Mortgage characteristics and the racial incidence of default

Previous research has shown that relative to White borrowers, Black and Hispanic borrowers taking out mortgages at the height of the early-2000s housing boom experienced significantly higher delinquency rates. In this paper we attempt to gain a better understanding of the factors that gave rise to these racial differences in mortgage delinquency. Using a database of nearly 3 million mortgages originated between 2005 and 2009, we find that minority borrowers were significantly more likely to have mortgages with high-risk contract characteristics, such as prepayment penalties, payment resets, and terms that limit principal paydown. While much of the racial variation in the prevalence of these characteristics can be explained by common measures of borrower creditworthiness, we also provide evidence that even after conditioning on a rich set of borrower controls, minority borrowers were more likely to have several high-risk mortgage characteristics. Results from mortgage default models and a decomposition exercise show that the concentration of minority borrowers in such loans elevated default rates for Black and Hispanic borrowers by 2 and 4 percentage points, respectively, relative to the default rate for White borrowers. The totality of our results suggest that exotic loan characteristics acted as mortgage default accelerants for many minority homeowners that experienced significant income and equity shocks during the Great Recession.