Does College Level the Playing Field? The Homeownership and Mortgage - - PowerPoint PPT Presentation

Does College Level the Playing Field? The Homeownership and Mortgage Experience

Carlos Garriga

Assistant Vice President, Research Division

Lowell Ricketts

Senior Analyst, Center for Household Financial Stability

Don Schlagenhauf

Chief Economist, Center for Household Financial Stability

Federal Reserve Bank of St. Louis www.stlouisfed.org/hfs

*These are my own views, and not necessarily the views of the Federal Reserve Bank of St. Louis, Federal Reserve System, or the Board of Governors

Motivation

• Households headed by college-educated Black or Hispanic/Latino

individuals fared worse in the 2007 – 2013 period than Whites and Asians, as well as their peers who didn’t earn a degree.

• During this same period, the U.S. suffered the worst housing crisis

in modern memory and the second worst recession.

• How much of the divergent wealth outcomes can be explained by

different mortgage borrowing and homeownership experiences during this turbulent time?

Takeaways

• Compared to whites, minority groups held a greater concentration
• f variable rate loans, including interest-only ARMs.
• These loans were associated with greater default rates.
• Minority groups had higher default rates across all products,

including fixed rate loans.

• Individuals with higher incomes had higher ownership rates of

riskier loans (ARMs, I.O. ARMs).

• Assuming college-educated individuals occupy higher income

quartiles; defaults were concentrated among college-educated Hispanic/Latinos.

Overview

• Introduction
• Data, Sample Choice, Summary Statistics
• Loan Products and Default Rates, By Race/Ethnicity
• Results by Income Distribution Within Racial/Ethnic Groups
• Conclusion

Introduction

• All racial and ethnic groups embraced the dream of

homeownership during the run-up to the housing crash.

• For many college graduates, purchasing a home of their own was

the logical next step.

• With few accumulated assets, their financial stability and hopes
• f wealth accumulation were heavily reliant on this investment in

housing.

Homeownership Peaks Close to Our Sample Date

30 35 40 45 50 55 60 65 70 75 80 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Total White, Non-Hispanic Black/African-American Hispanic, any Race

Source: Current Population Survey/Housing Vacancy Survey, Series H-111, U.S. Census Bureau.

Homeownership Rates by Race and Ethnicity of Householder, 1994 to Present

Percent

Data

• Merged Confidential Home Mortgage Disclosure Act (HMDA) with

a match of loans in the McDash dataset.

• Time series data by individual loans with detailed borrower

information best suited to assess mortgage experience.

• Total match includes over 89 million loans originated between

1992 and 2014.

• Random subsample of loans originating in June 2005 for white,

non-Hispanic borrowers and larger sample for minority groups.

Data

• Advantages:
• Direct measurement of demographics (reported at loan application)

avoids identification issues.

• Monthly frequency gives dynamic look at loans at origination,

termination, and everything in between.

• Direct measurement of income at the time of origination.
• Disadvantages:
• No direct measurement of educational attainment.
• Income is static over time, doesn’t capture job loss.

Data

• Our analysis focuses on four groups: Black/African-Americans,

Asians; Hispanic/Latino, any race; White, not Hispanic.

• We have unique loans distributed as follows:
• Asian: 4,680
• Black/African-American: 7,970
• Hispanic/Latino, any Race: 11,865
• White, Non-Hispanic: 9,024

Lower FICO Scores, Higher Rates, Lower Appraisal

Variable Asian Black Hispanic/Latino White Median Applicant Income 97 62 68 76 Median FICO Score 729 656 685 719 Median Appraisal Amount 385 189 262 233 Median Interest Rate 5.875 6.375 6.25 5.875 Share Fixed 46.9 55.7 51.2 64.1 Share Variable 52.3 43.5 48 34.6 NOTE: All dollar amonts are in thousands.

Summary Statistics by Race/Ethnicity, March 2006

LOAN PRODUCTS AND DEFAULT RATES

Loan Product Definitions

• Fixed-Rate Mortgage: Mortgage loan where the interest rate

stays the same over the life of the loan.

• Adjustable Rate Mortgage (ARM): Mortgage loan where the

interest rate periodically adjusts based on an index.

• Interest-Only ARM: An adjustable-rate loan with an initial

interest-only payment period. No principal is paid during this

• time. Monthly payments increase substantially after the period.
• Balloon Mortgage: A mortgage which has a balance due at the

end of its life. This “balloon” payment is usually large.

Minority Groups had More ARMs, Specialty Loans

53 46 52 50 62 29 33 32 30 22 12 16 10 13 11 3 3 3 4 3 10 20 30 40 50 60 70

Total Asian Black/African-American Hispanic/Latino, any Race White, Non-Hispanic

Fixed ARM I.O. ARM I.O Period Unknown Balloon unknown Distribution of Loan Products

Percentage Share of Loans Originating in June 2005

Highest Default Rate for Interest-Only ARMs

7.0 7.5 15.1 18.1

2 4 6 8 10 12 14 16 18 20

Balloon unknown Fixed ARM I.O. ARM I.O Period Unknown

Default Rates, By Product Type

Percentage Share of Loans Originating in June 2005

Default Rates Higher Across All Products

8 5 10 9 5 15 11 20 16 11 18 14 19 24 11 7 6 10 7 5 5 10 15 20 25 30

Total Asian Black/African-American Hispanic/Latino, any Race White, Non-Hispanic

Fixed ARM I.O. ARM I.O Period Unknown Balloon unknown Default Rate, by Loan Product and Racial/Ethnic Group

Percentage Share of Loans by Type Originating in June 2005

Real Estate Owned Sales are Majority of Defaults

4.3 8.3 7.3 3.6 3.3 3.3 3.9 1.9 0.3 0.6 0.8 0.4 1 2 3 4 5 6 7 8 9 Asian Black/African-American Hispanic/Latino, any Race White, Non-Hispanic

REO Sales Liquidation to Termination Payoff out of Foreclosure Loan Defaults, by Type Termination and Race

Percentage Share of Loans Originating in June 2005, Sample Ends in June 2013

Underwater Loans Were Motivating Factor

RESULTS BY INCOME DISTRIBUTION

Income Distribution, Rough Proxy for Education

Asian’s had Greatest Holdings of ARMs

60 25 10 3 47 32 16 3 44 34 18 3 32 43 22 2

10 20 30 40 50 60 70 80

Fixed ARM I.O. ARM I.O Period Unknown Balloon unknown

1st Quartile 2nd Quartile 3rd Quartile 4th Quartile Product Type, By Income Quartiles, Asian Group

Percentage Share of Loans Originating in June 2005

ARM Ownership Rate Similar Across All Quartiles

59 33 4 3 54 32 9 3 52 31 11 4 45 34 14 4

10 20 30 40 50 60 70 80

Fixed ARM I.O. ARM I.O Period Unknown Balloon unknown

1st Quartile 2nd Quartile 3rd Quartile 4th Quartile Product Type, By Income Quartiles, Black/African-American Group

Percentage Share of Loans Originating in June 2005

Pronounced Positive Relationship, Income w/ ARMs

64 25 6 3 52 29 12 4 45 32 15 4 37 36 21 4

10 20 30 40 50 60 70 80

Fixed ARM I.O. ARM I.O Period Unknown Balloon unknown

1st Quartile 2nd Quartile 3rd Quartile 4th Quartile Product Type, By Income Quartiles, Hispanic/Latino Group

Percentage Share of Loans Originating in June 2005

Positive Relationship Holds for Whites as Well

71 19 7 2 68 19 9 2 60 23 12 4 49 28 19 2

10 20 30 40 50 60 70 80

Fixed ARM I.O. ARM I.O Period Unknown Balloon unknown

1st Quartile 2nd Quartile 3rd Quartile 4th Quartile Product Type, By Income Quartiles, White, non-Hispanic Group

Percentage Share of Loans Originating in June 2005

Defaults for Hispanic/Latinos Among Highest Earners

23 28 21 33 22 26 22 25 34 25 27 21 21 22 29 21

5 10 15 20 25 30 35 40

Asian Black/African-American Hispanic/Latino, any Race White, Non-Hispanic

1st Quartile 2nd Quartile 3rd Quartile 4th Quartile Distribution of Loan Defaults, by Income Quartiles within Racial Groups

Percentage Share of Loans Ending in Default, Sample Ends in June 2013

Conclusion

• Risky loan products were concentrated in the upper income

quartiles, which we assume encompass the college-educated.

• During the crash those products had more severe default rates.
• In general, default rates were higher for minority groups.
• Looking at defaults by income shows a concentration of defaults

among Hispanics/Latinos who earn the most.

Conclusion

• Given that our sample only includes individuals who have applied

and been approved for a loan we likely don’t have the true bottom of the income distribution.

• This suggests that the default rates within the lower income

quartiles also capture the experience of some college educated individuals.

Further Research

• Benchmark our income distribution with that of Survey of

Consumer Finances and Census, who is missing and what can we say about educational coverage?

• Within the Interest Only ARMs and ARMs in general, what

idiosyncratic characteristics are predictors of default?

• What if we look at geographic flashpoints of the housing crisis

(NV, CA, FL) and the minority communities there. Are there different trends within these local markets?

For More Information…

Center for Household Financial Stability stlouisfed.org/hfs In the Balance Research Essays stlouisfed.org/publications/in-the-balance FRED Economic Data research.stlouisfed.org/fred2