Working Paper: NBER ID: w29142
Authors: David Hao Zhang; Paul S. Willen
Abstract: Motivated by the assessment of racial discrimination in mortgage pricing, we introduce a new methodology for comparing the menus of options borrowers face based on their choices. First, we show how standard regression-based approaches for assessing discrimination in the menus context can lead to misleading and contradictory results. Second, we propose a new methodology that is robust these problems based on relatively weak economic assumptions. More specifically, we use pairwise dominance relationships in choices supplemented by restrictions on the range of plausible menus to define (1) a test statistic for equality in menus and (2) a difference in menus (DIM) metric for assessing whether one group of borrowers would prefer to switch to another group's menus. Our statistics are robust to arbitrary heterogeneity in borrower preferences across racial groups, are sharp in terms of identification, and can be efficiently computed using Optimal Transport methods. Third, we devise a new approach for inference on the value of Optimal Transport problems based on directional differentiation. Fourth, we use our methodology to estimate mortgage pricing differentials by race on a novel data set linking 2018--2019 Home Mortgage Disclosure Act (HMDA) data to Optimal Blue rate locks. We find robust evidence for mortgage pricing differentials by race, particularly among Conforming mortgage borrowers who are relatively creditworthy.
Keywords: mortgage pricing; discrimination; menu problem; racial disparities
JEL Codes: C12; G21; G51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| menu distributions offered to different racial groups (J15) | mortgage pricing differentials (G21) |
| traditional regression-based approaches (C29) | misleading results due to the menu problem (C52) |
| controlling for rates and discount points (E43) | contradictory results (C52) |
| black borrowers' willingness to increase interest rate (E43) | switch to the menus of non-Hispanic white borrowers (G51) |
| Hispanic borrowers' willingness to pay more (G51) | switch to the menus of non-Hispanic white borrowers (G51) |