James N. Conklin, Kristopher Gerardi, and Lauren Lambie-Hanson
Working Paper 2022-17a
November 2022 (Revised June 2024)
Abstract:
We document large racial disparities in the ability of homeowners to access their accumulated housing wealth. Minority homeowners are significantly more likely to have their mortgage equity withdrawal (MEW) product applications rejected than White homeowners, and the unconditional disparities are significantly larger than those found in prior studies that focused on purchase and rate/term refinance loans. Had Black homeowners faced the same MEW denial rate as White homeowners in our sample period, we show they would have extracted an additional $11.2 billion in housing equity, or almost 25 percent of the total amount of actual equity extracted. Controlling for key underwriting variables significantly narrows the racial disparities, with the Black-White gap falling by more than 80 percent, and the Hispanic-White gap falling by more than 70 percent. Credit scores and debt-to-income ratios are the most important factors explaining the gaps, while differences in loan-to-value ratios contribute only modestly. "Residual" disparities after conditioning on observable underwriting factors are large and vary significantly across lenders. A battery of tests suggests that differences in unobserved underwriting factors are unlikely to fully explain the residual disparities, which tend to be larger in geographic areas characterized by more racial animus.
JEL classification: G21, G51, J15
Key words: housing wealth, mortgage, home equity, racial disparities
https://doi.org/10.29338/wp2022-17
The authors thank Stephanie Sezen for excellent research assistance and Bob Avery for sharing his Home Mortgage Disclosure Act lender file. They are also grateful to Neil Bhutta, Julie Cheney, Hajime Hadeishi, Bob Hunt, Jake Krimmel, Tesia Lemelle, Dan Ringo, Dubravka Ritter, Amanda Roberts, Anna Tranfaglia, Athena Tsouderou, and audience participants at the American Real Estate and Urban Economics Association National Conference, the FDIC Consumer Research Symposium, the Florida State University/University of Florida Critical Issues in Real Estate Symposium, and the Federal Reserve Bank of New York for providing helpful comments and suggestions. Barbara Brynko provided outstanding editorial assistance. An earlier version of this paper was posted as Atlanta Fed working paper 2022-17. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. No statements here should be treated as legal advice. Any remaining errors are the authors' responsibility.
James Conklin is at the Terry College of Business at the University of Georgia. Lauren Lambie-Hanson is at the Federal Reserve Bank of Philadelphia. Please address questions regarding content to Kristopher Gerardi, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309.
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