. Copyright 1994 by Kluwer Academic Publishers

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Publisher Info
Article provided by Springer in its journal Journal of Real Estate Finance & Economics.

Volume (Year): 9 (1994)
Issue (Month): 3 (November)
Pages: 197-215
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Handle: RePEc:kap:jrefec:v:9:y:1994:i:3:p:197-215

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  1. Cole, Rebel, 1999. "Availability of credit to small and minority-owned businesses: Evidence from the 1993 National Survey of Small Business Finances," MPRA Paper 4715, University Library of Munich, Germany. [Downloadable!]
  2. Song Han, 2002. "On the economics of discrimination in credit markets," Finance and Economics Discussion Series 2002-2, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. David Horne, 1997. "Mortgage Lending, Race, and Model Specification," Journal of Financial Services Research, Springer, vol. 11(1), pages 43-68, February. [Downloadable!] (restricted)
  4. Ken Cyree & Keith Harvey & Michael Melton, 2004. "Bank Lending to Native American Applicants: An Investigation of Mortgage Flows and Government Guarantee Programs on Native American Lands," Journal of Financial Services Research, Springer, vol. 26(1), pages 29-54, August. [Downloadable!] (restricted)
  5. Judith K. Robinson, 2002. "Race, Gender, and Familial Status: Discrimination in One US Mortgage Lending Market," Feminist Economics, Taylor and Francis Journals, vol. 8(2), pages 63-85, July. [Downloadable!] (restricted)
  6. Paul Huck, 2000. "Home mortgage lending by applicant race/ethnicity: do HMDA figures provide a distorted picture?," Consumer and Community Affairs Policy Studies 2000-3, Federal Reserve Bank of Chicago. [Downloadable!]
  7. Danny Ben-Shahar, 2006. "Screening Mortgage Default Risk: A Unified Theoretical Framework," Journal of Real Estate Research, American Real Estate Society, vol. 28(3), pages 215-240. [Downloadable!]
  8. David G. Blanchflower & Phillip B. Levine & David J. Zimmerman, 1998. "Discrimination in the Small Business Credit Market," NBER Working Papers 6840, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. George H. Lentz & Ko Wang, 1998. "Residential Appraisal and the Lending Process: A Survey of Issues," Journal of Real Estate Research, American Real Estate Society, vol. 15(1), pages 11-40. [Downloadable!]
  10. Richard Anderson & James VanderHoff, 1999. "Mortgage Default Rates and Borrower Race," Journal of Real Estate Research, American Real Estate Society, vol. 18(2), pages 279-290. [Downloadable!]
  11. Stanley D. Longhofer, 1996. "Cultural affinity and mortgage discrimination," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 12-24. [Downloadable!]
  12. Robert Avery & Patricia Beeson & Paul Calem, 1997. "Using HMDA Data as a Regulatory Screen for Fair Lending Compliance," Journal of Financial Services Research, Springer, vol. 11(1), pages 9-42, February. [Downloadable!] (restricted)
  13. Robert F. Phillips & Anthony M.J. Yezer, 1996. "Self-Selection and Tests for Bias and Risk in Mortgage Lending: Can You Price the Mortgage If You Don't Know the Process?," Journal of Real Estate Research, American Real Estate Society, vol. 11(1), pages 87-102. [Downloadable!]
  14. Fred J. Phillips-Patrick & Clifford V. Rossi, 1996. "Statistical Evidence of Mortgage Redlining? A Cautionary Tale," Journal of Real Estate Research, American Real Estate Society, vol. 11(1), pages 13-24. [Downloadable!]
  15. Michael LaCour-Little, 1996. "Application of Reverse Regression to Boston Federal Reserve Data Refutes Claims of Discrimination," Journal of Real Estate Research, American Real Estate Society, vol. 11(1), pages 1-12. [Downloadable!]
  16. Douglas Evanoff & Lewis Segal, 1997. "Strategic Responses to Bank Regulation: Evidence From HMDA Data," Journal of Financial Services Research, Springer, vol. 11(1), pages 69-93, February. [Downloadable!] (restricted)
  17. Eric Rosenblatt, 1997. "A Reconsideration Of Discrimination In Mortgage Underwriting With Data From A National Mortgage Bank," Journal of Financial Services Research, Springer, vol. 11(1), pages 109-131, February. [Downloadable!] (restricted)
  18. HAROLD Black & M. Collins & Ken Cyree, 1997. "Do Black-Owned Banks Discriminate against Black Borrowers?," Journal of Financial Services Research, Springer, vol. 11(1), pages 189-204, February. [Downloadable!] (restricted)
  19. Amy Cutts & Robert Order, 2004. "On the Economics of Subprime Lending," The Journal of Real Estate Finance and Economics, Springer, vol. 30(2), pages 167-196, November. [Downloadable!] (restricted)
  20. Douglas D. Evanoff & Lewis M. Segal, 1996. "CRA and fair lending regulations: resulting trends in mortgage lending," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 19-46. [Downloadable!]
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