Eric Rosenblatt

Can Urban Indicators Predict Home Price Appreciation? Implications for Redlining Research

Economists commonly control for neighborhood indicators, such as median income, in underwriting models that test for redlining. Many such indicators are highly correlated with neighborhood racial composition and therefore have the capacity to “explain away” the role of race in lending decisions. This paper argues that indicators should be included in models of underwriting only if they affect future home prices, and hence the value of the default option, in a consistent fashion. Testing the effect of nine census variables, taken from two recent redlining papers, on California tract appreciation from 1986 to 1994, a consistent relationship between indicators and home price is not found.

The Probability of Fixed and Adjustable Rate Mortgage Termination

This article analyzes mortgage terminations using a national individual loan data set for the 1986–1992 period. The standard option-choice-theoretic framework is supplemented with variables to proxy for non-option-related termination determinants. Separate multinominal logit models are estimated for three mortgage types: 30-year FRMs, 15-year FRMs, and 30-year ARMs. The results indicate substantial differences in the response of the mortgage types to variables included in the model. FRM15 prepayments are the most responsive to prepayment option values; FRM30 prepayments are less responsive to option values and are dirven by local area housing market and economic conditions; ARM prepayment rates are higher but defeult rates are lower relative to the FRMs. A noteworthy finding is that teaser discounts reduce the likelihood of ARM defaults.

A Reconsideration of Discrimination in Mortgage Underwriting with Data from a National Mortgage Bank

This paper, analyzing over 12,000 conventional and FHA/VA loan applications to a national mortgage lender in the 1989-1990 period, argues that mortgage denials occur only in a minority of cases, where the borrower has not learned the lender’s underwriting rules in advance. Widespread borrower foreknowledge of such rules is demonstrated by a discriminant finding that 9 of 10 borrowers “correctly” choose whether to apply under FHA vs. conventional programs, based on financial and equity characteristics. This contrasts with the far lower ability of econometric models to identify approval/denial outcomes. It is revealing that denials on the basis of credit problems, the only important information generally not available until post application, account for most racial/ ethnic differences and borrower education affects the probability of approval of government insured loans more than loan to value. Contrary to common assumptions, race differences in FHA/VA lending are at least as pronounced as in conventional lending; and outcomes for Asians, correctly measured, diverge as much from outcomes for whites, as do outcomes for Hispanics and African American.

Collateral pledge, sunk-cost fallacy and mortgage default

Individuals and firms pledge collateral to mitigate agency costs or contracting frictions in a world with asymmetric information. However, the option value theory suggests that once the mark-to-market asset valuation is below the current debt, the firms and individuals should default on their debt contract irrespective of the initial collateral pledged. In this paper, we estimate default models and find that after controlling for mark-to-market asset valuation, initial collateral remains an important predictor of mortgage default. Specifically, individuals that pledge higher collateral have a lower hazard to default. Our results are consistent with models of sunk cost fallacy.

Who Bears the Pen? Relative Income and Gender Gap in Mortgage Signing Order

The major empirical challenge for estimating the driving force of the gender difference is theomitted variable bias because the proposed factor is usually intertwined with other observableand unobservable characteristics. This paper adopts a novel approach to tackle this identificationproblem and examines how the relative income defines gender roles in the context of mortgagesigning order. We first document that men sign first 89% of the time when a mixed-gendercouple applies for a housing loan. The signing order reflects purely behavioral preferences, asthere is no difference in the legal rights or obligations of either the first or second borrowers. Weshow that relative income is the major determinant of the observed gender gap in signing orderand we exclude other possible explanations such as discrimination, loan officer bias and socialnorms. To isolate relative income from differences in other dimensions, we compare the signingorder of the mixed- and same-gender couples and find that the effects of relative income not onlypersists but also are fairly comparable between the two groups. Finally, we provide consistentmacro-level evidences by both cross-sectional and dynamic analysis and show that gender gap insigning order is higher in states with larger gender wage gap and experiences a declining trendover time.This paper adopts a novel approach to examine the roles of gender difference and intra-household economic power in mortgage signing order. We develop an “economic power�? index based on relative economic power within the same-sex couple households. We then use this measure along with gender identity and other factors to explain signing order in different-gender couples. Our results suggest that, while pure economic power explains much of the observed signing order, gender difference plays an important role. Exploit regional variation reveals that gender difference in signing order is greater in states with a larger gender wage gap and red states whose residents predominantly vote for the Republican.