We conduct an empirical investigation to explain observed differentials in mortgage overage pricing. Our analysis makes several contributions. First, we study an area of mortgage pricing that is little understood by consumers and has received little scrutiny in the literature. Second, we consider the impact of the market power of individual loan officers on overages paid by borrowers, particularly minorities. Third, we include a number of borrower and lender characteristics not available in previous analysis.
Importantly, we introduce a new direct measure of the market power of individual loan officers. We also incorporate the interactive effects of loan officer market power and the race of the borrower in determining the rate of the mortgage loan. Through the use of these new variables and employing proprietary data from different branches of a nationwide mortgage lending institution, we conclude that the market power of the lender and the bargaining or negotiating ability of the borrower are important determinants of overages. We find that overages paid by minorities who purchase homes are larger than those paid by whites. Our evidence suggests that this is due to differences in the pools of borrowers rather than to racial discrimination. Indeed, tests show that the pool of refinancings is more homogeneous across races than the pool for purchases, and we find no differences by race for refinancings. We conclude that a more effective way to eliminate racial differences in overages is to pursue policies designed to increase the ability of minorities to bargain more effectively rather than to enact additional antidiscrimination laws.
JEL classification: G18, G21, G28, G38
Key words: discrimination, lending, minority, overages, race
The authors gratefully acknowledge Raphael Bostic, Wayne Passmore, Forrest Stanley, and two anonymous referees for helpful comments that substantially improved the paper. They also thank the Financial Management Association and the Federal Reserve Bank of Chicago, where previous versions of this work were presented. The authors acknowledge the support of a University of Tennessee Finance Department Summer Faculty Research Award and two Exhibit, Performance, and Publication Expenses Awards. Portions of this work were completed while DeGennaro served as a Visiting Scholar at the Federal Reserve Bank of Atlanta. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to Harold A. Black, Department of Finance, University of Tennessee, Knoxville, Tennessee 37996; Thomas P. Boehm, Department of Finance, University of Tennessee, Knoxville, Tennessee 37996; Ramon P. DeGennaro, Department of Finance, University of Tennessee, Knoxville, Tennessee 37996, 865-974-3216, firstname.lastname@example.org.
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