Mortgage Credit – In Memoriam Frank Nothaft
Paper Session
Saturday, Jan. 7, 2023 2:30 PM - 4:30 PM (CST)
- Chair: Jay Sa-Aadu, University of Iowa
Mortgages Are Still Confusing
Abstract
The variation across borrowers in the cost of a mortgage loan is profound. For 1.2 million loans acquired by Fannie Mae from 2017 to 2019, the average loan amount is $240,000, and average total mortgage cost, upfront cash plus note rate differential, is about $2,100. Other things equal, loans originated through mortgage brokers had higher lender fees, while those originated at credit unions had lower. Borrowers who paid no upfront cash to lenders had lower total loan costs, as did borrowers who lived in a census tract with a greater share of adults with a college degree. The pattern of differences is similar for title and settlement charges, but differences are much smaller, and variation more driven by geography. For a subset of borrowers who were surveyed on their shopping approach, borrowers who said it was “too much hassle” to seek an additional quote or who said their mortgage broker “shopped for them” paid more than others. Borrower race is an abiding issue in mortgage lending, but differences across races are smaller than those mentioned above. Black and Hispanic borrowers paid more than white borrowers. Asian borrowers paid less, primarily due to getting lower rates.The Age Gap in Mortgage Access
Abstract
This paper uses data on millions of single-borrower mortgage applications to study the relationship between applicant age and mortgage application outcomes. Conditional on a rich set of applicant, property, and loan characteristics, mortgage refinance applications submitted by older borrowers are associated with higher rejection probabilities. This pattern holds within lender and across loan types. Rejection probability increases smoothly with age and accelerates in old age. The acceleration is slower for female applicants. Inability to maintain properties may contribute as older applicants are more likely to be rejected for insufficient collateral. Lastly, using the loan-level pricing adjustment identification strategy, I find similar empirical relationships between borrower age and coupon rate on home purchase and refinance mortgages that were sold to Fannie Mae and Freddie Mac. Taken at face value, age appears to be an equally important correlate of mortgage application outcomes as race and ethnicity. Overall, the results suggest that older individuals systematically face higher barriers to mortgage access. Potential explanations are discussed.The Demand for Long-Term Mortgage Contracts and the Role of Collateral
Abstract
Long-term fixed-rate mortgage contracts protect households against repricing in aggregate interest rates and credit risk. Using UK administrative data, I show that the cost of a longer-term mortgage compared to rolling over a sequence of shorter-term contracts is increasing in the loan-to-value (LTV) ratio, a measure of credit risk. With LTV declining and hence collateral coverage improving over the life of the loan, high-LTV borrowers incur a “collateral term premium”, in addition to a standard bond term premium. At 95% LTV, this raises the cost of a 5-year fixed-rate contract relative to a sequence of 2-year contracts by around 70 basis points per annum. To quantify the net benefit of longer-term contracts to households, I build a life-cycle model of optimal mortgage fixation choice. Collateral term premia lower the insurance benefit of 5-year (10-year) fixed-rate contracts to high-LTV borrowers by half (two thirds), and can explain why high-LTV borrowers insure less against interest rate risk compared to low-LTV borrowers.Discussant(s)
Christopher Martin
,
Federal Deposit Insurance Corporation
Ingrid Gould Ellen
,
New York University
Sarah Strochak
,
New York University
Knut-Are Aastveit
,
Norges Bank
JEL Classifications
- R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location