MBA On Discrimination: Blame The System

WASHINGTON - The Mortgage Bankers Association (MBA) has released, "A Review of Statistical Problems in the Measurement of Mortgage Market and Credit Risk" conducted by Professor Anthony M. Yezer of the George Washington University and sponsored by MBA's Research Institute for Housing America (RIHA).

This paper examines the fundamental assumptions within the statistical analysis of discrimination and credit risk and the impact these flawed models had on the mortgage market ranging from false findings of discrimination to incorrectly detecting the future rise of default rates. Serving as a valuable resource to identify the flaws that continue to be overlooked in today's analyses, the paper promotes the improvement of the measurement of mortgage market discrimination and credit risk for a more accurate assessment.

"Mortgage lenders throughout the industry are committed to fair lending, and expend considerable resources to ensure that they adhere to the letter and the spirit of all applicable laws and regulations. It is particularly disheartening then that lenders are often the subject of ill considered accusations regarding discrimination, accusations based upon analyses that lack statistical rigor," said Michael Fratantoni, MBA's Vice President of Research and Economics. "Though the problems with these simplistic modes of analysis are well known to the academic world, it is clear the application to the mortgage market needs to be re-examined as the problems continue to be overlooked in today's analysis. As we look to the future and make efforts to improve the mortgage process, recognizing these problems and striving for accurate and thorough analysis can only benefit both borrowers and the real estate finance industry."

Key findings include:

· Conventional models of mortgage discrimination, prepayment and default lack robust theoretical support. Without a solid grounding in theory, the statistical techniques commonly used today to estimate these models produce biased and inconsistent results, falsely indicating discrimination where it does not exist.

· In choosing loan terms such as, the value of the property being purchased and down payment, applicants know that they are influencing their cost of credit and their probability of rejection. Thus the probability of rejection and mortgage rates are due to choices of both the applicant and the lender.

False assumptions introduce systematic biases into the estimates that make the models fail in ways that are particularly troubling. Discrimination tests tend to produce false positive indications of discrimination where none exists and tests for default risk are particularly bad at detecting instances where future default rates are likely to rise significantly.

The serious limitations of current statistical approaches to testing for discrimination and credit risk in mortgage lending have likely contributed to recent problems in mortgage markets. If these limitations are not recognized and naïve reliance on them continues, current problems are likely to recur in the future. Alternatively, there are major gains to be made if economic analysis of mortgage market discrimination and mortgage credit risk can be improved.

Read the full paper HERE

About the Research Institute for Housing America:

The Research Institute for Housing America of the Mortgage Bankers Association is a 501(c)(3) trust fund. Its chief purpose is to encourage and aid - through grants and sponsored research to distinguished scholars, educational institutions, research facilities, and government organizations - the pursuit of knowledge of mortgage markets and real estate finance. Its mission emphasizes rigorous analysis furthering understanding of how to expand rental opportunities and home ownership among the underserved, and how to encourage equal access to mortgage credit for all qualified borrowers.

The Mortgage Bankers Association (MBA) is the national association representing the real estate finance industry, an industry that employs more than 280,000 people in virtually every community in the country. Headquartered in Washington, D.C., the association works to ensure the continued strength of the nation's residential and commercial real estate markets; to expand homeownership and extend access to affordable housing to all Americans. MBA promotes fair and ethical lending practices and fosters professional excellence among real estate finance employees through a wide range of educational programs and a variety of publications. Its membership of over 2,200 companies includes all elements of real estate finance: mortgage companies, mortgage brokers, commercial banks, thrifts, Wall Street conduits, life insurance companies and others in the mortgage lending field.