The release of data on mortgage originations collected under the Home Mortgage Disclosure Act has given rise to a number of articles that cite "racial disparities" in loan denial and approval rates. But do these numbers represent differences arising from the application of consistent credit standards to various groups, or are they disparities that arise from inconsistent credit standards? From the data as required by and reported under the HMDA, you cannot know the answer.
To find out, you have to be able to match loan performance data that is, delinquencies and defaults to the same reporting categories as the denial and approval data. This obvious point has been made numerous times over the years. Decades ago, Nobel laureate Gary Becker pointed that if there is lending discrimination, the group that is being discriminated against should have lower default rates than other groups, not higher. How loan denial and approval rates relate to delinquency and default rates is readily testable, if you have the data.
In order to allow the required analysis, Congress should amend the HMDA enacted nearly 40 years ago to add to its reporting requirements loan performance data under the same categories as the loan origination data. These are now entirely absent from HMDA reporting.
Typical journalistic coverage of HMDA reports completely fails to consider loan performance data. For example, a front-page article on the release of HMDA data in American Banker makes zero mention of loan performance results.
By contrast, a recent scholarly paper performs the required matching of the two sets of data. "Mortgage Market Conditions and Borrower Outcomes: Evidence from the 2012 HMDA Data and Matched HMDA-Credit Record Data," by Federal Reserve researchers Neil Bhutta and Glenn Canner, was published in the Federal Reserve Bulletin in November 2013.
"We present the results of a first look at a new data set composed of HMDA records matched to borrowers' credit records," the authors report. "The matched data provide an opportunity to explore many aspects of home lending that the HMDA data alone cannot address."
The authors continue, "We are able to compare the credit characteristics (for example, credit scores) at loan origination, and subsequent payment performance by various HMDA attributes such as income, minority status, and type of lender." This comparison is exactly what we need to properly understand and analyze lending patterns. But we need to include loan performance data in HMDA reporting in order to perform such analysis on a regular basis.
Among the paper's most important conclusions about HMDA denial rates is this: "Across racial and ethnic groups, notable differences in performance were found." ("Performance" means loan performance as measured by delinquencies.) A footnote expands on this finding: "When we account more precisely for location, loan pricing and credit score in a multivariate regression, we find sizeable and statistically significant differences in loan performance for blacks and Hispanic whites relative to non-Hispanic whites." These results are consistent with a 1996 study by the Federal Reserve and Freddie Mac.
As the authors say, "Further research is needed to better understand why [racial group] differences in loan payment performance persist after accounting for score, location and higher-priced status of the loan." They intend to explore the topic in future work.
Indeed, further research is definitely needed, and public data must be provided to researchers so that they may do so. Additional analysis matching origination data with loan performance data can clarify the factors and issues involved in mortgage lending with a dispassionate, non-journalistic approach, just as displayed by the Fed researchers.
Congress should include loan performance reporting requirements under HMDA. Only then can we know whether the denial and approval rates by group are differences or disparities.
Alex J. Pollock is a resident fellow at the American Enterprise Institute in Washington, DC. He was president and chief executive of the Federal Home Loan Bank of Chicago from 1991 to 2004. Edward J. Pinto is co-director of the AEI International Center on Housing Risk and a former chief credit officer of Fannie Mae.