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U.S. Department of Housing and Urban Development Office of Policy Development and Research Equal Credit Opportunity: Accessibility to Mortgage Funds by Women and by Minorities 8H-1464IM 7-77 LIBRARY en - ' " 1 1 > Final Technical Report EQUAL CREDIT OPPORTUNITY ACCESSIBILITY TO MORTGAGE FUNDS BY WOMEN AND BY MINORITIES Volume I by Robert^Schafer Helen F. Ladd Joint Center for Urban Studies of the Massachusetts Institute of Technology and Harvard University H-2879 For sale by the Superintendent of Documents, UUL Government Printing Office, Washington, D.C. 20402 This work was prepared in whole with Federal funds, and the author hereby grants the Federal Government an unlimited, free license to use and reproduce in whole or in part in any appropriate form this work and to have Federal agents use and reproduce in whole or in part this work. The contents of this report do not necessarily reflect the views or policies of the Department of Housing and Urban Development or the U.S. Government. FOREWORD When the Office of Policy Development and Research began its Women and Mortgage Credit Project, we were motivated by our awareness that, in the past, mortgage lenders had discriminated against women. Indeed, lenders themselves have acknowledged their past practice of discounting wives' incomes. In addition, research on homeownership had also indicated that women were much less likely to purchase homes than men with similar incomes. Was this because women were being discriminated against? Until recently, it was impossible to test directly for discrimination in the mortgage market because we did not have the necessary data. Then several states -- among them, California and New York -- began to require state-regulated lending institutions to maintain data, including rejected applications, that would permit monitoring of lending practices on the basis of both sex and race. (This happened even before the implementation of the reporting requirements of the Equal Credit Opportunity Act.) So while continuing to urge women and minorities to enter the mortgage market, we decided, as part of the research component of the Women and Mortgage Credit Project, to examine the newly available data. Note that only two states are involved. Note also that the study cannot tell us whether there is discrimination at the pre-application stage, with lenders discouraging women and minorities from even applying for a mortgage. But with these cautions observed, the study reveals little evidence of discrimination against women in the mortgage market 1 or of the discounting of wives incomes. On the other hand, the study shows continued widespread discrimination against minorities and, to our surprise, some evidence of discrimination against "male-only" applicants. This two-volume report also puts the lie to another assumption — that social science research only tells you what you already know. It does not. Read on. Donna E. Shalala Assistant Secretary for Policy Development and Research CONTENTS Research Staff Chapters 1. Introduction 2. Model 3. D e c i s i o n t o L e n d in 4. T e r m s o f M o r t g a g e L e n d i n g in 5. A p p r a i s a l P r a c t i c e s in 6. D e c i s i o n t o L e n d in N e w 7. M o r t g a g e T e r m s in N e w Development California California California York York Research Principal Investigators: Staff Robert Schafer Helen F. Ladd Research Coding Assistants: Supervisor: Manuscript Preparation: Steve Erfle Gary Reid Mark Roberts Sari Nelinson Elizabeth Gleason Chapter 1 INTRODUCTION A v a r i e t y o f F e d e r a l a n d s t a t e s t a t u t e s c u r r e n t l y m a k e it f o r b a n k i n g i n s t i t u t i o n s t o d i s c r i m i n a t e in t h e g r a n t i n g of mortgage l o a n s o n .the b a s i s o f c e r t a i n c h a r a c t e r i s t i c s o f t h e b o r r o w e r as r a c e , s e x , or m a r i t a l status or on the b a s i s of c e r t a i n illegal such charac- t e r i s t i c s of t h e p r o p e r t y , s u c h a s t h e a r b i t r a r y u s e of a g e o r tion. 1 These laws reflect two social c o n c e r n s , one relating i n d i v i d u a l j u s t i c e a n d t h e o t h e r t o t h e v i a b i l i t y of u r b a n loca- to neigh- borhoods. Generally accepted concepts of justice require that individuals n o t b e t r e a t e d a d v e r s e l y j u s t b e c a u s e t h e y h a p p e n to s h a r e certain c h a r a c t e r i s t i c s of a g r o u p . especially M e m b e r s h i p in c e r t a i n g r o u p s , t h o s e d e f i n e d b y t h e c o l o r o f a p e r s o n ' s s k i n , h a s in t h e p a s t s u l t e d in d i f f e r e n t i a l t r e a t m e n t . This concept of justice and h i s t o r i c v i o l a t i o n s have led to laws that p r o h i b i t i n g d i f f e r e n t i a t i o n b a s e d on o t h e r f a c t o r s r e l a t e d t o t h e Equal Credit Opportunity Act t h i s concept of its discriminatory l e n d i n g o n t h e b a s i s of c e r t a i n u n a c c e p t a b l e c a t e g o r i e s w h i l e of the loan such as applicant income or net w e a l t h . re- The (as a m e n d e d , M a r c h 2 3 , 1 9 7 6 ) allow- riskiness Federal embodies fairness: It s h a l l b e u n l a w f u l f o r a n y c r e d i t o r t o d i s c r i m i n a t e a g a i n s t any a p p l i c a n t , w i t h r e s p e c t to any aspect of a c r e d i t t r a n s a c tion (1) o n t h e b a s i s o f r a c e , c o l o r , r e l i g i o n , n a t i o n a l o r i g i n , sex or marital s t a t u s , or age (provided the applicant has the capacity to contract); (2) b e c a u s e a l l or p a r t o f t h e a p p l i c a n t ' s i n c o m e d e r i v e s from any public a s s i s t a n c e p r o g r a m ; or (3) b e c a u s e t h e a p p l i c a n t h a s in g o o d f a i t h e x e r c i s e2d a n y right under the Consumer Credit Protection A c t . 1-2 L a w s r e q u i r i n g d i s c l o s u r e of m o r t g a g e l e n d i n g b y c e n s u s o r z i p c o d e , e n c o u r a g i n g f i n a n c i a l i n s t i t u t i o n s to " h e l p meet t h e c r e d i t n e e d s o f t h e l o c a l c o m m u n i t i e s in w h i c h t h e y a r e c o n s i s t e n t w i t h the safe and sound operation of such tract chartered institutions," 3 o r m a k i n g d i s c r i m i n a t i o n on the basis of the age or location of a build4 i n g illegal, e m a n a t e f r o m t h e c o n c e r n s of c o m m u n i t y a c t i v i s t g r o u p s . T h e s e g r o u p s b e l i e v e t h a t l e n d i n g i n s t i t u t i o n s c o n t r i b u t e to t h e d e c l i n i n g q u a l i t y o f l i f e in c e r t a i n u r b a n n e i g h b o r h o o d s by refusing t o grant m o r t g a g e s even t h o u g h demand e x i s t s , or by granting mortgages w i t h less favorable terms even though the expected yield and risk o f l o s s a r e t h e s a m e a s in o t h e r n e i g h b o r h o o d s . Older neighborhoods a r e u s u a l l y a l l e g e d to be the t a r g e t of these p r a c t i c e s , w h i c h commonly referred to as "redlining." As a c o n s e q u e n c e , this are alleged p r a c t i c e m a y h a v e its m o s t s e v e r e e f f e c t on m i n o r i t y g r o u p s w h o to be concentrated in r e d l i n e d tend areas. This study uses m o r t g a g e application data to examine the t o w h i c h u r b a n m o r t g a g e l e n d e r s d i s c r i m i n a t e o n t h e b a s i s of extent prohibi- t e d b o r r o w e r c h a r a c t e r i s t i c s a n d t h e e x t e n t to w h i c h a l l e g a t i o n s anti-redlining groups are v a l i d . Its f o c u s on t h e l e n d e r ' s t o - l e n d r a t h e r t h a n o n t h e a g g r e g a t e v o l u m e of l e n d i n g by by decision- geographic a r e a , an o u t c o m e t h a t r e f l e c t s b o t h s u p p l y a n d d e m a n d f a c t o r s , d i f 5 ferentiates this study from most previous studies. Multivariate s t a t i s t i c a l a n a l y s i s is u s e d to d e t e r m i n e t h e i m p a c t o f t h e d i s c r i m i n a t i o n v a r i a b l e s on t h e p r o b a b i l i t y t h a t a l o a n w i l l b e d e n i e d or m o d i f i e d , and the terms of mortgage c r e d i t , controlling jective measures of The b a n k e r s 1 for o b - risk. m o r t g a g e l e n d i n g d e c i s i o n is o n l y o n e l i n k in a 1-3 c h a i n of d e c i s i o n s that d e t e r m i n e t h e extent to w h i c h d e c e n t is a c c e s s i b l e to m i n o r i t i e s and w o m e n . housing O t h e r a c t o r s in t h e u r b a n h o u s i n g m a r k e t a l l e g e d l y h a v e m a j o r i m p a c t s on t h e a b i l i t y o f w o m e n a n d m i n o r i t i e s to b u y h o m e s . Among these actors are real estate brokers who m a y steer buyers away from or toward certain neighbor- h o o d s on t h e b a s i s o f r a c e , s e x , o r m a r i t a l s t a t u s ; r e a l estate a p p r a i s e r s w h o m a y u n d e r a p p r a i s e c e r t a i n t y p e s o f p r o p e r t y in a d i s c r i m i n a t o r y m a n n e r ; o r i n s u r a n c e c o m p a n i e s w h o m a y r e f u s e to fire insurance to certain geographic areas or to categories g homeowners. T h e a n a l y s i s o f the. r o l e o f t h e s e - a c t o r s e x c e p t i o n of appraisers) sell of (with the is o u t s i d e t h e s c o p e o f t h i s s t u d y . Their i n t e r a c t i o n w i t h m o r t g a g e l e n d e r s m u s t b e k e p t in m i n d , h o w e v e r , when interpreting the results of this study. For example, a t h a t banks d o not appear to discriminate against m i n o r i t i e s m a k i n g m o r t g a g e loans m i g h t be due to advance screening by finding in real estate brokers who tell their minority clients that they should e v e n a p p l y for a b a n k not loan. THE RESIDENTIAL LENDING PROCESS A b a n k i n g i n s t i t u t i o n ' s d e c i s i o n to m a k e a l o a n f o r t h e p u r c h a s e of a s i n g l e f a m i l y h o u s e and t h e t e r m s on w h i c h t h a t i s m a d e a r e p a r t of a c o m p l e x p o r t f o l i o d e c i s i o n . At one loan level, t h e b a n k m u s t d e t e r m i n e t h e a p p r o p r i a t e p o r t i o n o f its a s s e t s to h o l d in t h e f o r m o f m o r t g a g e s on r e s i d e n t i a l p r o p e r t y . The for r e s i d e n t i a l m o r t g a g e s from the bank influences this composition d e c i s i o n t h r o u g h its i m p a c t o n the. e x p e c t e d r a t e of r e t u r n demand and 1-4 r i s k on t h i s t y p e o f i n v e s t m e n t r e l a t i v e t o a l t e r n a t i v e types. In a d d i t i o n , l i q u i d i t y n e e d s , l e n d e r a t t i t u d e s t o w a r d r i s k , a n d r e g u l a t o r y ' c o n s t r a i n t s a l l p l a y m a j o r r o l e s in t h i s decision. R e g u l a t o r y c o n s t r a i n t s m a y a f f e c t the portfolio composition a s in t h e c a s e o f t h e r e q u i r e m e n t t h a t s a v i n g s a n d l o a n directly, associations i n v e s t a c e r t a i n p e r c e n t a g e of t h e i r a s s e t s in r e a l e s t a t e , o r i n d i r e c t l y , a s w h e n a b i n d i n g u s u r y l a w a p p l i e s to c e r t a i n t y p e s investments s u c h a s i n s t a t e m o r t g a g e s on o n e - t o - f o u r b u t not to other family of houses types. At a second level, the lender must determine which applications f o r l o a n s o n s p e c i f i c p r o p e r t i e s t o a c c e p t a n d t h e t e r m s on w h i c h t h e loans w i l l be m a d e . Those applications of acceptable a r e a p p r o v e d a s r e q u e s t e d or w i t h m o d i f i c a t i o n subject to f u n d s b e i n g a v a i l a b l e in t h e p o r t f o l i o for t h i s t y p e o f other applications are quality sufficient investment; rejected. Both the c r e d i t w o r t h i n e s s of the b o r r o w e r and the o f f e r e d b y t h e p r o p e r t y i n f l u e n c e the q u a l i t y o f t h e security application. T h e i n d i v i d u a l ' s c r e d i t w o r t h i n e s s generally d e p e n d s on such f a c t o r s as his or her c u r r e n t and expected future i n c o m e , employment e x p e r i e n c e and p r o s p e c t s , net w e a l t h , and c r e d i t h i s t o r y . The more c r e d i t w o r t h y t h e b o r r o w e r , t h e l o w e r is t h e p r o b a b i l i t y t h a t h e o r she w i l l d e f a u l t on the l o a n . As a reflection of the m a r k e t v a l u e of the p r o p e r t y , the a p p r a i s e d value m e a s u r e s the v a l u e as c o l l a t e r a l . property's T h e g r e a t e r t h e c o l l a t e r a l in r e l a t i o n to t h e s i z e o f t h e l o a n , t h e l e s s is t h e r i s k o f l o s s t o t h e b a n k t h e e v e n t of foreclosure. in 1-5 U n c e r t a i n t y p l a y s a m a j o r r o l e in t h e l e n d i n g d e c i s i o n . On t h e b a s i s o f c u r r e n t a n d p a s t i n f o r m a t i o n a b o u t the b o r r o w e r and t h e p r o p e r t y , t h e l e n d e r m u s t p r o j e c t the a b i l i t y of the borrower t o m a k e t i m e l y p a y m e n t s in t h e f u t u r e and m u s t a s s e s s the probability t h a t t h e v a l u e of t h e p r o p e r t y w i l l f a l l s h o r t of the l o a n at s o m e f u t u r e d a t e . outstanding A s d i s c u s s e d b e l o w , t h i s u n c e r t a i n t y may l e a d b a n k s t o d e v e l o p o p e r a t i n g procedures t h a t have discriminatory effects. U n c e r t a i n t y is n o t t h e o n l y e x p l a n a t i o n lending, however. for discriminatory T h e f o l l o w i n g s e c t i o n s p r e s e n t t h e r a n g e of allegations commonly made against conventional mortgage lenders. T h e s e i n c l u d e a l l e g a t i o n s of d i s c r i m i n a t i o n on the b a s i s of b o t h t h e c h a r a c t e r i s t i c s o f the m o r t g a g e a p p l i c a n t a n d the l o c a t i o n of the property. D I S C R I M I N A T I O N ON T H E B A S I S OF THE C H A R A C T E R I S T I C S OF T H E BORROWER A l t h o u g h m o r t g a g e l o a n s a r e f u l l y s e c u r e d by s p e c i f i c propert i e s , b a n k i n g i n s t i t u t i o n s p a y c l o s e a t t e n t i o n to the credit worthi n e s s o f the b o r r o w e r w h e n e v a l u a t i n g m o r t g a g e a p p l i c a t i o n s . The q u a l i t y of t h e c o l l a t e r a l p r o t e c t s t h e l e n d e r a g a i n s t l o s s in a f o r e c l o s u r e s i t u a t i o n , b u t f o r e c l o s u r e is c o s t l y a n d h a s the potent i a l for c r e a t i n g b a d w i l l in t h e c o m m u n i t y . Hence, to reduce the p r o b a b i l i t y o f d e l i n q u e n c y a n d t o m i n i m i z e t h e p o s s i b i l i t y of forec l o s u r e , b a n k s u s u a l l y p e r f o r m t h o r o u g h c r e d i t a n a l y s e s of mortgage applicants. T h i s w a s n o t a l w a y s the c a s e ; for e x a m p l e , d u r i n g the 1920s, w h e n s h o r t m a t u r i t y , b a l l o o n p a y m e n t l o a n s p r e v a i l e d , b a n k e r s were 1-6 m o r e c o n c e r n e d w i t h t h e q u a l i t y of t h e c o l l a t e r a l t h a n w i t h c r e d i t w o r t h i n e s s of t h e b o r r o w e r . N o t u n t i l the 1 9 3 0 s w i t h s h i f t to l o n g e r m a t u r i t y a m o r t i z e d l o a n s did b a n k e r s borrower ratings and personal interviews. s i g n i f i c a n t l y to t h e r i s k i n e s s of t h e use "objective" the introduce Since World War II, most banks have recognized that borrower characteristics Banks the contribute loan. f a c t o r s s u c h as i n c o m e , n e t w e a l t h , and c r e d i t h i s t o r i e s to d e t e r m i n e t h e c r e d i t w o r t h i n e s s of the borrower. Representatives of women's and m i n o r i t y groups a l l e g e , h o w e v e r , that e v e n t h e a p p l i c a t i o n o f t h e s e "objective 11 factors leaves room for discriminatory treatment, especially when banks are not required e x p l a i n t h e r e a s o n s for r e j e c t i o n . to B a n k s m a y , for e x a m p l e , d e f i n e i n c o m e d i f f e r e n t l y for d i f f e r e n t a p p l i c a n t s , f a i l t o f o l l o w u p on a d v e r s e c r e d i t r e p o r t s t h a t m a y b e i n c o r r e c t , or v a r y the m a x i m u m a c c e p t a b l e r a t i o of m o n t h l y p a y m e n t - t o - m o n t h l y i n c o m e or o t h e r c r i t e r i a d e p e n d i n g on c e r t a i n c h a r a c t e r i s t i c s of t h e borrower. T h e i m p o r t a n c e of t h e a p p l i c a n t ' s p e r s o n a l i n t e r v i e w w i t h l o a n o f f i c e r of the b a n k l e a v e s a d d i t i o n a l l e e w a y for in t h e loan e v a l u a t i o n p r o c e s s . subjectivity Subjective evaluation has a rele- v a n t and valuable p l a c e in l e n d i n g d e c i s i o n s . assessing T h e loan o f f i c e r hard to m e a s u r e q u a l i t i e s such as the a p p l i c a n t ' s of a t t a c h m e n t to the p r o p e r t y , m o t i v a t i o n , c h a r a c t e r , a n d s t a b i l i t y of f a m i l y l i f e . 7 the strorujih reputation, This subjectivity of the p r o c e s s c o m b i n e d w i t h the i m p o r t a n c e to the l e n d e r of is evaluation borrower c h a r a c t e r i s t i c s , h o w e v e r , p r o v i d e s a s i t u a t i o n in w h i c h b a n k s could d i s c r i m i n a t e , if t h e y w i s h e d , a g a i n s t c e r t a i n c a t e g o r i e s of b o r rowers. W h e t h e r b a s e d o n r a c i a l p r e j u d i c e or o u t d a t e d stereotypes, 1-7 discrimination against minority, female, or unmarried applicants r u n s c o u n t e r to a c c e p t e d n o t i o n s of s o c i a l j u s t i c e a n d is n o w illegal. D i s c r i m i n a t i o n on B a s i s of Sex or M a r i t a l Married Women. Status Women's groups complain that married women are treated unfairly by traditional mortgage lending criteria l a t e d to t h e m e a s u r e m e n t o f h o u s e h o l d income. As documented s e v e r a l s u r v e y s in t h e e a r l y 1 9 7 0 s , m o r t g a g e l e n d e r s o f t e n reby expli- c i t l y - d i s c o u n t e d t h e w i f e ' s i n c o m e b y 50 p e r c e n t o r m o r e w h e n g uating mortgage applications. eval- Fifty percent discounting means a b a n k e r treats an application from a two-worker household that having $ 2 0 , 0 0 0 in a n n u a l i n c o m e w i t h 40 p e r c e n t c o n t r i b u t e d b y t h e w i f e as c o m p a r a b l e to t h a t f r o m a s i n g l e e a r n e r h o u s e h o l d h a v i n g $ 1 6 , 0 0 0 in annual income, all other factors held constant. Such a procedure a p p a r e n t l y r e p r e s e n t s a r u l e o f t h u m b s o l u t i o n to t h e p r o b l e m of e s t i m a t i n g t h e p r o b a b i l i t y d i s t r i b u t i o n s of f u t u r e i n c o m e f o r two- earner households. Although income discounting was apparently widely used, c i f i c p r a c t i c e s varied across banks and a c r o s s a p p l i c a n t s . study by the U . S . C o m m i s s i o n on Civil Rights found that A In a d d i t i o n , t h e found t h a t b a n k s w e r e m o r e likely to d i s c o u n t the w i f e ' s 1973 several H a r t f o r d b a n k s , for e x a m p l e , t r e a t e d w i v e s w i t h p r o f e s s i o n a l 9 differently from wives with other jobs. spe- jobs study earnings if she w e r e of c h i l d b e a r i n g a g e or if t h e h o u s e h o l d c o n t a i n e d school children. In s o m e c a s e s t h e b a n k m i g h t r e q u i r e a letter" to c o u n t any of the w i f e ' s income at a l l . A "baby "baby pre- 1-8 letter" is a p h y s i c i a n ' s s t a t e m e n t w h i c h a t t e s t s t o t h e w i f e ' s or husband's s t e r i l i t y , their use of approved birth c o n t r o l o r their 'Willingness to t e r m i n a t e pregnancy. The view that the possibility of pregnancy increases the r i s k i n e s s o f t h e l o a n is n o t r e s t r i c t e d t o t h e l e n d e r s o f tional mortgages. methods, conven- I n d e e d , p r e - 1 9 7 3 standards for V A loans state c l e a r l y t h a t t h e m e r e p o s s i b i l i t y o f p r e g n a n c y is a r e a s o n for d i s counting a wife's income."^ Although VA policy was changed in J u l y 1973, a t t i t u d e s changed more slowly as evident from the late 1 9 7 3 v i e w o f a V A o f f i c i a l t h a t it is " u n - A m e r i c a n t o c o u n t a w o m a n ' s i n c o m e " a n d t h e o n l y c a s e in w h i c h a w o m a n ' s i n c o m e could 12 b e c o u n t e d w o u l d b e if s h e w e r e "to h a v e a hysterectomy." F H A p o l i c y t r a d i t i o n a l l y h a s b e e n l e s s r e s t r i c t i v e in t h i s regard t h a n V A p o l i c y ; the FHA c r i t e r i o n for fully c o u n t i n g the income working wives states that "income and motivating interest may of nor- m a l l y be expected to continue throughout the early period of mort13 gage risk." individual It i s , h o w e v e r , s o m e w h a t v a g u e , l e a v i n g r o o m for interpretation. T h e p r a c t i c e of i n c o m e d i s c o u n t i n g c a n b e c r i t i c i z e d on the g r o u n d s of b e i n g u n w i s e b a n k p o l i c y , h a v i n g d i s c r i m i n a t o r y effects, and being inconsistent with generally accepted concepts of social justice. M a n y g r o u p s h a v e a r g u e d t h a t 50 p e r c e n t o r m o r e i n c o m e discount- i n g r e p r e s e n t s b a d b a n k p o l i c y b e c a u s e it is b a s e d o n outdated s t e r e o t y p e s o f t h e r o l e o f w o m e n in t h e l a b o r f o r c e . These argue that changing social conditions and liberal m a t e r n i t y groups leave 1-9 p o l i c i e s , r e n d e r o b s o l e t e t h e a s s u m p t i o n i m p l i c i t in i n c o m e dis- c o u n t i n g that m a r r i e d women have little long run c o m m i t m e n t to 14 remaining>in the labor force. A recent HUD-sponsored study p r o v i d e s s t a t i s t i c a l e v i d e n c e in s u p p o r t o f t h i s a r g u m e n t . Using P a r n e s d a t a on h o u s e h o l d incomes b e t w e e n 1966 and 1 9 7 0 , the study f o u n d t h a t t h e 50 p e r c e15 nt rule represents over-discounting second earner incomes. of This would be even more true today m l i g h t of c o n t i n u e d c h a n g e s in the r o l e o f w o m e n in t h e l a b o r during the 1 9 7 0 s . ^ In a d d i t i o n , a s i m p l e r u l e of t h u m b calling f o r 50 p e r c e n t or a n y o t h e r f i x e d d i s c o u n t is n o t l i k e l y to c o r p o r a t e f u l l y t h e d i f f e r e n c e s in b o t h t h e e x p e c t e d v a r i a n c e o f i n c o m e for d i f f e r e n t h o u s e h o l d in- level and the types. Second, critics of income discounting have emphasized desirable discriminatory effects. force its un- Since non-white wives tend c o n t r i b u t e m o r e to household income than do white w i v e s , to for e x a m p l e , i n c o m e d i s c o u n t i n g h a s a p o t e n t i a l l y s e r i o u s i m p a c t on 17 t h e a b i l i t y o f m i n o r i t y h o u s e h o l d s to o b t a i n m o r t g a g e credit. D i s c o u n t i n g r e l a t e d t o w h e t h e r t h e w i f e is o f c h i l d b e a r i n g a g e b e u n d e s i r a b l e b e c a u s e o f its d i f f e r e n t i a l i m p a c t on y o u n g households. F i n a l l y , and m o s t fundamentally, the practice of income counting can be criticized f o r i t s u s e of e x p e c t a t i o n s about b e h a v i o r in t h e e v a l u a t i o n o f i n d i v i d u a l a p p l i c a t i o n s . From bank's perspective, the absence of good applicant-specific other than current income, employment h i s t o r y , and credit m a y make this approach the m o s t rational solution to the f i c u l t p r o b l e m of p r o j e c t i n g an a p p l i c a n t ' s future income may disgroup the data record difand 1-10 a b i l i t y to p a y d e b t s . From society's perspective, however, this a p p r o a c h runs c o u n t e r to the g e n e r a l l y a c c e p t e d c o n c e p t of justice t h a t p e o p l e s h o u l d b e treated as i n d i v i d u a l s instead of as g r o u p members; in p a r t i c u l a r , t h e y s h o u l d n o t b e c a t e g o r i z e d vantageous classifications. The Equal Credit Opportunity Act (ECOA) p r o h i b i t s c l a s s i f i c a t i o n s , and makes income discounting law. into disad- sex-based illegal under federal The F e d e r a l R e s e r v e B o a r d ' s R e g u l a t i o n B r e l a t i n g to e q u a l c r e d i t o p p o r t u n i t y e x p l i c i t l y r u l e s o u t t h e u s e of "assumptions or aggregate statistics relating to the likelihood that any group o f persons w i l l bear or rear children o r , for that r e a s o n , w i l l 18 r e c e i v e d i m i n i s h e d o r i n t e r r u p t e d i n c o m e in t h e f u t u r e . " The Federal Home Loan Bank Board's nondiscrimination guidelines rule out income discounting even more explicitly: A practice of discounting all or part of either spouse's i n c o m e w h e r e s p o u s e s a p p l y j o i n t l y is a v i o l a t i o n o f s e c t i o n 527 o f t h e N a t i o n a l H o u s i n g A c t . A s w i t h o t h e r i n c o m e , when s p o u s e s apply j o i n t l y for a l o a n , the d e t e r m i n a t i o n as t o w h e t h e r a s p o u s e ' s i n c o m e q u a l i f i e s for c r e d i t p u r p o s e s should depend upon a reasonable evaluation of his or her past, present, and reasonably foreseeable economic circumstances . Single Women. Women's groups believe that lenders nate against the single woman discrimi- (single, d i v o r c e d , w i d o w e d , or rated) because of their p r e j u d i c i a l attitudes toward w o m e n . sepaI t is a l l e g e d that these attitudes are based on outdated m y t h s that w o m e n a r e inherently u n s t a b l e , are incapable of conducting their own f a i r s , and n e e d the p r o t e c t i o n of a m a l e ; that the d i v o r c e d m u s t b e e m o t i o n a l l y u n s t a b l e ; a n d t h a t t h e i n a b i l i t y o f an af- woman unmar- r i e d female to find a m a n d e m o n s t r a t e s t h a t something m u s t be w r o n g with her.^ 1-11 In a d d i t i o n t o o u t r i g h t d e n i a l on t h e b a s i s o f s e x , i l l e g a l under ECOA, women's groups believe that banks discriminate in m o r e s u b t l e w a y s such as imposing so m a n y a d d i t i o n a l r e q u i r e m e n t s on female applicants that they either withdraw their applications suffer unacceptable financial burdens. t h e p a y m e n t of a l l . o u t s t a n d i n g These requirements include d e b t s , the p u r c h a s e of m o r t g a g e s u r a n c e , the taking of monthly payments directly from the p a y c h e c k , a n d t h e c o - s i g n i n g of t h e m o r t g a g e b y an m a li e . or in- applicants appropriate 2 1 Female applicants may also be adversely affected by lender e v a l u a t i o n p o l i c i e s t h a t , w h i l e n o t n e c e s s a r i l y d e s i g n e d to d i s c r i m i n a t e a g a i n s t w o m e n , have the effect of doing s o . The exclusion f r o m t h e l o a n e v a l u a t i o n p r o c e s s of a l i m o n y , c h i l d s u p p o r t payments a n d p u b l i c a s s i s t a n c e is o n e s u c h p o l i c y b e c a u s e o f t h e importance of these income categories to single female applicants. According t o the F e d e r a l Reserve Board's Regulation B implementing the Credit Opportunity A c t , a lender must now "consider alimony Equal and c h i l d support p a y m e n t s as income to the extent that they are likely 22 to be consistently made." T h e r e g u l a t i o n s g o on t o s t a t e f a c t o r s t h a t t h e b a n k m a y c o n s i d e r in d e t e r m i n i n g t h e of consistent payments. likelihood Lender treatment of alimony or s u p p o r t is l i k e l y t o b e m o s t p r o b l e m a t i c f o r w h o m t h e s p o u s e ' s l i a b i l i t y is child for t h e s e p a r a t e d person, unclear. The Federal Reserve Board Regulations also explicitly t h a t p u b l i c a s s i s t a n c e income m u s t be fully counted as state income. Although not explicitly a woman's issue since men receive the public 1-12 assistance a s w e l l a s w o m e n , t h e h i g h e r i n c i d e n c e of f e m a l e headed f a m i l i e s o n w e l f a r e w o u l d m a k e e x c l u s i o n of s u c h i n c o m e a p a r t i c u larly serious problem for-women. W o m e n m a y also b e treated u n f a v o r a b l y b e c a u s e of credit records. insufficient An u n m a r r i e d w o m a n , for e x a m p l e , may have no credit r e c o r d because of past d i s c r i m i n a t i o n a g a i n s t her by consumer credit c o m p a n i e s w h i l e a d i v o r c e d w o m a n m a y h a v e n o c r e d i t r e c o r d in h e r 23 own name. T h u s , u n m a r r i e d , divorced or separated w o m e n may not q u a l i f y for m o r t g a g e s e v e n t h o u g h t h e y h a v e a d e q u a t e income and wealth. F i n a l l y , b a n k s h a v e b24e e n c r i t i c i z e d f o r d i s c r i m i n a t i n g o n b a s i s of m a r i t a l s t a t u s . Women's groups view this alleged c r i m i n a t o r y b e h a v i o r a s a n o u t c o m e of b a n k e r s ' p r e j u d i c i a l the dis- atti- t u d e s toward w o m e n and c r i t i c i z e it for its p o t e n t i a l impact on w o m e n w h o a r e d i s p r o p o r t i o n a t e l y s i n g l e . 25 It s h o u l d b e n o t e d , however, t h a t E C O A m a k e s d i s c r i m i n a t o r y l e n d i n g b e h a v i o r on b a s i s of m a r i t a l status illegal independent of the sex of the the 26 applicant. O n e i n t e r e s t i n g q u e s t i o n is w h e t h e r b a n k s against applications discriminate involving any unmarried or separated appli- c a n t s , w h e t h e r s u c h a p p l i c a n t s b e m a l e o r f e m a l e or b o t h m a l e female applying and jointly. Racial Discrimination In t h e p a s t , r a c i a l p r e j u d i c e h a s c l e a r l y b e e n a f a c t o r in 27 t h e lending d e c i s i o n s of b a n k s . r o l e in t h e r a c i a l d i s c r i m i n a t i o n Mortgage lenders played a key p r a c t i c e d by all s e g m e n t s of the 1-13 r e a l e s t a t e i n d u s t r y , i n c l u d i n g t h e e n f o r c e m e n t t h r o u g h 1948 o f a restriction in t h e d e e d o n t h e r a c e o f f u t u r e p u r c h a s e r s . discrimination Racial in m o r t g a g e l e n d i n g is c l e a r l y i l l e g a l u n d e r 1968 Civil Rights A c t . However, recent studies employing v a r i a t e statistical techniques on individual a p p l i c a n t the multi- information indicates that this law has not eliminated racial discrimination mortgage in lending. Glenn Lowry's study based on a six-metropolitan area sample o f m o r t g a g e a p p l i c a t i o n s from the summer and fall of 1977 supports t h e h y p o t h e s i s t h a t s o m e s u b g r o u p s of t h e n o n - w h i t e p o p u l a t i o n are 28 discriminated against. In p a r t i c u l a r , L o w r y f o u n d t h a t seeking to purchase very expensive homes and nonwhites with tenuous financial positions seeking to buy m o d e s t homes suffered significant disadvantages compared to similarly situated H e a l s o f o u n d e v i d e n c e o f w i d e v a r i a t i o n in l e n d e r s 1 nonwhites whites. treatment of r a c i a l m i n o r i t i e s b o t h across regions and among lenders within given a region. T h e m o r t g a g e l e n d i n g d e c i s i o n s d u r i n g 1976 and 1 9 7 7 o f s a v i n g s b a n k s in f i v e N e w Y29o r k m e t r o p o l i t a n studied by Robert Schafer. mutual areas were recently The study concludes that minority a p p l i c a n t s in t h e f o u r l a r g e s t a r e a s e x p e r i e n c e d s u b s t a n t i a l discrimination in t h e m o r t g a g e l e n d i n g p r o c e s s . the four largest metropolitan Consistently as were similarly situated whites. denied O n l y in t h e N e w Y o r k C i t y h o w e v e r , w a s t h e r e e v i d e n c e of s u b s t a n t i a l d i s c r i m i n a t i o n (Asians and across a r e a s , b l a c k a p p l i c a n t s w e r e , on a v e r a g e , twice as likely to have their mortgage application other minorities racial Hispanics). area, against 1-14 GEOGRAPHIC DISCRIMINATION A t t h e h e a r t of t h e c u r r e n t r e d l i n i n g d e b a t e is t h e allegation t h a t l e n d e r s s o m e t i m e s e v a l u a t e l o a n a p p l i c a t i o n s on t h e b a s i s the property's location without looking at the applicant's of credit w o r t h i n e s s o r t h e v a l u e o f t h e s p e c i f i c p r o p e r t y as c o l l a t e r a l . In its simplest f o r m , r e d l i n i n g refers to the d e l i n e a t i o n of w h o l e n e i g h b o r h o o d s w i t h i n w h i c h lenders r e f u s e to g r a n t m o r t g a g e W h i l e o u t r i g h t r e f u s a l t o l e n d is o n e f o r m of r e d l i n i n g , l i n i n g g r o u p s p o i n t to s e v e r a l i n d i r e c t t a c t i c s s u c h a s antiredunfavorable terms and systematic underappraisal of property that could the same credit. have effect. The terms of the loan (i.e., loan-to-value r a t i o , m a t u r i t y , i n t e r e s t r a t e , d i s c o u n t p o i n t s , and closing costs) can be m a d e unfavorable as t o m a k e a n y o f f e r e d l o a n u n a c c e p t a b l e t o a worthy applicant. so credit- If t h e a p p l i c a n t w e r e t r y i n g t o p u r c h a s e a p r o p - e r t y for i t s m a r k e t v a l u e o f $ 4 0 , 0 0 0 a n d a b a n k o n l y o f f e r e d a 40 percent-of-value l o a n , the applicant would face the difficult of raising $24,000. task A s a r e s u l t , t h e a p p l i c a n t m i g h t n o t be a b l e to p u r c h a s e t h e p r o p e r t y , a n d t h e n e t e f f e c t c o u l d b e t h e s a m e a s if t h e b a n k h a d r e f u s e d t o l e n d in t h e area. If t h e p r o p e r t y w e r e u n d e r a p p r a i s e d , (e.g., at $20,000 w i t h a m a r k e t v a l u e of $ 4 0 , 0 0 0 ) , the size of the loan w o u l d be limited. Using this tactic, a lender could offer the potential borrower a l o a n o f o n l y $ 1 6 , 0 0 0 u s i n g t h e c o n v e n t i o n a l l o a n - t o - v a l u e r a t i o of 80 p e r c e n t . A g a i n , the net effect could be to prevent the from purchasing the p r o p e r t y . applicant A l l e g a t i o n s of u n d e r a p p r a i s a l are 1-15 frequently made by community organizations concerned with l e n d i n g in t h e i r n e i g h b o r h o o d s . mortgage Antiredlining groups also t h a t t h e l e n d e r s f r e q u e n t l y j u s t i f y l o w e r a p p r a i s a l s by allege applying m o r e rigid structural standards or other appraisal criteria (e.g., m i n i m u m h o u s e w i d t h , u s e of a s b e s t o s s h i n g l e s , m i n i m u m n u m b e r bedrooms and bathrooms, minimum garage size, mixed or l a n d u s e s ) t o p r o p e r t i e s in r e d l i n e d a r e a s . inharmonious They also say that lenders, through their appraisal staff, presume that certain i n g s a r e e c o n o m i c a l l y o b s o l e s c e n t e v e n t h o u g h a m a r k e t for still exists. build- them A n o t h e r c o m m o n a l l e g a t i o n is t h a t b a n k s s t a l l a p p r a i s a l until the purchase and sale contract has of the expired. F o r t h e p u r p o s e s o f t h i s s t u d y r e d l i n i n g is d e f i n e d as follows: R e d l i n i n g is t h e r e f u s a l t o l e n d , o r t h e g r a n t i n g of m o r t g a g e s w i t h less favorable t e r m s , even though the expected yield and risk of loss are the same as they are for m o r t g a g e s g r a n t e d in o t h e r a r e a s . T o i m p l e m e n t a n y r e d l i n i n g t a c t i c , l e n d i n g i n s t i t u t i o n s or o t h e r e n t i t y , s u c h a s i n s u r a n c e c o m p a n i e s , w o u l d h a v e to the areas to be r e d l i n e d . some identify Two of the c r i t e r i a m o s t f r e q u e n t l y leged to be used to differentiate among neighborhoods p u r p o s e s are age of housing and race. for P e o p l e l i v i n g in these neighbor- h o o d s h a v i n g a s i g n i f i c a n t p r o p o r t i o n o f o l d h o u s i n g s t o c k or or minority households have indicated that they believe that are redlining their al- black banks neighborhoods. Previous Redlining Studies. A m u l t i t u d e of s t u d i e s b y n i t y g r o u p s in l a r g e c i t i e s t h r o u g h o u t t h e U n i t e d S t a t e s commu- examining t h e g e o g r a p h i c d i s t r i b u t i o n of l o a n s g r a n t e d b y b a n k i n g institu- t i o n s p u r p o r t to p r o v i d e s u p p o r t for r e d l i n i n g c l a i m s . None of 1-16 t h e s e s t u d i e s , h o w e v e r , -- e v e n t h e m o s t c a r e f u l l y d o n e -- provide 30 c l e a r evidence on the redlining p h e n o m e n o n as defined above. T h e major .difficulty arises from their failure either to recognize or to c o n t r o l s t a t i s t i c a l l y for the n o n - r e d l i n i n g m e a s u r e s banks m a y l e g i t i m a t e l y use to m a k e e i t h e r no or only a few loans in specific geographic areas. These include: the lack of d e m a n d for m o r t g a g e l o a n s in a n a r e a , r e l a t i v e l y applicants, external risks vacant buildings) few adequate creditworthy (e.g., widespread vandalism or that greatly threaten the value of the nearby property, and decisions by entities beyond the control of lenders such as real estate brokers and insurance companies. Most previous studies, especially those by community activist g r o u p s , can be c r i t i c i z e d a s w e l l for their failure to m a k e the d i s t i n c t i o n between neighborhood disinvestment and r e d l i n i n g , a d i s t i n c t i o n p a r t i c u l a r l y i m p o r t a n t for p o l i c y p u r p o s e s . It w o u l d b e f a i r t o s a y t h a t r e d l i n i n g is a t l e a s t a c o n t r i b u t i n g factor t o d i s i n v e s t m e n t in t h o s e n e i g h b o r h o o d s i n an a r b i t r a r y w i t h d r a w a l of f u n d s . where redlining Neighborhood results disinvestment, h o w e v e r , c a n t a k e p l a c e in t h e a b s e n c e o f a n y r e d l i n i n g b y banks. F o r e x a m p l e , p r o p e r t y v a l u e s m a y f a l l in a n e i g h b o r h o o d b e c a u s e h o u s i n g s t o c k is o b s o l e t e (i.e., the rooms and apartments s m a l l w i t h i n a d e q u a t e o p e n p l a y s p a c e for c h i l d r e n ) holds 1 are and the house- r e a l i n c o m e s h a v e i n c r e a s e d e n o u g h t o a l l o w t h e m to b u y o r r e n t houses or a p a r t m e n t s elsewhere w i t h larger rooms and m o r e space. the If a n a r e a is c o n s i d e r e d v e r y r i s k y (e.g., high foreclosure r a t e , h i g h r a t e of fire l o s s , large p r o p e r t y tax arrearages) open and 1-17 b a n k s a r e n o l o n g e r l e n d i n g t h e r e , i t is d i f f i c u l t t o d e t e r m i n e w h e t h e r t h e i r d e c i s i o n to s t o p l e n d i n g in t h e a r e a p r e c e d e d p r e c i p i t a t e d t h e d e c l i n e , a c c e l e r a t e d an a l r e a d y e x i s t i n g or occurred subsequent to the and decline, decline. R o b e r t S c h a f e r ' s s t u d y of N e w Y o r k m u t u a l s a v i n g s b a n k s includes c o n t r o l s for the v a r i o u s legitimate c o n s i d e r a t i o n s upon which lend- 31 ers may base their decision. e v i d e n c e of discrimination While this study found widespread against individual minority t h e findings on r e d l i n i n g w e r e m i x e d . neighborhoods were redlined applicants, Allegations that particular in t h e R o c h e s t e r and S y r a c u s e nuM ro- p o l i t a n areas were contradicted and there was very little o f r e d l i n i n g in B u f f a l o . In t h e A l b a n y — S c h e n e c t a d y — T r o y ovuUmu^ a r e a , the r e s u l t s w e r e c o n s i s t e n t w i t h t h e r e d l i n i n g a l l e g a t i o n s in t w o n e i g h b o r h o o d s a n d c o n t r a d i c t o r y in s i x o t h e r s . In t h e g r e a t e r Y o r k City a r e a , the results contradict the allegation n e i g h b o r h o o d s and are i n c o n c l u s i v e for five o t h e r s . for two A t t e m p t s to the allegation that older neighborhoods were redlined proved c o n c l u s i v e in a l l f i v e m e t r o p o l i t a n STUDY New test in- areas. OUTLINE T h i s study e x a m i n e s e m p i r i c a l l y the e x t e n t to w h i c h mortgage applicants are discriminated against because of their sex, race, m a r i t a l s t a t u s , or age or b e c a u s e of the n e i g h b o r h o o d (age, racial c o m p o s i t i o n , o r g e o g r a p h i c a r e a ) in w h i c h t h e i r p r o p e r t y is located. T o e x a m i n e t h i s i s s u e , d e t a i l e d i n f o r m a t i o n i s n e e d e d f i r s t , on t h e o b j e c t i v e f a c t o r s s u c h a s t h e c r e d i t w o r t h i n e s s of individual 1-18 a p p l i c a n t s and the s e c u r i t y v a l u e of the p r o p e r t y that legitimately a f f e c t the m o r t g a g e lending decision a n d , s e c o n d , on the i s t i c s o f t h e a p p l i c a n t or t h e p r o p e r t y t h a t c o n s t i t u t e discrimination. characterillegal F o r t u n a t e l y , C a l i f o r n i a and New York state require state-regulated banks to maintain this d e t a i l e d on all mortgage applications. 32 laws information W i t h the e x c e p t i o n of the study being conducted concurrently with this study by the pilot Federal 33 H o m e L o a n B a n k , n o o t h e r c o m p a r a b l e d a t a s e t is available. The California and N e w York data sets are not identical; have strengths and w e a k n e s s e s . The New York recording form includes for example, marital status, net w e a l t h , and years at present tion, all of w h i c h are omitted from the California form. both occupa While the New York form records house purchase price and income in i n t e r v a l form o n l y , C a l i f o r n i a p r o v i d e s m u c h m o r e p r e c i s e and detail i n f o r m a t i o n on t h e s e v a r i a b l e s i n c l u d i n g t h e s e p a r a t e i n c o m e s of the applicant and co-applicant where applicable. California In a d d i t i o n , t h e f o r m p r o v i d e s i n f o r m a t i o n on t h e f i n a l t e r m s of the m o r t g a g e c o n t r a c t w h i c h , e x c e p t for t h e l o a n - t o - v a l u e r a t i o , is n o t a v a i l a b l e in N e w Y o r k . By r e l y i n g on both data s o u r c e s , this c a n f o c u s on a b r o a d e r r a n g e o f i s s u e s t h a n w o u l d b e p o s s i b l e a single data set. In p a r t i c u l a r , t h e N e w Y o r k i n f o r m a t i o n p o s s i b l e a test of d i s c r i m i n a t i o n on the basis of m a r i t a l w h i l e t h e C a l i f o r n i a d a t a s e t p e r m i t s an e x a m i n a t i o n o f study with makes status discrimin- a t o r y b e h a v i o r in t h e t r e a t m e n t a c c o r d e d s e c o n d a r y i n c o m e , t h e s e t t i n g of m o r t g a g e t e r m s , a n d t h e a p p r a i s a l Two other major advantages practices. f l o w f r o m t h e u s e of t w o separate 1-19 data sets. F i r s t , a wide variety of lending institutions can analyzed and compared. The California data cover all state-chartered s a v i n g s a n $ l o a n a s s o c i a t i o n s in C a l i f o r n i a , w h i l e t h e N e w data apply York to state chartered commercial b a n k s , savings and a s s o c i a t i o n s , and m u t u a l savings b a n k s . be loan To the e x t e n t p o s s i b l e , the N e w York data are a n a l y z e d s e p a r a t e l y by type of bank. S e c o n d , the d a t a cover a w i d e range of e c o n o m i c conditions. T h e r a p i d e c o n o m i c g r o w t h and b o o m i n g h o u s i n g m a r k e t in California c o n t r a s t s h a r p l y w i t h t h e s i t u a t i o n in N e w Y o r k s t a t e . In a wide variety of metropolitan a r e a s c a n b e s t u d i e d in b o t h a l l o w i n g large areas to be compared with small and areas with slowly growing. addition, rapidly For e x a m p l e , the San Jose states, growing metropolitan a r e a is g r o w i n g m o r e r a p i d l y t h a n t h e r e s t o f C a l i f o r n i a b e c a u s e t h e g r o w t h o f t h e h i g h t e c h n o l o g y f i r m s in t h e " S i l i c o n Valley." A n d in N e w Y o r k , t h e R o c h e s t e r a r e a ' s e c o n o m y is m u c h b e t t e r o f f t h a t of the r e s t of the economic c o n d i t i o n s c o v e r e d b y t h e t w o d a t a s o u r c e s is t h e p o t e n t i a l i z a b i l i t y of the r e s u l t s . general- Results that are consistent across a w i d e v a r i e t y of c i r c u m s t a n c e s w i l l provide a firm foundation t h e f o r m u l a t i o n of n a t i o n a l in t h e f o l l o w i n g c h a p t e r s . Models are presented for models to a n a - issues: 1. Appraisal 2. D e c i s i o n s to a p p r o v e , m o d i f y , or d e n y a m o r t g a g e such policy. T h e n e x t c h a p t e r d i s c u s s e s the t h e o r e t i c a l b a s e s for the lyze three than state. An i m p o r t a n t c o n s e q u e n c e o f t h e v a r i e t y o f b a n k s a n d estimated of tion; practices; applica- 1-20 3. Mortgage credit terms (interest r a t e , loan-to-value maturity p e r i o d , downward loan m o d i f i c a t i o n s , and ratio, loan fees). C h a p t e r s 3 to 5 p r e s e n t the r e s u l t s for C a l i f o r n i a savings loan associations. by considering and In C h a p t e r 3 , t h e l e n d i n g d e c i s i o n is a n a l y z e d f o u r o u t c o m e s to a l o a n a p p l i c a t i o n : applied for, increasing the requested approved l o a n a m o u n t p r i o r to as approval, d e c r e a s i n g t h e r e q u e s t e d l o a n a m o u n t p r i o r to a p p r o v a l , a n d denial. C h a p t e r 4 c o n t a i n s an a n a l y s i s of the c o n d i t i o n s under which mort- g a g e c r e d i t is e x t e n d e d ; t h a t i s , t h e i n t e r e s t r a t e , l o a n amount, m a t u r i t y p e r i o d , and loan fees. Appraisal practices are analyzed C h a p t e r 5, using information on denied as w e l l as approved in mortgage applications. Chapters 6 a n d 7 p r e s e n t t h e r e s u l t s for s t a t e r e g u l a t e d e r s in N e w Y o r k S t a t e . C h a p t e r 6 is d e v o t e d t o t h e a n a l y s i s f o u r o u t c o m e s to a m o r t g a g e a p p l i c a t i o n : approval as applied m o d i f i c a t i o n p r i o r to a p p r o v a l , d e n i a l , a n d w i t h d r a w a l . analyzes downward modifications in t h e r e q u e s t e d l o a n lendof for, Chapter 7 amount. 1-21 Footnotes - Chapter Equal Credit Opportunity Act 1 (as a m e n d e d M a r c h 2 3 , 1976), Public Law 93-495, Title VII; Federal Home Loan Bank C F R T i t l e 1 2 , C h . V , S u b c h a p t e r B , P a r t 528 Board, (effective 7-1-78); California Business and Transportation Agency, Department Savings and Loans, Subchapter 4 of Chapter 3, Title 21, of "Regula- tions Pursuant to the Housing F i n a n c i a l Discrimination Act of 1977" (May 1 3 , 1 9 7 9 ) ; a n d N e w Y o r k , E x e c u t i v e L a w §296-9(1976). Equal Credit Opportunity Act, Public Law 93-495, Title Section 701 (March, 1976). Public Law 95-128, 95th Cong., 1st sess. (October 12, Federal Home Loan Bank Board, C.F.R. Title 12, C h . V , B, Part VII, 1977). Subchapter 528. T w o m a j o r e x c e p t i o n s a r e G l e n n C . L o w r y , "An A n a l y s i s of Discrim- i n a t i o n in M o r t g a g e L e n d i n g , " W o r k i n g P a p e r N o . 4 2 , B a n k i n g Research Center, (Evanston, 111.: Northwestern University, 1977); and Robert Schafer, Mortgage Lending Decisions: and C o n s t r a i n t s Urban Studies, (Cambridge,MA.: Criteria MIT-Harvard Joint Center for 1978). T h e r e is s o m e e v i d e n c e t h a t e a c h of t h e s e a c t o r s in d i s c r i m i n a t o r y b e h a v i o r . participate See U . S . D e p a r t m e n t of Housing U r b a n D e v e l o p m e n t , " B a c k g r o u n d a n d I n i t i a l F i n d i n g s of t h e ing M a r k e t P r a c t i c e s S u r v e y , " (Washington, D.C.: 1978); and Hous- U.S. 1-22 D e p a r t m e n t of H o u s i n g a n d U r b a n D e v e l o p m e n t , I n s u r a n c e in A m e r i c a American (Washington, D.C.: 1978); and United States v . the Institute of Real Estate A p p r a i s e r s , et a l . , Civil A c t i o n , N o . 76 C1448 (N.D. I L L . , 1976) (complaint and a g r e e m e n t w i t h t h e A m e r i c a n I n s t i t u t e of R e a l E s t a t e and t h e N a t i o n a l A s s o c i a t i o n o f 7. McGraw-Hill 1 9 6 2 ) , c h . 5; a n d U n i t e d S t a t e s on C i v i l R i g h t s , M o r t g a g e M o n e y : Appraisers (Clearinghouse Publication (New Y o r k : Commission W h o G e t s It? S t u d y of M o r t g a g e L e n d i n g D i s c r i m i n a t i o n 8. settlement Realtors). S e e , for e x a m p l e , W i l l i s B r y a n t , M o r t g a g e L e n d i n g ticut, Crisis A Case in H a r t f o r d , 48, June 1974), ch. Connec3. A 1971 Federal Home Loan Bank survey of savings and loans found that m o r e than half the respondents would count less than fifty p e r c e n t of t h e income of a w i f e , age 2 5 , w i t h 2 s c h o o l age dren with full time secretarial position. a 1972 U . S . S a v i n g a n d L o a n L e a g u e s u r v e y f o u n d t h a t o n l y 28 p e r c e n t o f t h e veyed lenders would count wife's income fully. o f 14 r e s p o n d e n t s Hartford, Connecticut a r e a , said they would fully count the wife's These surveys are cited r e p o r t e d in a v a r i e t y o f s o u r c e s i n c l u d i n g N a t i o n a l o f N e g r o W o m e n , I n c . W o m e n a n d Hocusing: i n a t i o n in F i v e A m e r i c a n C i t i e s income or Council A R e p o r t on S e x Discrim- (U.S. D e p a r t m e n t o f H o u s i n g U r b a n D e v e l o p m e n t , J u n e 1 9 7 5 ) , a n d U . S . C o m m i s s i o n on Rights, Mortgage Money: sur- Only 6 out f r o m 9 l e n d i n g i n s t i t u t i o n s in t h e even under favorable conditions. chil- Who Gets It? Civil and 1-23 9. U . S . Commission on Civil Rights, Mortgage Money: It?, C h . 4, Table Who Gets 8. 10. I b i d . y -p. 4 2 . 11. S e e , for e x a m p l e , testimony by W i l l i a m L . T a y l o r , "Economic P r o b l e m s of W o m e n , " H e a r i n g s B e f o r e the J o i n t E c o n o m i c Committee, U . S . C o n g r e s s , 93rd C o n g r e s s , 1st session D.C.: (Washington, U n i t e d S t a t e s G o v e r n m e n t P r i n t i n g O f f i c e , 1 9 7 3 ) , p . 196 p. and 176. 12. Ibid. 13. U . S . Department of Housing and Urban D e v e l o p m e n t , M o r t g a g e A n a l y s i s Handbook for M o r t g a g e Insurance on One to Properties 14. 15. Four-Family (1972), sec. 1 - 2 2 . F o r e x a m p l e , see T a y l o r t e s t i m o n y , 1973 J o i n t E c o n o m i c mittee Credit Com- Hearings. U . S . D e p a r t m e n t o f H o u s i n g a n d U r b a n D e v e l o p m e n t , W o m e n in t h e Mortgage Market 1976). (Washington: U.S. Government Printing Office, Even though the study gives insufficient attention t h e v a r i a n c e of i n c o m e , i t s g e n e r a l c o n c l u s i o n t h a t realistic p r o j e c t i o n s w o u l d l e a d t o l e s s t h a n 50 p e r c e n t d i s c o u n t i n g probably valid. to is 1-24 16. B e t w e e n 1947 a n d 1 9 6 4 , t h e l a b o r f o r c e p a r t i c i p a t i o n rate of w o m e n in t h e a g e g r o u p t w e n t y - f i v e t o t h i r t y - f o u r increased a b o u t three-tenths of a percentage point per y e a r . Between 1964 a n d 1 9 7 7 , t h e p a r t i c i p a t i o n r a t e r o s e a t a r a t e of percentage points per year. L a b o r F o r c e in 1990 1 9 7 9 ) , p . 11 a n d 17. 1.7 S e e R a l p h E . S m i t h , W o m e n in t h e (Washington: The Urban Institute, March passim. S e e , for e x a m p l e , t e s t i m o n y b y T a y l o r , 1 9 7 3 J E C Hearings, p . 195; U . S . C o m m i s s i o n on C i v i l R i g h t s , M o r t g a g e M o n e y : G e t s I t ? , c h . 4; a n d N a t i o n a l C o u n c i l o f N e g r o W o m e n , Women and Housing, p . 18. 71. F e d e r a l R e s e r v e B o a r d , R e g u l a t i o n B , 12 C . F . R . 2 0 2 . 6 (Effective March 23, 19. 1977). Federal Home Loan Bank Board, Nondiscrimination C.F.R. Title 12, Ch. V , Part 20. Inc., Guidelines, 531.8. N a t i o n a l C o u n c i l of N e g r o W o m e n , I n c . , W o m e n and Housing, pp. 53, 63, 66. 21. Ibid., pp. 61-65. 22. F e d e r a l R e s e r v e B o a r d , R e g u l a t i o n B , 12 C . F . R . (effective March 23, 23. 1977). N a t i o n a l C o u n c i l o f N e g r o W o m e n , I n c . , W o m e n and pp. 24. 202.6 Housing, 64-66. S e e , for e x a m p l e , T a y l o r t e s t i m o n y , 1 9 7 3 J E C H e a r i n g s ; a n d Commission on Civil Rights, Mortgage Money: U.S. Who Gets It, Ch. 4 1-25 25. Taylor t e s t i m o n y , 1973 JEC Hearing. 26. T h e U . S . C o u r t of A p p e a l s for the D i s t r i c t of C o l u m b i a has ruled that the Equal Credit Opportunity A c t requires a savings a n d loan a s s o c i a t i o n to a g g r e g a t e t h e i n c o m e s o f an unmarried c o u p l e in d e t e r m i n i n g t h e i r c r e d i t w o r t h i n e s s in p r o c e s s i n g a joint mortgage application. ice C o . , A s s o c i a t e s , I n c . Markham v.Colonial Mortgage (August 2 , 1979) as r e p o r t e d in the Housing and Development Reporter, August 20, 1979, pp. 27. See g e n e r a l l y , Charles A b r a m s , Forbidden Neighbors 28. U n i v e r s i t y of C a l i f o r n i a , 279-80. (New Y o r k : H a r p e r , 1956); and Davis M c E n t i r e , Residence and Race California: Serv- (Berkeley, 1960). G l e n n C . L o w r y , "An A n a l y s i s o f D i s c r i m i n a t i o n in M o r t g a g e L e n d i n g , " B a n k i n g R e s e a r c h C e n t e r , W o r k i n g P a p e r N o . 42 (Evanston, 111.: 29. 30. Northwestern University, Robert Schafer, Mortgage Lending Decisions: straints (Cambridge, MA.: Studies, 1978). 1978). C r i t e r i a and C o n - M I T - H a r v a r d J o i n t C e n t e r for U r b a n F o r a t h o r o u g h r e v i e w of t h e r e d l i n i n g l i t e r a t u r e , see A . Thomas King, "Redlining: A Critical Review of the Literature with Suggested Research," Federal Home Loan Bank B o a r d , Draft, 1978. 31. Robert Schafer, op. cit. 32. C a l i f o r n i a , B u s i n e s s a n d T r a n s p o r t a t i o n A g e n c y , D e p a r t m e n t of S a v i n g s a n d L o a n , L o a n R e g i s t e r R e p o r t ; N e w Y o r k , B a n k i n g Department, Supervisory Procedure G-107. 1-26 T h e C o m p t r o l l e r of t h e C u r r e n c y a n d t h e F D I C c o n d u c t e d a larges c a l e s u r v e y of m o r t g a g e l e n d i n g a p p l i c a t i o n s at 300 lending i n s t i t u t i o n s a r o u n d t h e c o u n t r y , b u t the quality of the data was disappointing. F o r e x a m p l e , p a r t i c i p a t i o n was voluntary a n d o n l y 176 of t h e 300 i n s t i t u t i o n s selected actually participated. T h e s u r v e y c o n s i s t e d of a two-part form; one part to b e c o m p l e t e d by t h e l e n d e r a n d t h e other to be completed by the applicant. A l t h o u g h b a n k s s e n t in 13,613 parts and a p p l i c a n t s 1 0 , 2 8 7 , o n l y 5,107 m a t c h e d . matches were rejected And only 138 of the applications. Since March 23, 1977, the Federal Reserve Board t i o n B) h a s r e q u i r e d m e m b e r b a n k s to " r e q u e s t " (Regula- i n f o r m a t i o n on t h e r a c e , n a t i o n a l o r i g i n , s e x , m a r i t a l s t a t u s , and a g e of a p p l i c a n t s for " c o n s u m e r c r e d i t r e l a t i n g to the p u r c h a s e of residential real property." U n f o r t u n a t e l y , R e g u l a t i o n B only r e q u i r e s t h a t t h e a p p l i c a n t and j o i n t a p p l i c a n t be " a s k e d , but n o t r e q u i r e d " to s u p p l y t h i s information. CHAPTER 2 MODEL DEVELOPMENT T h e a c c e s s t o m o r t g a g e c r e d i t of w o m e n , m i n o r i t i e s , old p e o p l e , - a n d t h o s e t r y i n g to p u r c h a s e h o u s e s in a l l e g e d l y l i n e d a r e a s m a y b e l i m i t e d or r e s t r i c t e d red- in a t l e a s t f o u r ways. First, a lender may discourage certain potential borrowers s u b m i t t i n g a f o r m a l a p p l i c a t i o n for a m o r t g a g e . from Second, after the borrower has submitted a formal a p p l i c a t i o n , the person thorized by the lending institution to estimate the value or a p p r a i s e , t h e p r o p e r t y m a y d i f f e r e n t i a l l y a n d au- of, systematically u n d e r a p p r a i s e c e r t a i n types of p r o p e r t i e s r e l a t i v e to o t h e r s . Underappraisal of this type reduces the maximum loan amount below w h a t it w o u l d b e w i t h n o n - d i s c r i m i n a t o r y a p p r a i s a l . Third, the lender may use its loan application evaluation process discriminate systematically against certain types of w i t h the result that such applicants face higher applicants probabilities of l o a n d e n i a l o r a d v e r s e m o d i f i c a t i o n t h a n s i m i l a r l y applicants who are not discriminated against. to situated Fourth, the lender m a y a r b i t r a r i l y impose harsher m o r t g a g e loan terms (e.g. higher interest rates, shorter maturity periods, and higher f e e s ) o n s o m e a p p l i c a n t s r e l a t i v e to o t h e r s . In c a s e s w h e r e potential borrower cannot afford the harsher terms, this t i c e m a y h a v e i m p a c t s s i m i l a r to t h o s e of o u t r i g h t l o a n This study d e a l s w i t h three of these four w a y s that m a y l i m i t t h e a c c e s s to m o r t g a g e c r e d i t . Since our data T h i s is the pracdenial. lenders base i n c l u d e s o n l y f o r m a l a p p l i c a t i o n s , w e a r e u n a b l e to e x a m i n e first m e t h o d , pre-screening by lenders. loan the unfortunate; 2-2 m a n y a l l e g e t h a t p r e - s c r e e n i n g , a l t h o u g h i l l e g a l w h e n it h a s a d v e r s e i m p a c t s o n a p p l i c a n t s f r o m t h e g r o u p s of i n t e r e s t , is a w i d e s p r e a d m e t h o d of lender d i s c r i m i n a t i o n . To the extent t h a t o u r r e s u l t s p r o v i d e e v i d e n c e of d i s c r i m i n a t i o n a t t h e s e q u e n t s t a g e s of t h e l e n d i n g p r o c e s s , t h e y s u g g e s t t h a t c r i m i n a t o r y p r e - s c r e e n i n g may e x i s t as w e l l . sub- dis- The reverse is n o t t r u e , h o w e v e r ; a b s e n c e of e v i d e n c e s u p p o r t i n g c h a r g e s of d i s c r i m i n a t i o n r e l a t e d to f o r m a l a p p l i c a t i o n s d o e s n o t a l a c k of d i s c r i m i n a t i o n a t the p r e - a p p l i c a t i o n imply stage. The f o l l o w i n g s e c t i o n s p r e s e n t the g e n e r a l form of m o d e l s u s e d in o u r e m p i r i c a l a n a l y s i s of b o t h t h e and New York data sets. California First, we outline a portfolio m o d e l of t h e l e n d i n g d e c i s i o n . the choice Second, we discuss the decision- t o - l e n d m o d e l s , m o d e l s t h a t p r e d i c t t h e p r o b a b i l i t i e s of v a r i ous loan application o u t c o m e s such as d e n i a l , a p p r o v a l m o d i f i c a t i o n , and approval with no modification. p r e s e n t t h r e e s e t s of m o r t g a g e t e r m m o d e l s : with Third, we a downward modifi- c a t i o n m o d e l ; a s i m u l t a n e o u s m o d e l of t h e i n t e r e s t r a t e , t e r m t o - m a t u r i t y , and loan-to-value ratio; and a loan fee model. F i n a l l y , we c o n c l u d e the chapter w i t h an o u t l i n e of our apprai- sal model. PORTFOLIO CHOICE MODEL Upon r e c e i v i n g an a p p l i c a t i o n for a m o r t g a g e , a lender d e c i d e w h e t h e r to a p p r o v e t h e a p p l i c a t i o n a s r e c e i v e d , it w i t h some m o d i f i c a t i o n in t e r m s , or t u r n it d o w n . approve Lenders m a y d i s c o u r a g e the s u b m i s s i o n of formal a p p l i c a t i o n s from cants they belive will likely be denied. Applicants may w i t h d r a w their applications prior or subsequent to a must applialso lender's 1-3 decision. (See F i g u r e 2 - 1 f o r a n i l l u s t r a t i o n o f t h e s e decisions.) A lender's decision on a mortgage application can be viewed as a function of b o r r o w e r c h a r a c t e r i s t i c s , the quality of the l a t e r a l , a n d t h e r e q u e s t e d t e r m s a s e x p r e s s e d in t h e col- following model: Pij where P ^ = f(B.,C.,T.) (2.1) = p r o b a b i l i t y of o u t c o m e i ( r a n g i n g from a p p r o v a l as a p p l i e d f o r t o d e n i a l ) the j B. 3 t h on application; = v e c t o r of b o r r o w e r c h a r a c t e r i s t i c s , such as income and net wealth; Cj = v e c t o r of p r o p e r t y c h a r a c t e r i s t i c s d e s c r i b e t h e q u a l i t y of t h e that collateral, and Tj = v e c t o r o f t h e r e q u e s t e d t e r m s of the mortgage. A s n o t e d in C h a p t e r 1 , t h i s l e n d i n g d e c i s i o n s h o u l d b e in a p o r t f o l i o c h o i c e Borrower viewed context. characteristics T h e b a n k is c o n c e r n e d w i t h t h e r e t u r n it w i l l e a r n o n mortgage loan. For any g i v e n loan t e r m s , the net income b y t h e b a n k in a n y y e a r t each received of the loan c o n t r a c t d e p e n d s on whether or not the borrower makes the scheduled payments on time. This, in t u r n , d e p e n d s o n c e r t a i n c h a r a c t e r i s t i c s of t h e b o r r o w e r such a s h i s / h e r i n c o m e in y e a r t . be- A simple linear relationship t w e e n t h e p r o b a b i l i t y o f d e f a u l t in y e a r t (P ) a n d borrower 1-4 Figure 2-1 Figure 2-1 Mortgage Applications and Lender Decisions 1-5 characteristics in y e a r t (Y^) is s h o w n in F i g u r e 2-2. 1 F r o m t h e p e r s p e c t i v e of t h e b a n k e r a t t h e t i m e o f mortgage a p p l i c a t i o n , t h e c h a r a c t e r i s t i c s o f t h e b o r r o w e r in y e a r t a r e unknown. bution. At best, is a r a n d o m v a r i a b l e w i t h a k n o w n distri- Figure 2-3 shows two probability distributions of, example, household i n c o m e in y e a r t w h e r e h o u s e h o l d A ' s for income has a smaller variance than household B's income, while expected 2 incomes of the two h o u s e h o l d s are the same. The banker w a n t s to m a x i m i z e the return on his constrained by his attitude v a r i a n c e of the r e t u r n . portfolio toward risk as measured by the The dollar return (Rt) of a mortgage y e a r t is a r a n d o m v a r i a b l e w i t h m e a n , E R ^ , a n d in variance, 2 E (Rj_-ER^_) . We can express the expected return ERt = X [l-P(Yt)] as: + x'p(Yt) w h e r e X = r e t u r n if n o d e f a u l t , a n d x ' = r e t u r n if b o r r o w e r d e f a u l t s for a l l or p a r t of year collecting (net o f c o s t s o f payments). Given our linear specification of P(Yfc), it can easily be shown — 2 t h a t E R t i s a l i n e a— r 2f u n3 c t i o n o f Y a n d E (R^-ER^_) is a l i n e a r function of EfY^-Y^) . Hence, the expected return on the m o r t g a g e in y e a r t a n d i t s v a r i a n c e d e p e n d o n t h e m e a n and v a r i a n c e o f t h e h o u s e h o l d ' s i n c o m e in y e a r t . The banker b e c o n c e r n e d w i t h t h e r e t u r n in e a c h y e a r o f t h e will mortgage contract; we will keep the analysis simple, however, by o n a s i n g l e y e a r t .4 focusing The p r e c e d i n g d i s c u s s i o n implies that the higher the ex- 1-6 Figure 2-2: P r o b a b i l i t y of D e f a u l t P t a-bY Y Figure 2-3: t Probability Distributions o f H o u s e h o l d Income 1-7 p e c t e d v a l u e of c e r t a i n b o r r o w e r c h a r a c t e r i s t i c s in y e a r t , t h e h i g h e r t h e q u a l i t y such as (Q) of t h e l o a n , w h i l e greater the variance, the lower the q u a l i t y . Hence, we Q = Q(Yt,VarYt), with 3_Q - >0 3 income the have: (2.3) and HQ 9VarY t ^°* T w o i s s u e s a r i s e in t h i s c o n t e x t . First, the banker does not k n o w Y t a n d V a r Y f c a t t h e t i m e of t h e m o r t g a g e d e c i s i o n a n d must project them. S e c o n d , t h e w a y in w h i c h Y t a n d V a r Y ^ c o m - b i n e to d e t e r m i n e q u a l i t y d e p e n d s o n t h e b a n k e r ' s toward thus attitude risk. P r o j e c t i o n of b o r r o w e r c h a r a c t e r i s t i c s . A t t h e t i m e of the lending d e c i s i o n , the banker only has information on c u r r e n t and p a s t c h a r a c t e r i s t i c s of the b o r r o w e r . With i n f o r m a t i o n , the b a n k e r m i g h t use c u r r e n t v a l u e s of the this character- i s t i c s s u c h a s n e t w e a l t h o r i n c o m e a s a p r o x y for f u t u r e pected values. difficult; T h e p r o j e c t i o n of f u t u r e v a r i a n c e s ex- is m o r e the applicant's previous employment stability p r e s e n t s o n e c r u d e m e a s u r e t h a t m i g h t b e u s e d for t h i s re- purpose. T h e l i m i t e d i n f o r m a t i o n on w h i c h to b a s e p r o j e c t i o n s for i n d i v i d u a l h o u s e h o l d s m a y i n d u c e b a n k e r s , in s o m e c a s e s , to simplify their task by categorizing applicants into T h i s a l l o w s t h e m to u s e g r o u p p r o j e c t i o n s , f o r w h i c h groups. informa- tion may be available, rather than individual p r o j e c t i o n s , d e t e r m i n e t h e q u a l i t y of a n a p p l i c a t i o n . To the extent to that 1-8 an applicant household is n o t t y p i c a l of t h e g r o u p in w h i c h it has been categorized or that the group projections are based o n o u t d a t e d s t e r e o t y p e s , t h e b a n k e r ' s e s t i m a t e of t h e o f t h e a p p l i c a t i o n w i l l b e in e r r o r . j e c t i o n s is d i s c u s s e d crimination quality T h i s use of g r o u p pro- f u r t h e r b e l o w in t h e c o n t e x t of t h e d i s - variables. Banker attitudes toward risk. The functional relationship b e t w e e n Y ^ , V a r Y ^ , a n d t h e q u a l i t y of t h e a p p l i c a t i o n the banker's subjective attitudes toward risk. r e p r e s e n t s t w o s e t s of i s o - q u a l i t y c o n t o u r s . presents a different quality level. reflects Figure 2-4 Each contour Since quality re- increases w i t h Y a n d d e c r e a s e s w i t h V a r Y , q u a l i t y r i s e s w i t h m o v e s in a northwesterly direction. B a n k A is m o r e r i s k a v e r s e t h a n b a n k B in t h a t i t is w i l l i n g t o g i v e up m o r e Y f o r a g i v e n in V a r Y t h a n is t h e o t h e r reduction bank. The points C and D represent two different households. A l t h o u g h t h e p r o j e c t e d m e a n i n c o m e of D is h i g h e r t h a n for C , t h e p r o j e c t e d v a r i a n c e of D is h i g h e r , t h e r e b y ing t h e r i s k a s s o c i a t e d w i t h l e n d i n g to D . that increas- For example, house- hold C might represent a white married male engineer while a white married male self-employed entrepreneur. Whether D is p r e f e r r e d t o C o r v i c e - v e r s a d e p e n d s o n t h e b a n k e r ' s tudes toward risk. The more risk averse banker (bank D. The preceding discussion for the c u r r e n t s t u d y . atti- (bank A in Figure 2-4) prefers C w h i l e the more risk n e u t r a l banker B in F i g u r e 2 - 4 ) p r e f e r s yields t w o m a j o r D, implications F i r s t , m e a s u r e s of b o r r o w e r charac- 1-9 Figure 2-4: L e n d e r A t t i t u d e T o w a r d Risk Var Bank A V Var Bank B Y 1-10 teristics (B^) s h o u l d , a s f a r a s p o s s i b l e , i n c l u d e measures of v a r i a n c e as w e l l a s m e a s u r e s of e x p e c t e d v a l u e . Second, d i f f e r e n t t y p e s of b a n k s s h o u l d , a s far a s p o s s i b l e , b e a n a l y z e d s e p a r a t e l y b e c a u s e of t h e i r p o t e n t i a l l y d i f f e r e n t tudes toward risk atti- taking. Customer Relationship. One additional, potentially t a n t , b o r r o w e r c h a r a c t e r i s t i c r e m a i n s to b e m e n t i o n e d : rower's r e l a t i o n s h i p to the lending b a n k . portfolio composition decisions may Because importhe bor- lenders' affect their deposits and hence the total size of their investment portfolio, profit maxi- m i z a t i o n m a y in s o m e i n s t a n c e s i n d u c e b a n k s to g i v e p r i o r i t y lending d e c i s i o n s to their own d e p o s i t o r s . in This appears to be c o m m o n p r a c t i c e , for e x a m p l e , in c o n n e c t i o n w i t h b a n k l o a n s b u s i n e s s firms during periods of tight c r e d i t . In t h i s to situa- t i o n , b u s i n e s s loan recipients m i g h t be required to maintain a given level of compensating balances on d e p o s i t at the lending b a n k s , a p r a c t i c e w h i c h lowers the e f f e c t i v e c o s t to the bank of m a k i n g t h e l o a n . Whether this customer relationship e q u a l l y i m p o r t a n t for m o r t g a g e l e n d e r s is n o t k n o w n . e x t e n t t h a t it e x i s t s a t a l l , p r e f e r e n t i a l m o r t g a g e is To lending b a s e d o n t h e d e p o s i t o r r e l a t i o n s h i p is l i k e l y to b e m o s t lent when mortgage the funds m u s t be rationed by non-price preva- means e i t h e r b e c a u s e of a c r e d i t crunch or b e c a u s e of a b i n d i n g usury law. Q u a l i t y of t h e Collateral T h e q u a l i t y of t h e c o l l a t e r a l c a n b e v i e w e d analogously 1-11 to the b o r r o w e r c h a r a c t e r i s t i c s . The probability that a bank w i l l f o r e c l o s e in y e a r t is d e t e r m i n e d b y t h e p r o b a b i l i t y t h e b o r r o w e r w i l l d e f a u l t in y e a r t a n d b a n k p o l i c y foreclosure. that toward In t h e e v e n t of f o r e c l o s u r e in y e a r t , t h e r e - turn to the bank on the loan d e p e n d s on the v a l u e of the coll a t e r a l in y e a r t , t h e o u t s t a n d i n g of loan b a l a n c e , and the costs foreclosure. H e n c e , a t t h e t i m e of t h e m o r t g a g e a p p l i c a t i o n , t h e m u s t p r o j e c t d i s t r i b u t i o n s of the p r o p e r t y v a l u e for years of the m o r t g a g e c o n t r a c t . lender future The current market value of t h e p r o p e r t y is p r e s u m a b l y t h e b e s t s i n g l e m e a s u r e of t h e p e c t e d v a l u e of t h e p r o p e r t y . fully the variance It does n o t , h o w e v e r , ex- incorporate in t h e e x p e c t e d v a l u e o f t h e p r o p e r t y . To the extent that house buyers are concerned about future sala- bility and uncertainty, market values will reflect both market e x p e c t a t i o n s a b o u t the future s a l a b i l i t y of i n d i v i d u a l prop- erties and the certainty with which those expectations are held. The more uncertain buyers are about the future expected s a l e s p r i c e of a p r o p e r t y , t h e m o r e i t s m a r k e t v a l u e w i l l b e discounted. However, market values do not reflect all the risks borne by lenders because mortgagors and mortgagees may h a v e d i f f e r e n t e x p e c t a t i o n s a b o u t the u s e f u l life of the prop- e r t y o r t h e f u t u r e v i a b i l i t y of t h e n e i g h b o r h o o d a n d a r e likely to d i s c o u n t u n c e r t a i n t i e s a t d i f f e r e n t rates. S o m e of these d i f f e r e n c e s b e t w e e n m o r t g a g o r s and mortg a g e e s m a y b e r e f l e c t e d in d i f f e r e n c e s b e t w e e n t h e value and the sales p r i c e . appraised For example, appraisers might value 1-12 properties below the sales price because lenders use a longer time horizon than the purchaser (mortgage applicant) when pre- d i c t i n g e v e n t s t h a t m i g h t a f f e c t t h e f u t u r e v a l u e of t h e p r o p erty, because lenders attach more weight than the purchaser to the u n c e r t a i n t y a s s o c i a t e d w i t h h o u s i n g m a r k e t externali- ties ( i . e . t h e e f f e c t s o n t h e m a r k e t v a l u e of a n y g i v e n e r t y of t h e c o n d i t i o n s of s u r r o u n d i n g p r o p e r t i e s a n d prop- the n e i g h b o r h o o d ) , or because the lender lacks control over decisions of the purchaser (e.g. m a i n t e n a n c e ) the property's future value. that will affect Thus, from the perspective the lender, the appraised value may be a better proxy the sales p r i c e for the future v a l u e of the than property. In a d d i t i o n t o a p p r a i s e d v a l u e , l e n d e r s a r e l i k e l y pay particular attention to neighborhood ing the q u a l i t y of the c o l l a t e r a l . i n c o m e in t h e n e i g h b o r h o o d of to f a c t o r s in d e t e r m i n - Measures such as the o r t h e e x t e n t of h o u s i n g c o d e t i o n s , for e x a m p l e , m i g h t Jje u s e d as p r o x i e s for t h e average viola- expected o u t l o o k for t h e n e i g h b o r h o o d w h i l e t h e r a t e of c h a n g e of in- c o m e o r of p o p u l a t i o n m i g h t b e u s e d a s p r o x i e s f o r t h e v a r i ance associated with that expected outlook; such measures assume that the greater the past i n s t a b i l i t y , the greater e x p e c t e d v a r i a n c e in t h e the future. H e n c e , as in t h e c a s e of b o r r o w e r c h a r a c t e r i s t i c s , w h e n e x a m i n i n g t h e q u a l i t y of t h e c o l l a t e r a l (for a n y g i v e n terms of t h e m o r t g a g e , i n c l u d i n g t h e l o a n t o v a l u e r a t i o ) , t h e n e e d s to p r o j e c t b o t h t h e e x p e c t e d f u t u r e v a l u e o f the property a n d t h e v a r i a n c e of t h a t f u t u r e v a l u e in o r d e r t o p r o j e c t lender the 1-13 e x p e c t e d r a t e o f r e t u r n a n d v a r i a n c e of a s p e c i f i c One additional complication should be noted. mortgage. The future value o f t h e p r o p e r t y m a y i n f l u e n c e t h e r e t u r n to t h e b a n k in t w o w a y s , f i r s t d i r e c t l y t h r o u g h i t s i m p a c t o n t h e s a l e s v a l u e in the e v e n t of f o r e c l o s u r e and second i n d i r e c t l y through its on borrower d e c i s i o n s . If t h e v a l u e o f t h e p r o p e r t y impact should decline below the outstanding loan a m o u n t , the b o r r o w e r , gardless of h i s / h e r a b i l i t y to make loan p a y m e n t s , may to d e f a u l t , t h e r e b y h a s t e n i n g Loan re- decide foreclosure. Terms T h e f i n a l e l e m e n t o f t h e p o r t f o l i o c h o i c e m o d e l is t h e lender's c h o i c e of t e r m s . T h e d e c i s i o n - t o - l e n d m o d e l , as i f i e d in E q u a t i o n 2 - 1 i n c l u d e s a s i n d e p e n d e n t v a r i a b l e s spec- the t e r m s as r e q u e s t e d b y t h e b o r r o w e r . These might include the borrower's requested interest rate (presumably the lowest market rate of i n t e r e s t , c o n s i s t e n t w i t h the other t e r m s ) , m a t u r i t y period, and the loan-to-value r a t i o . Holding other factors stant, the higher the interest rate, the greater is t h e con- expected r e t u r n to t h e l e n d e r , w h i l e t h e l o n g e r t h e m a t u r i t y p e r i o d or t h e h i g h e r t h e l o a n - t o - v a l u e r a t i o , t h e g r e a t e r is t h e r i s k sociated with the loan. If, after e v a l u a t i n g a m o r t g a g e a p p l i c a t i o n , the lender decides that the loan w o u l d represent an u n a c c e p t a b l e risk r e l a t i o n to the e x p e c t e d r e t u r n , the lender can c h o o s e b r i n g t h e r e t u r n in l i n e w i t h t h e r i s k . Raising the in either to r e f u s e t o g r a n t t h e l o a n a t a l l o r to m o d i f y t h e t e r m s as- to interest 1-14 r a t e is g e n e r a l l y t h e s i m p l e s t w a y of m a k i n g t h e t e r m s m o r e f a v o r a b l e to t h e l e n d e r , b u t in s o m e s t a t e s m a y b e r u l e d by binding usury laws. out In a d d i t i o n , l e n d e r s m a y d e c r e a s e the loan amount below the requested amount, thereby decreasing loan-to-value ratio. the V a r i a t i o n s in t h e m a t u r i t y p e r i o d o f loan are m o r e d i f f i c u l t to i n t e r p r e t . On the one hand, the shorten- ing t h e m a t u r i t y p e r i o d w o u l d a p p e a r to r e d u c e t h e r i s k i n e s s t h e i n v e s t m e n t to t h e b a n k s i n c e s h o r t t e r m e v e n t s a r e m o r e dictable than long term e v e n t s . On the other h a n d , the maturity may increase the risk, other factors held of pre- shorter constant, b y i n c r e a s i n g t h e s i z e o f t h e m o n t h l y p a y m e n t s in r e l a t i o n to income. Summary The previous discussion can be summarized as follows. c o m p l e t e m o d e l of t h e o u t c o m e of a n o n d i s c r i m i n a t o r y decision process would a) A lending include: C u r r e n t or p a s t c h a r a c t e r i s t i c s of the applicant representing both the expected level and the of f u t u r e c h a r a c t e r i s t i c s variance (for e x a m p l e , c u r r e n t in- c o m e , c u r r e n t net w e a l t h , employment h i s t o r y , and credit b) history). C h a r a c t e r i s t i c s representing the applicant's tionship to the lending bank (for e x a m p l e , w h e t h e r o r n o t a p p l i c a n t is a d e p o s i t o r at the c) rela- C h a r a c t e r i s t i c s of the p r o p e r t y and its bank). neighborhood r e p r e s e n t i n g t h e e x p e c t e d v a l u e of t h e p r o p e r t y and 1-15 v a r i a n c e of its v a l u e neighborhood (for e x a m p l e , a p p r a i s e d i n c o m e , c h a n g e in n e i g h b o r h o o d p o p u l a t i o n , c h a n g e in p o p u l a t i o n , a v e r a g e value, income, housing prices). d) Requested terms (for e x a m p l e , i n t e r e s t r a t e , l o a n to a p p r a i s e d v a l u e r a t i o , a n d m a t u r i t y period). A l t h o u g h t h e v a r i a b l e s a r e l i s t e d s e p a r a t e l y in t h e above o u t l i n e , their potential interaction should be n o t e d . For example, borrower income interacts with the requested terms a s a d e t e r m i n a n t o f t h e q u a l i t y of t h e a p p l i c a t i o n . The ques- t i o n is w h e t h e r h o u s e h o l d i n c o m e w i l l b e s u f f i c i e n t to p e r m i t the h o u s e h o l d to m a k e the required m o n t h l y p a y m e n t s w h i c h are determined the maturity jointly by the interest r a t e , loan a m o u n t , and period. T h e s e p o r t f o l i o c h o i c e c o n s i d e r a t i o n s a p p l y to a l l of t h e d e c i s i o n - t o - l e n d p r o c e s s . into two p a r t s . aspects This process can be divided F i r s t , for all a p p l i c a t i o n s the lender must d e c i d e w h e t h e r to g r a n t t h e l o a n a s r e q u e s t e d , to g r a n t it a f ter m o d i f y i n g t h e l o a n a m o u n t , or to d e n y i t . approved contract. the S e c o n d , for l o a n s , t h e l e n d e r m u s t s e t t h e t e r m s of t h e all mortgage In t h e n e x t s e c t i o n , w e f o c u s o n t h e f i r s t s t a g e of process. DECISION MODEL U s i n g d a t a f r o m i n d i v i d u a l m o r t g a g e a p p l i c a t i o n s on b o r r o w e r c h a r a c t e r i s t i c s a n d q u a l i t y of c o l l a t e r a l l i s t e d a b o v e And the variables o n t h e o u t c o m e of t h e d e c i s i o n p r o c e s s (e.g. 1-16 deny, a c c e p t , or m o d i f y ) , m o d e l s of t h e f i r s t s t a g e of the landing decision can be e s t i m a t e d . T w o m a j o r t y p e s of m o d e l s a r e a v a i l a b l e for t h i s p u r p o s e : models. linear and A l t h o u g h e a s i e r a n d c h e a p e r to e s t i m a t e S-shaped than S - s h a p e d models, linear models have three major drawbacks: first, the predicted p r o b a b i l i t i e s may fall outside the zero-to-one r e a s o n a b l e for p r o b a b i l i t i e s ; range s e c o n d , e a c h v a r i a b l e is c o n - s t r a i n e d to h a v e a c o n s t a n t m a r g i n a l i m p a c t o n t h e probability that a certain action w i l l be taken; and t h i r d , linear m o d e l s d o n o t s i m u l t a n e o u s l y a c c o u n t for t h e p o s s i b i l i t y of m o r e two outcomes. T h e f i r s t t w o p o i n t s a r e i l l u s t r a t e d b y the line labeled "linear" in F i g u r e 2 - 5 in w h i c h t h e probability of d e n i a l is d e p i c t e d a s a f u n c t i o n of t h e r e q u e s t e d value than loan-to- ratio. A n a p p r o p r i a t e l y s p e c i f i e d S - s h a p e d c u r v e a l l o w s the p r o b a - b i l i t y to a p p r o a c h z e r o a n d o n e a s s y m p t o t i c a l l y , a n d a l l o w s an i n d e p e n d e n t v a r i a b l e ' s m a r g i n a l i m p a c t on the p r o b a b i l i t y of an o u t c o m e to v a r y w i t h t h e p r o b a b i l i t y o f t h a t o u t c o m e . For e x a m p l e , a g i v e n i n c r e a s e in the r e q u e s t e d l o a n - t o - v a l u e ratio h a s an s m a l l e r i m p a c t o n t h e p r o b a b i l i t y of d e n i a l for low or h i g h d e n i a l p r o b a b i l i t i e s t h a n for i n t e r m e d i a t e probabilities. T h e s p e c i f i c t e c h n i q u e u s e d in t h i s s t u d y i n v o l v e s esti- mating S-shaped curves using multinomial logit analysis. By e s t i m a t i n g t h e l o g a r i t h m of t h e o d d s r a t h e r t h a n t h e p r o b a b i l i t y d i r e c t l y , t h e l o g i t m o d e l h a s an S - s h a p e d f o r m r e m a i n s w i t h i n t h e z e r o - t o - o n e b o u n d s of that probability. In a d d i t i o n , t h i s t e c h n i q u e a l l o w s t h e s i m u l t a n e o u s con- 1-17 Figure 2-5: S-Shaped Versus Linear Model 1-18 s i d e r a t i o n of m o r e than two o u t c o m e s . If t h e r e a r e f o u r o u t - c o m e s , three independent equations can be estimated within t h e c o n s t r a i n t t h a t t h e s u m of t h e p r o b a b i l i t i e s of a l l outcomes must be one. Therefore, one outcome becomes r e f e r e n c e p o i n t for c a l c u l a t i n g the o d d s . = 3X and More four the specifically, for i = 2 , 3 , 4 (2.4) 4 IP. = 1 l i=l (2.5) th w h e r e P ^ is t h e p r o b a b i l i t y o f t h e i of e x p l a n a t o r y v a r i a b l e s , a n d o u t c o m e , X is a v e c t o r 3 is a v e c t o r o f p a r a m e t e r s . four choices are tied together simultaneously through P Equation 2.5. and Ideally, the vector X should include all the vari- a b l e s d i s c u s s e d a b o v e in t h e c o n t e x t o f t h e p o r t f o l i o model. All In o t h e r w o r d s , X w o u l d i n c l u d e b o r r o w e r choice characteristics, property and neighborhood c h a r a c t e r i s t i c s , and requested terms. Discrimination As discussed in C h a p t e r 1 , p r e j u d i c i a l a t t i t u d e s of bankers o r s t a n d a r d o p e r a t i n g p r o c e d u r e s d e s i g n e d t o r e d u c e c o s t s or to s i m p l i f y t h e e v a l u a t i o n of a p p l i c a t i o n s m a y l e a d l e n d e r s t o m a k e mortgage lending decisions that discriminate some borrowers. illegally To ascertain whether discrimination against on b a s i s o f s e x , m a r i t a l s t a t u s , a g e , or p r o p e r t y l o c a t i o n a t t h e f i r s t s t a g e of t h e l e n d i n g p r o c e s s , w e c a n a d d exists variables m e a s u r i n g those c h a r a c t e r i s t i c s to the m u l t i n o m i a l logit the model 1-19 a n d t e s t for t h e i r s t a t i s t i c a l significance. T h e n a t u r e of s t a t i s t i c a l h y p o t h e s i s t e s t i n g m a k e s d i f f i c u l t to p r o v e that d i s c r i m i n a t i o n e x i s t s . If t h e it discrimi- n a t i o n v a r i a b l e s a r e n o t s t a t i s t i c a l l y s i g n i f i c a n t , it c a n inferred that discrimination is n o t a f a c t o r , p r o v i d e d that the discrimination variables are correctly specified and they are not correlated with any relevant variables b e c a u s e of i n a d e q u a t e i n f o r m a t i o n . be that excluded If t h e d i s c r i m i n a t i o n vari- ables are statistically significant, on the other h a n d , we only state that the results are consistent with the of d i s c r i m i n a t o r y b e h a v i o r . existence The e x t e n t to w h i c h a r e s u l t i n t e r p r e t e d a s s u p p o r t for t h e h y p o t h e s i s of is discrimination d e p e n d s o n t h e c o m p l e t e n e s s of t h e r e s t of t h e m o d e l ; t h a t o n h o w w e l l t h e m o d e l c o n t r o l s for t h e n o n d i s c r i m i n a t o r y t h a t e n t e r i n t o t h e d e c i s i o n to Sex. lend. t h e b a s i s of t h e s e x o f t h e a p p l i c a n t o r a p p l i c a n t s , w e d e f i n e t h e f o l l o w i n g t h r e e c a t e g o r i e s of no male 2) M a l e - f e m a l e : one male applicant and one female first applicant applicant applicant Categories 1 and 3 include both individual and joint tions on applications: 1) F e m a l e o n l y : no female is, factors T o t e s t for d i s c r i m i n a t i o n b y m o r t g a g e l e n d e r s 3) M a l e o n l y : can applica- (the j o i n t a p p l i c a n t is o f t e n r e f e r r e d t o a s t h e co-appli- cant) while category 2, by definition, includes only joint ap- plications . The s i m p l e s t form of sex d i s c r i m i n a t i o n could be by examined a d d i n g ; t o t h e p o r t f o l i o c h o i c e m o d e l v a r i a b l e s for t w o o f 1-20 these three c a t e g o r i e s , using the excluded category as a b a s e . In o t h e r w o r d s , t w o v a r i a b l e s m i g h t b e a d d e d , o n e whether the application denoting is f e m a l e o n l y a n d t h e o t h e r m a l e T h e c o e f f i c i e n t s of t h e s e t w o v a r i a b l e s in t h e p r o b a b i l i t y d e n i a l e q u a t i o n w o u l d then m e a s u r e the impact of an all o r a l l m a l e a p p l i c a t i o n o n t h e p r o b a b i l i t y of d e n i a l to t h e m o r e t r a d i t i o n a l m a l e - f e m a l e a p p l i c a t i o n , for o t h e r r e l e v a n t only. of female compared controlling factors. T e s t i n g f o r d i s c r i m i n a t i o n o n t h e b a s i s of s e x is c o m p l i c a t e d b y the fact t h a t l e n d e r s , to the e x t e n t they discrim- i n a t e , m a y not d i s c r i m i n a t e equally a g a i n s t all m e m b e r s of a particular sex. For e x a m p l e , consider the finding of a sta- tistically insignificant coefficient on the female-only vari- a b l e in t h e p r o b a b i l i t y of d e n i a l e q u a t i o n . hand, On the one t h i s m a y r e f l e c t a t r u e a b s e n c e of d i s c r i m i n a t i o n a g a i n s t a p p l i c a n t s ; o n t h e o t h e r h a n d , it m a y a l s o b e c o n s i s t e n t discrimination against some female a p p l i c a n t s , such as of c h i l d b e a r i n g a g e , b u t n o t a g a i n s t o t h e r s . female with those To test this more subtle h y p o t h e s i s , the m o d e l would need to be respecified with two female sex v a r i a b l e s , one d e n o t i n g t h a t at l e a s t one of the female applicants none is o f c h i l d b e a r i n g a g e a n d t h e o t h e r t h a t o f t h e f e m a l e a p p l i c a n t s is o f c h i l d b e a r i n g age. T h e a l l e g a t i o n s r e l a t i n g to s e x d i s c r i m i n a t i o n outlined in c h a p t e r 1 i n d i c a t e t h e d e s i r a b i l i t y o f w o r k i n g w i t h a m o r e d e t a i l e d b r e a k d o w n t h a t t a k e s a c c o u n t o f w h e t h e r or n o t the f e m a l e a p p l i c a n t is in t h e c h i l d b e a r i n g a g e r a n g e o r is employed. The distinction between working and non-working female 1-21 applicants reflects the allegation that bankers may discriminate a g a i n s t a p p l i c a t i o n s w h e r e p a r t of the income c o m e s from an a l l e g e d l y u n r e l i a b l e s o u r c e , the e a r n i n g s of the w o r k i n g woman. The break-down between childbearing and non-childbearing age females captures the potential distinction made by bankers between those w o m e n for whom the threat of pregnancy increases t h e p r o b a b i l i t y t h a t t h e y w i l l l e a v e t h e l a b o r f o r c e or w i l l i n c u r a d d i t i o n a l e x p e n s e s a n d t h o s e for w h o m l i t t l e t h r e a t is present. To i m p l e m e n t this d i s a g g r e g a t e d m o d e l , o n e type of cant would again be excluded from the m o d e l and used as applithe b a s e and s e p a r a t e v a r i a b l e s d e f i n e d for all the r e m a i n i n g of a p p l i c a n t s . In g e n e r a l , w e e x c l u d e t h e t y p e o f types applicant l e a s t l i k e l y t o b e d i s c r i m i n a t e d a g a i n s t ; in t h i s c a s e , i t is the joint application from a m a l e - f e m a l e couple w i t h the w o m a n beyond childbearing age. T h e e m p l o y m e n t s t a t u s of w o m e n c a n t s is t r e a t e d d i f f e r e n t l y in N e w Y o r k t h a n in appli- California. In N e w Y o r k , w e o n l y k n o w w h e t h e r o r n o t t h e f e m a l e applicant w o r k s w h i l e in C a l i f o r n i a w e k n o w t h e a c t u a l i n c o m e e a r n e d by all applicants. T h e r e f o r e , in N e w Y o r k t h e w o r k i n g s t a t u s of w o m e n is a n a l y z e d b y a d d i n g t h i s f a c t o r t o t h e d e s c r i p t i o n of the types of a p p l i c a n t s ; the b a s e would then be a joint cation from a male-female couple with a nonworking woman childbearing age. beyond T h e f e a s i b i l i t y o f t h i s a p p r o a c h in a n y ticular data set depends on the numbers of the from the various types of applicants; par- observations in m a n y c a s e s d a t a t a t i o n s m a y r e q u i r e types of a p p l i c a t i o n s to b e appli- limi- consolidated. 1-22 T h e a l l e g a t i o n of i n c o m e d i s c o u n t i n g c a n b e t e s t e d more e x p l i c i t l y in C a l i f o r n i a w h e r e i n f o r m a t i o n o n t h e separate i n c o m e s o f t h e a p p l i c a n t a n d t h e c o - a p p l i c a n t is available. With such d a t a , models can be specified that allow explicitly f o r d i f f e r e n t i a l t r e a t m e n t o f t h e i n c o m e of t h e p r i m a r y secondary workers. and In a d d i t i o n , t h e s e m o d e l s c a n b e u s e d t e s t t h e h y p o t h e s i s t h a t l e n d e r s t r e a t t h e i n c o m e of to the s e c o n d a r y w o r k e r d i f f e r e n t l y f o r f e m a l e w o r k e r s t h a n for m a l e workers. Marital Status. The basic application categories to m a r i t a l status are c o n s t r u c t e d as 1) U n m a r r i e d : relating follows: at least one applicant unmarried, none separated, 2) S e p a r a t e d : 3) M a r r i e d : at least one applicant separated, No a p p l i c a n t unmarried or separated, w h e r e a n u n m a r r i e d a p p l i c a n t is o n e w h o is e i t h e r s i n g l e m a r r i e d ) , d i v o r c e d , or w i d o w e d . A n a l o g o u s l y to t h e s e x d i s - c r i m i n a t i o n c a s e , the s i m p l e s t test for m a r i t a l discrimination i n v o l v e s i n c l u d i n g in t h e p o r t f o l i o c h o i c e m o d e l r e p r e s e n t i n g two of the three categories; ried" (never variables the c a t e g o r y "mar- is t h e l o g i c a l c h o i c e a s a b a s e s i n c e a p p l i c a t i o n s married couples r e p r e s e n t the traditional type of by mortgage application. A g a i n , such a simple specification may be inadequate d e t e c t d i s c r i m i n a t i o n on the basis of m a r i t a l status where such discrimination other types. interacts w i t h d i s c r i m i n a t i o n of As a related point, this simple specification does to 1-23 not p e r m i t a test of the h y p o t h e s i s that u n m a r r i e d w o m e n discriminated against vis-a-vis unmarried men. H e n c e , the final model specifications interact the marital status gories w i t h sex of the a p p l i c a n t , and w h e r e data are w i t h the age of the female a p p l i c a n t . a v a i l a b l e o n l y for N e w are cate- adequate, Marital status data are York. R a c e of A p p l i c a n t . The allegations of discriminatory lend- ing o n t h e b a s i s o f t h e r a c e of t h e a p p l i c a n t a r e t e s t e d b y c l u d i n g s e p a r a t e v a r i a b l e s for e a c h n o n - m i n o r i t y r a c i a l sufficiently represented in t h e p a r t i c u l a r s a m p l e . subdi- category, used as the b a s e , includes all those a p p l i c a n t s for w h i c h a p p l i c a n t is a m e m b e r o f a r a c i a l A g e of A p p l i c a n t . no minority. A p p l i c a n t s are grouped into o n e of age c a t e g o r i e s to test for a g e - b a s e d d i s c r i m i n a t i o n . gories sam- catego- r i e s ; in o t h e r s , t h e " o t h e r m i n o r i t i e s " c a t e g o r y c a n b e The non-minority category In s o m e ples, black and other minorities are the only feasible v i d e d i n t o H i s p a n i c s a n d Asians.^ in- The five cate- are: 1) U n d e r 25 years, 2) 25 to 34 years, 3) 35 to 44 years, 4) 45 to 54 years, 5) 55 o r m o r e The middle age years. (35 t o 44) g r o u p h a s b e e n s e l e c t e d t o s e r v e as t h e b a s e b e c a u s e a p p l i c a n t s in t h a t g r o u p a r e l e a s t l i k e l y to be discriminated against. Property Location or Neighborhood F a c t o r s . Redlining 1-24 allegations are examined in two w a y s . First, the geographic area containing the property is identified through dummy variables. In the New York and a few of the California metropoli- tan a r e a s , w e are able to test local allegations that certain neighborhoods are redlined by lenders. In the other metropol- itan a r e a s , we are only able to compare lending decisions in the central city(s) to those in the surrounding suburbs. In all cases, a suburban area is the base for comparison. Second, neighborhood characteristics such as the racial composition or the age of the neighborhood are included to test for discrimination against largely minority or very old neighborhoods. It should be noted that the results for the age of the neighborhood measure are likely to be ambiguous because of its correlation with objective measures of the risk of loss (such as the condition of specific property) that may have been excluded. Although this is likely to be the case in the New York m o d e l s , the California models include the age of the specific property. T h e r e f o r e , the age of the neighborhood measure (fraction of housing built before 1940) probably provides a reasonably clear test of discrimination against old neighborhoods in California. A t the same time, the exact meaning of the coefficients of the building age variables is probably ambiguous because they could represent risk factors building condition) or discrimination buildings)• (e.g., (e.g., against old 1-25 MORTGAGE TERMS MODELS Whether or not illegal discrimination exists at the loan decision stage, institutional lenders may discriminate in the setting of mortgage terms. models relating to terms: This section describes three (1) a model of downward adjustments of loan amounts for modified loans, (2) a complete model of mortgage terms for all approved loans, and (3) a model of loan fees. With the exception of the loan fee m o d e l , the portfolio choice considerations outlined at the beginning of this chapter are applicable. Modified Loan Amount The decision to lend model predicts the probabilities a r a n g e o f o u t c o m e s , o n e of w h i c h i n v o l v e s m o d i f y i n g t h e amount. loan T h e d i s c r i m i n a t i o n v a r i a b l e s in t h e m o d i f i c a t i o n tion are hard to interpret, h o w e v e r , because some of equa- applicants m a y b e m o r e a g g r e s s i v e t h a n o t h e r s in s e e k i n g l a r g e l o a n s , a n d the equation does not distinguish between large and small modifications. To supplement the modification m o d e l , we the sample to loans t h a t are m o d i f i e d d o w n w a r d and a m o d e l o f t h e d o l l a r a m o u n t of m o d i f i c a t i o n . estimate Defining as the requested amount minus the granted amount n u m b e r ) , the model can be expressed as restrict MODOWN (a p o s i t i v e follows: MODOWN = f(REQLOAN, R I S K , DISC) (2.6) where REQLOAN is the requested loan amount, R I S K is t h e r i s k o f t h e l o a n a s m e a s u r e d by 2-26 a v e c t o r of f i n a n c i a l characteristics of t h e b o r r o w e r a n d t h e p r o p e r t y , 7 the requested t e r m s , and D I S C is a v e c t o r of d i s c r i m i n a t i o n The higher the requested given variables. loan, all other factors held c o n s t a n t , t h e l a r g e r t h e d o l l a r a m o u n t of t h e m o d i f i c a t i o n l i k e l y to b e . Risk factors enter positively since the is higher the risk associated with the requested t e r m s , the greater t h e i n c e n t i v e f o r t h e l e n d e r to r e d u c e t h e r i s k b y t h e s i z e of t h e l o a n . is reducing F i n a l l y , a f i n d i n g of a p o s i t i v e sign on one or more of the d i s c r i m i n a t i o n v a r i a b l e s w o u l d be cons i s t e n t w i t h t h e h y p o t h e s i s of d i s c r i m i n a t o r y b e h a v i o r . a m p l e , a positive sign on the variable representing For applicants o v e r 54 y e a r s o l d w o u l d i m p l y t h a t , a m o n g t h o s e a p p l i c a n t s a p p l i c a t i o n s a r e m o d i f i e d d o w n w a r d , o l d p e o p l e on 34-45 Provided the other variables included in t h e e q u a t i o n a d e q u a t e l y c o n t r o l f o r t h e r i s k of l o s s , a finding can be i n t e r p r e t e d as d i s c r i m i n a t o r y b e h a v i o r l e n d e r s r a t h e r t h a n a s a r e f l e c t i o n of e x c e s s i v e l o a n by that age whose average experience larger modifications ceteris paribus than the year old reference g r o u p . ex- such by demands group. S i n c e this m o d e l has v e r y few data r e q u i r e m e n t s beyond those needed to e s t i m a t e the d e c i s i o n - t o - l e n d m o d e l s , it can be estim a t e d in b o t h N e w Y o r k a n d C a l i f o r n i a in a n y m e t r o p o l i t a n area w i t h a s u f f i c i e n t number of d o w n w a r d m o d i f i e d a p p l i c a t i o n s . specific variables included as m e a s u r e s of risk or tory b e h a v i o r w i l l vary across the two states and The discriminaacross 1-27 metropolitan areas. Interest R a t e , Maturity P e r i o d , and Loan-to-Value Ratio H a v i n g d e c i d e d to g r a n t m o r t g a g e c r e d i t , the lending bank m u s t set the terms of the mortgage contract, including the interest rate, maturity, and loan-to-value ratio. final The terms r e f l e c t the c o m p l e x i n t e r a c t i o n of b o r r o w e r and lender p r e f e r e n c e s , o b j e c t i v e m e a s u r e s of r i s k , and p o s s i b l y discrimi- n a t o r y b e h a v i o r on the p a r t of the lending i n s t i t u t i o n . It should be noted that both lenders and borrowers may be willing to make trade-offs among the three terms. For example, a lender m a y c h a r g e an a b o v e a v e r a g e interest rate as c o m p e n s a t i o n for the additional risk associated with a longer than average matu- r i t y or a h i g h e r than a v e r a g e l o a n - t o - v a l u e r a t i o , or m a y be w i l l i n g to i n c r e a s e t h e l o a n a m o u n t , l e a d i n g t o a h i g h e r t o - v a l u e r a t i o , in r e t u r n for a s h o r t e r m a t u r i t y p e r i o d . larly, a borrower may prefer a higher interest rate H e n c e , a c o m p l e t e m o d e l of Simi- combined w i t h a long m a t u r i t y p e r i o d to a lower i n t e r e s t rate with a short maturity. loan- combined mortgage t e r m s should i n c o r p o r a t e the s i m u l a t a n e o u s d e t e r m i n a t i o n of three variables. C o n s e q u e n t l y , a system of s i m u l t a n e o u s t i o n s is n e e d e d t o a n a l y z e t h e t h r e e j o i n t l y d e t e r m i n e d gage equamort- terms. T h e following three e q u a t i o n s summarize the m o d e l used this the in study: INT = f ( M A T , L T O A V , INT , V R M , R I S K , DISC) (2.7) MAT = h ( I N T , L T O A V , R E Q M A T , R I S K , DISC) (2.8) 1-28 LTOAV = g ( I N T , M A T , R L T O A V , R I S K , DISC) (2.9) where I N T is t h e c o n t r a c t i n t e r e s t M A T is t h e m a t u r i t y rate; period; L T O A V is t h e r a t i o o f t h e g r a n t e d l o a n a m o u n t to the INT m p r a i s e d v a l u e of t h e property; is t h e m a r k e t r a t e of interest; V R M is e q u a l t o o n e if t h e m o r t g a g e is a v a r i a b l e mortgage and zero ap- rate otherwise; R I S K is r i s k a s m e a s u r e d b y a v e c t o r of f i n a n c i a l t e r i s t i c s of the b o r r o w e r and the D I S C is a v e c t o r of d i s c r i m i n a t i o n charac- property; variables; R E Q M A T is t h e r e q u e s t e d m a t u r i t y p e r i o d ; and R L T O A V is t h e r a t i o o f t h e r e q u e s t e d l o a n a m o u n t t o t h e a p p r a i s e d v a l u e of the property. The signs of the e n d o g e n o u s v a r i a b l e s are h a r d to p r e d i c t since they r e f l e c t a c o m p l e x interaction of b o r r o w e r and lender preferences. In a d d i t i o n t o t h e t h r e e j o i n t l y d e t e r m i n e d variables endogenous (INT, M A T , L T O A V ) , the m o d e l includes m a r k e t ( e . g . I N T ^ a n d V R M in t h e I N T e q u a t i o n ) , m e a s u r e s of preference factors borrower ( e . g . R E Q M A T in t h e M A T e q u a t i o n a n d R L T O A V in t h e L T O A V e q u a t i o n ) , m e a s u r e s o f t h e r i s k i n e s s of t h e l o a n t o t h e b a n k as m e a s u r e d by the f i n a n c i a l c h a r a c t e r i s t i c s of the borrower and the property (RISK), and discrimination variables (DISC). Controlling f o r m a t u r i t y terra p e r i o d (MAT) a n d loan-to-value 2-29 ratio (LTOAV) a n d in t h e a b s e n c e o f d i s c r i m i n a t o r y vior, the contract interest rate lending (INT) on an a p p r o v e d l o a n expected to be h i g h e r the higher the m a r k e t rate of behais interest, to be lower on v a r i a b l e rate loans than fixed rate loans pro- v i d e d i n t e r e s t r a t e s a r e e x p e c t e d to c o n t i n u e r i s i n g , a n d to b e h i g h e r t h e g r e a t e r t h e r i s k i n e s s of t h e l o a n to t h e b a n k where r i s k is m e a s u r e d b y t h e f i n a n c i a l c h a r a c t e r i s t i c s of t h e b o r rower and the p r o p e r t y . Because borrowers always prefer to higher interest r a t e s , controlling for t h e o t h e r t e r m s , b o r r o w e r p r e f e r e n c e s a r e n o t i n c l u d e d as an v a r i a b l e in t h e i n t e r e s t r a t e e q u a t i o n . lower mortgage explanatory Discriminatory b e h a v i o r w i t h r e s p e c t to c o n t r a c t i n t e r e s t r a t e s c a n b e lending examined b y t e s t i n g for t h e s t a t i s t i c a l s i g n i f i c a n c e o f e a c h of a v e c t o r of v a r i a b l e s r e p r e s e n t i n g c a t e g o r i e s of r a c e , s e x , m a r i t a l t u s , a g e , location of p r o p e r t y , and age and racial of the n e i g h b o r h o o d . sta- composition A f i n d i n g of h i g h e r i n t e r e s t r a t e s for a n y o n e of t h e s e c a t e g o r i e s w o u l d b e c o n s i s t e n t w i t h t h e h y p o t h e s i s of d i s c r i m i n a t o r y behavior. T h e l o g i c of t h e m a t u r i t y e q u a t i o n is s i m i l a r t o t h a t o f the interest rate equation. From the lender's perspective, h i g h e r r i s k l e g i t i m a t e l y r e q u i r e s h a r s h e r t e r m s , in t h i s shorter maturities. Since discriminatory motives would case also l e a d b a n k e r s to i m p o s e h a r s h e r t e r m s , a f i n d i n g o f s h o r t e r t u r i t i e s a s s o c i a t e d w i t h a n y o n e of t h e s u s p e c t categories w o u l d b e c o n s i s t e n t w i t h t h e h y p o t h e s i s of d i s c i m i n a t o r y v i o r , provided the equation were properly beha- specified. In c o n t r a s t to t h e i n t e r e s t r a t e c a s e , h o w e v e r , w h e r e ma- 1-30 borrowers unambiguously prefer lower interest rates, control- l i n g for t h e o t h e r m o r t g a g e t e r m s , d i f f e r e n t b o r r o w e r s may p r e f e r d i f f e r e n t m a t u r i t i e s d e p e n d i n g o n t h e i r s t a g e in the l i f e c y c l e , t h e i r e x p e c t e d p a t t e r n s of f u t u r e i n c o m e a n d s i z e of t h e i r r e q u e s t e d loan. Ideally, the borrower's the re- quested maturity should be included explicitly in t h e m a - t u r i t y e q u a t i o n a s i n d i c a t e d in e q u a t i o n 2 . 8 . To the extent that data limitations prevent this preference variable from being correctly m e a s u r e d , the discrimination variables must be interpreted cautiously. F o r e x a m p l e , if t h e p r e f e r e n c e o f p e o p l e for s h o r t e r m a t u r i t i e s older is n o t f u l l y c a p t u r e d in t h e p r e f - erence variable, a statistical finding that older applicants up with shorter maturity loans than younger applicants does necessarily imply that lenders discriminate against old On the other h a n d , even w i t h an imperfectly specified end not people. borrower preference variable, a finding that black applicants are given shorter maturity loans on average than similarly situated white applicants m i g h t legitimately be interpreted as indicating dis- criminatory lending behavior unless a convincing case can be m a d e t h a t the m a t u r i t y p r e f e r e n c e s of b l a c k s d i f f e r f r o m t h o s e of s i m i l a r l y s i t u a t e d significantly whites. Differing w e a l t h positions and other factors m a y b o r r o w e r s to prefer d i f f e r e n t loan-to-value r a t i o s . rower preferences are represented by the requested praised-value lead These bor- loan-to-ap- (RLTOAV) v a r i a b l e in t h e l o a n - t o - v a l u e equation. Since RLTOAV data are readily available, misspecification pre- s e n t s l e s s of a p r o b l e m in t h i s e q u a t i o n t h a n in t h e m a t u r i t y 1-31 equation. A s in t h e o t h e r t w o t e r m e q u a t i o n s , h i g h e r r i s k a s m e a - sured by the f i n a n c i a l c h a r a c t e r i s t i c s of the b o r r o w e r and the p r o p e r t y l e g i t i m a t e l y l e a d s t h e b a n k e r to i m p o s e h a r s h e r terms, in t h i s c a s e l o w e r l o a n - t o - v a l u e r a t i o s . beha- Discriminatory v i o r , to t h e e x t e n t it e x i s t s , a l s o l e a d s to l o w e r loan-to-value ratios. E q u a t i o n s 2.7 to 2.9 c a n b e e s t i m a t e d o n l y for t h e Califor- n i a d a t a b e c a u s e of t h e a b s e n c e of i n f o r m a t i o n o n m o r t g a g e t r a c t t e r m s in t h e N e w Y o r k d a t a s e t . Models have been esti- m a t e d u s i n g t w o s t a g e l e a s t s q u a r e s for e a c h o f t w o y e a r s four California metropolitan areas. con- in It s h o u l d b e n o t e d t h a t p r e s e n c e o f a b i n d i n g u s u r y law in N e w Y o r k S t a t e d u r i n g the the s t u d y p e r i o d w o u l d m a k e e q u a t i o n 2.7 l a r g e l y i r r e l e v a n t , in a n y case. Loan Fees Model M o r t g a g e lenders may also discriminate by charging some a p p l i c a n t s h i g h e r l o a n f e e s t h a n o t h e r s s i m p l y b e c a u s e of s e x , m a r i t a l s t a t u s , r a c e , a g e ; t h e l o c a t i o n of t h e i r their property; o r t h e a g e o r r a c i a l c o m p o s i t i o n of t h e n e i g h b o r h o o d . Since loan fees must be fully paid when the mortgage contract is s i g n e d , high loan fees increase the immediate financial burden o n t h e s e b o r r o w e r s a n d , in s o m e c a s e s , m a y k e e p t h e m f r o m p r o ceding with the planned house Loan fee information purchase. is u n a v a i l a b l e for t h e N e w Y o r k h e n c e the loan fee m o d e l o u t l i n e d here specifically t h e t y p e of l o a n f e e s u s e d b y C a l i f o r n i a s a v i n g s a n d banks; reflects loan 1-32 associations. I n c l u d e d in t h e t o t a l l o a n f e e s a r e t h e average costs to the b a n k of m a k i n g the l o a n , g e n e r a l l y a s s e s s e d as a p e r c e n t of t h e l o a n a m o u n t ; a p p r a i s a l , i n s p e c t i o n a n d other f e e s f o r s e r v i c e s ; a n d c h a r g e s for t i t l e i n s u r a n c e , c r e d i t re- p o r t , a n d o t h e r s e r v i c e s r e l a t e d to m a k i n g l o a n s t h a t a r e n o t u s u a l l y p e r f o r m e d b y a s s o c i a t i o n s to t h e e x t e n t t h a t such c h a r g e s e x c e e d s t a n d a r d or b i l l e d c o s t s for t h e s e r v i c e s . e x a m i n e d i s c r i m i n a t o r y b e h a v i o r in t h e s e t t i n g of t h e s e f e e s , we can e s t i m a t e the following m o d e l for approved To loan loans: LOANFEE = f(LOANAMT, P R O P , N E I G H , DISC) where L O A N F E E = t h e a m o u n t of t h e l o a n L O A N A M T = the a m o u n t of the fee, loan, P R O P = a v e c t o r of p r o p e r t y c h a r a c t e r i s t i c s (including a p p r a i s e d v a l u e , s i z e of p r o p e r t y , a n d building age) , NEIGH = a v e c t o r of n e i g h b o r h o o d c h a r a c t e r i s t i c s cluding level and change variables), DISC = a v e c t o r of d i s c r i m i n a t i o n (in- and variables. S i n c e t h e b a s i c f e e is d e t e r m i n e d a s a p e r c e n t a g e of s i z e of t h e l o a n , l o a n a m o u n t the ( L O A N A M T ) is e x p e c t e d to b e a n important explanatory variable. Property characteristics (PROP), such as the property's appraised v a l u e , physical size, and represent the property specific factors that might age, influence t h e c o s t t o t h e b a n k o f m a k i n g t h e l o a n a n d , h e n c e , t h e s i z e of the fee c h a r g e d . The neighborhood variables (NEIGH) represent those neighborhood characteristics that might influence the 1-33 bank's costs and that can legitimately be passed on to the borrower in the form of higher fees. It should be noted that variables representing the financial characteristics of the borrower are not included in the model. This exclusion reflects our view that loan fees are not part of the general portfolio choice model outlined above; more specifically, the purpose of loan fees is to recover the legitimate costs of processing loan applications rather than to offset the risk of the loan to the lender. The discrimination variables, m o s t of which are dichotomous dummy v a r i a b l e s , have straightforward interpretations; statistically significant positive coefficients are consistent with the hypothesis that lenders discriminate against certain types of applicants by setting loan fees higher than warranted by the size of the loan and the characteristics of the property. APPRAISAL PRACTICES MODEL When a mortgage is applied for on a particular property, the lending institution has an authorized person estimate the value o f , or appraise, the property. This appraised value is important because the maximum loan amount that a lender will offer an applicant depends on the appraised value of the property, the lender's p o l i c i e s , and the regulatory restrictions on loan-to-value r a t i o s . The applicant must provide the dif- ference between the purchase price and the loan amount either from his or her own resources, or from secondary sources of financing. 1-34 Some neighborhood organizations have alleged that propert i e s in c e r t a i n n e i g h b o r h o o d s a r e s y s t e m a t i c a l l y r e l a t i v e to their m a r k e t v a l u e . properties If b a n k s w e r e underappraised underappraising in s o m e n e i g h b o r h o o d s r e l a t i v e t o o t h e r neighbor- h o o d s , m o r t g a g o r s w o u l d h a v e to m a k e l a r g e r d o w n p a y m e n t s h o u s e s l o c a t e d in t h e s e u n d e r a p p r a i s e d n e i g h b o r h o o d s . instances, the larger downpayment requirements could In some prevent i n d i v i d u a l s f r o m p u r c h a s i n g p r o p e r t i e s in t h e s e a r e a s . also p o s s i b l e t h a t c e r t a i n types of a p p l i c a n t s on It is (e.g., women m i n o r i t i e s ) , in c o n t r a s t t o n e i g h b o r h o o d s , m a y b e or discriminated against. The proper test of discrimination is n o t w h e t h e r appraised v a l u e s are lower than m a r k e t v a l u e s , b u t w h e t h e r the r a t i o of appraised value to m a r k e t value varies systematically l o c a t i o n s o r t y p e s of a p p l i c a n t s . If a p p r a i s a l s across reflected a c t u a l m a r k e t c o n d i t i o n s , t h e r a t i o of a p p r a i s e d v a l u e t o m a r k e t value w o u l d be equal to one and s h o u l d , on a v e r a g e , n o r e l a t i o n s h i p to a n y p a r t i c u l a r v a r i a b l e . T h e r e f o r e , i t is i m p o r t a n t to a s c e r t a i n w h y a p p r a i s e d v a l u e s m a y d i f f e r market show from values. Appraised values may systematically differ from market v a l u e s for t h r e e r e a s o n s . First, appraisers may a p p r a i s e p r o p e r t i e s b e c a u s e the c o n s e q u e n c e s of underunderestimating the v a l u e of a p r o p e r t y are m o r e a c c e p t a b l e to t h e m than of o v e r e s t i m a t i n g this value. Overestimation increases those the c h a n c e s o f a c t u a l l o s s e s if t h e b o r r o w e r d e f a u l t s o n t h e underestimation decreases those chances. Second, lenders loan? face 1-35 uncertainty that purchasers do not. P u r c h a s e r s , as property o w n e r s , w i l l make decisions that affect the future m a r k e t value of the p r o p e r t y source (e.g., m a i n t e n a n c e d e c i s i o n s ) . T h i s is a of u n c e r t a i n t y for lenders b e c a u s e they have no c o n t r o l these decisions. T o c o m p e n s a t e for t h i s u n c e r t a i n t y , might value properties lower than their market values. over appraisers Third, lenders may use a longer time horizon than the m a r k e t does when p r e d i c t i n g e v e n t s t h a t m i g h t a f f e c t t h e f u t u r e v a l u e of t h e p r o p e r t y , w h i c h is a s e c u r i t y f o r a l o n g - t e r m i n v e s t m e n t . These r e a s o n s w o u l d lead to a p p r a i s e d v a l u e s b e i n g s o m e w h a t lower market than values. Externalities affecting the housing m a r k e t (i.e., the v a l u e o f a n y g i v e n p r o p e r t y is a f f e c t e d b y t h e c o n d i t i o n s surrounding properties and the neighborhood) uncertainty market of are reflected in factors t h a t m i g h t lead an appraiser to view a prop- erty more conservatively than the market. should be spatially clustered. These externalities For example, building abandonment is m o r e l i k e l y t o o c c u r in a s p e c i f i c a r e a r a t h e r t h a n in r a n domly distributed areas across the c i t y . A n i n c r e a s e in t h e n u m b e r o f a b a n d o n e d b u i l d i n g s in an a r e a m a y s i g n a l a s u b s t a n t i a l d r o p in p r o p e r t y v a l u e s . Appraisers might future give m o r e w e i g h t to this trend than the m a r k e t b e c a u s e they have a longer time horizon. One result would be a spatial in t h e a p p r a i s e d - v a l u e - t o - m a r k e t - v a l u e variation ratio. P u r c h a s e prices are used to m e a s u r e m a r k e t v a l u e . Although t h e a p p r a i s e d v a l u e m a y d i f f e r f r o m t h e p u r c h a s e p r i c e in v i d u a l c a s e s b e c a u s e o f v a r i a t i o n s in t h e r e l a t i v e indi- bargaining 1-36 skills of buyers and sellers, these effects should average out in a large s a m p l e . The model of appraisal practices is AVP = f(PROP, R I S K , DISC) (2.10) where AVP is the appraised value divided by the purchase price, PROP is a vector of property characteristics such as structure t y p e , RISK is a vector of financial and neighborhood characteristics used to measure r i s k , and DISC is a vector of discrimination v a r i a b l e s . California appraisal practices are analyzed with data on denied as w e l l as granted mortgage applications. In New Y o r k , purchase price information is insufficiently detailed to allow an analysis of appraisal practices. CONCLUSION W e have described three general approaches for analyzing the criteria used by lenders in processing mortgage applications: 1. lender action on the application (approve, m o d i f y , or deny)? 2. credit terms for approved and modified applications, including a model of the amount by which requested loan amounts are reduced; a simultaneous three-equation model of the interest rate, m a t u r i t y , and loan-to-value 2-37 ratio? and a model of loan fees; and 3. appraisal p r a c t i c e s . W e have endeavored to properly specify these models in this chapter. As we move into the following chapters that contain empirical estimates of the m o d e l s , data limitations sometimes prevent us from fully implementing the proper specification. For example, a measure of market interest rates is unavailable for use in the California interest rate equation. 2-38 Footnotes - Chapter 2 1. A logistic r e l a t i o n s h i p w o u l d b e p r e f e r a b l e to this l i n e a r r e l a t i o n s h i p , b u t is d i f f i c u l t to d e a l w i t h simple mathe- matically. 2. This can be proved as follows: i R t = E R t = X - (X-X ) E P t i = X - (X-X ) E ( a - b Y t ) i i __ = X - a (X-X ) + b (X-X ) Y t a n d V a r R t = E (R -ER^.) 2 , l = E[X-(X-X )Pt-X+(X-X ) EPtJ = E [X- (X-X ) [ a - b Y t ] - X + ( X - X 1 Z2 2 — 2 2 ) (a-bY "J 2Z = b (X-X ) E(Yt-Yt) It should be noted that the link b e t w e e n the v a r i a n c e of i n c o m e a n d t h e v a r i a n c e o f t h e p o r t f o l i o r e t u r n is m o r e c o m p l e x in t h e c a s e o f a n o n - l i n e a r p r o b a b i l i t y o f default function. 3. Note that w e are simplifying the analysis by ignoring covariances between t f 4. and Y^ for a l l y e a r s of the the contract j. It. s h o u l d b e n o t e d t h a t t h e v a r i a n c e o f h o u s e h o l d income f o r a t w o - e a r n e r h o u s e h o l d m a y b e l o w e r t h a n t h a t for a single earner household. For example, consider a two- e a r n e r m a l e - f e m a l e h o u s e h o l d w h e r e t h e i n c o m e of t h e m a l e in y e a r t is Y m a n d t h a t f o r t h e f e m a l e is Y - . f Then the 2-39 v a r i a n c e o f t o t a l h o u s e h o l d i n c o m e in y e a r t c a n expressed Var be as: (Y + Y J m f = Var Y m 4- V a r Y_ + 2 C o v f (Y Y ) m f A negative covariance between Y ^ and Y^ will reduce v a r i a n c e o f t h e s u m b e l o w t h e s u m of t h e the individual variances. T h e s t a t e m e n t in t h e t e x t s h o u l d b e q u a l i f i e d t o loan fees. exclude S e e t h e d i s c u s s i o n of t h e l o a n fee m o d e l below. In s o m e i n s t a n c e s in t h e e m p i r i c a l w o r k , b l a c k s cannot b e s e p a r a t e d o u t , a n d in o t h e r s , A s i a n s a r e i n c l u d e d the base. It s h o u l d b e n o t e d t h a t t h e t e r m " r i s k " is b e i n g s l i g h t l y d i f f e r e n t l y h e r e t h a n in t h e p o r t f o l i o as presented above. H e r e , it r e f e r s t o a l l used model objective factors influencing e i t h e r the expected return or v a r i a n c e of t h a t r e t u r n ; a b o v e it w a s used to refer to the in variance. the specifically Chapter 3 D E C I S I O N T O L E N D IN CALIFORNIA The e v a l u a t i o n of a p p l i c a t i o n s for l o a n s o n s p e c i f i c proper t i e s to d i s t i n g u i s h t h e d i f f e r e n t r i s k s of l o s s a m o n g t h e r rc=p-<:\ s e n t s a m a j o r p a r t of t h e r e s i d e n t i a l l e n d i n g p r o c e s s . In g e n e r l e n d e r s a p p r o v e t h o s e a p p l i c a t i o n s h a v i n g t h e l o w e r r i s k s of los p r o v i d e d t h e r e a r e e n o u g h f u n d s in t h e p o r t f o l i o for t h i s of investment; the other applications are r e j e c t e d . this d e s c r i p t i o n of the lending p r o c e s s indicates s t e p s , t h e a c t u a l p r o c e s s is i n t e r a c t i v e . type (Although sequential F o r e x a m p l e , if m o s t o f its r e s i d e n t i a l m o r t g a g e a p p l i c a t i o n s h a v e h i g h r i s k s o f l o s s , a b a n k m a y d e c i d e to r e d u c e t h a t p o r t i o n o f i t s a v a i l a b l e for r e s i d e n t i a l m o r t g a g e s ) . portfolio W h e n receiving an appli- c a t i o n for a m o r t g a g e , a lender m u s t d e c i d e w h e t h e r to the application as received, approve it with some in t e r m s , o r t u r n i t d o w n . modification Lenders may discourage the s i o n of f o r m a l a p p l i c a t i o n s f r o m a p p l i c a n t s w h o , t h e y will likely be denied. approve submisbelieve, Applicants may also withdraw their p l i c a t i o n s p r i o r o r s u b s e q u e n t to a l e n d e r ' s decision. In C h a p t e r 2 , a l e n d e r ' s d e c i s i o n o n a m o r t g a g e applica- t i o n w a s v i e w e d a s a f u n c t i o n o f t h e c r e d i t w o r t h i n e s s of b o r r o w e r , the quality of the c o l l a t e r a l , and the terms of the m o r t g a g e . DATA BASE AND MODEL estimates California. DESCRIPTION All state-regulated the requested In t h i s c h a p t e r , w e r e p o r t of t h i s d e c i s i o n to l e n d m o d e l for ap- savings and loan a s s o c i a t i o n s in C a l i - 3-2 fornia m u s t m a i n t a i n detailed data on m o r t g a g e a p p l i c a n t s . The s t a t e ' s d e p a r t m e n t o f s a v i n g s a n d l o a n p r e s c r i b e s t h e f o r m of i n f o r m a t i o n t h r o u g h its L o a n R e g i s t e r R e p o r t . contains the following information: The report the form t o t a l f a m i l y i n c o m e , in- c o m e o f a p p l i c a n t a n d c o a p p l i c a n t , p u r c h a s e p r i c e of subject property, whether or not the subject property will be owner o c c u p i e d , s e x of t h e a p p l i c a n t a n d c o a p p l i c a n t , r a c e or n a t i o n a l o r i g i n o f a p p l i c a n t a n d j o i n t a p p l i c a n t , a g e of t h e ap- p l i c a n t a n d j o i n t a p p l i c a n t , t y p e o f l o a n , r e q u e s t e d l o a n am o u n t , a p p r a i s e d v a l u e , t y p e of s t r u c t u r e , l i v i n g a r e a , y e a r b u i l t , n u m b e r of r e s i d e n t i a l u n i t s in t h e b u i l d i n g , action taken by lender, granted loan amount, interest rate and matur- i t y p e r i o d for g r a n t e d l o a n s , l o a n f e e s a n d d i s c o u n t s , w h e t h e r o r n o t t h e i n t e r e s t r a t e is v a r i a b l e , a n d t h e c e n s u s t r a c t w h i c h t h e p r o p e r t y is Four in located. t y p e s of l e n d e r a c t i o n o n m o r t g a g e a p p l i c a t i o n s identifiable on the Loan Register Reports: approved as for, approved w i t h a loan amount less than requested, are applied approved w i t h a loan amount larger than r e q u e s t e d , and d e n i e d . There no information on w i t h d r a w a l s by the a p p l i c a n t . where Cases the lenders offered a loan amount less than requested and a p p l i c a n t r e j e c t e d it are n o t s e p a r a t e l y i d e n t i f i e d . presumed that these have been treated as is the It is denials. The lack of information on a p p l i c a n t s who w e r e discouraged from making a written application could create a methodological p r o b l e m for this s t u d y . state-regulated Under the California r e g u l a t i o n s , s a v i n g s a n d l o a n a s s o c i a t i o n is r e q u i r e d to each 1-3 p r e p a r e a Loan Register R e p o r t for all w r i t t e n a p p l i c a t i o n s mortgages on residential properties. It a p p e a r s , h o w e v e r , this r e g u l a t i o n d o e s n o t c l e a r l y d e l i n e a t e the u n d e r w h i c h a w r i t t e n a p p l i c a t i o n is r e q u i r e d . for that circumstances However, r e g u l a t i o n m a y a c t t o m i n i m i z e the p r a c t i c e of i n f o r m a l i n g , a l t h o u g h t h e o p p o s i t e e f f e c t , o b v i o u s l y , is a l s o A s long as there are an a d e q u a t e n u m b e r of m o d i f i e d the screen- possible. approvals and denials among the written applications, the explanation t h e s e a c t i o n s s h o u l d r e f l e c t t h e b a s e s for d i s c o u r a g i n g applications. F o r e x a m p l e , if t h e a n a l y s i s o f d e n i a l s for written indicates t h e e x i s t e n c e of r a c i a l d i s c r i m i n a t i o n , d i s c r i m i n a t i o n is a l s o a l i k e l y f a c t o r in d e c i d i n g w h i c h a p p l i c a n t s s h o u l d b e discour- aged from applying. A lender would not likely discriminate a- gainst formal applicants and not against informal o n e s . How- e v e r , if t h e s t a t i s t i c a l a n a l y s i s d o e s n o t i n d i c a t e t h e exis- t e n c e o f d i s c r i m i n a t i o n , it is s t i l l p o s s i b l e t h a t l e n d e r s use a d i f f e r e n t s e t o f c r i t e r i a , i n c l u d i n g s e x or r a c e , in t h e i r i n f o r m a l s c r e e n i n g of applicants. This study analyzes applications for c o n v e n t i o n a l mort- g a g e s t o f i n a n c e t h e p u r c h a s e o f s i n g l e - f a m i l y h o u s e s for owner- o c c u p a n c y d u r i n g 1 9 7 7 a n d 1 9 7 8 in 16 m e t r o p o l i t a n a r e a s . The L o a n R e g i s t e r d a t a a r e s u p p l e m e n t e d by 1 9 7 0 c e n s u s d a t a , a n d income and household estimates from income tax r e t u r n s , matched to each r e s p o n s e u s i n g the census tract n u m b e r . In s o m e ( A n a h e i m - S a n t a A n a - G a r d e n G r o v e , C i t y of L o s A n g e l e s , mento, San Diego, San Jose, and Stockton) additional Sacrainforma- tion from local surveys w e r e added to the Loan Register areas data. 1-4 Model Description In g e n e r a l , f o u r o u t c o m e s o f t h e l e n d i n g b e h a v i o r o f Cali- fornia savings and loan associations can be studied: approved as applied for, approved w i t h a loan amount less than requested (modified d o w n ) , approved w i t h a loan amount larger than requested (modified up), and d e n i e d . The lender's decision de- p e n d s o n t h e c r e d i t w o r t h i n e s s of t h e b o r r o w e r , t h e q u a l i t y the c o l l a t e r a l , and the requested terms of the m o r t g a g e . of Various m e a s u r e s of financial and n e i g h b o r h o o d c h a r a c t e r i s t i c s are to capture the influence of these used factors. The financial characteristics are the requested loan amount in r e l a t i o n t o a n n u a l i n c o m e a n d t h e r a t i o of t h e r e q u e s t e d a m o u n t to t h e a p p r a i s e d v a l u e o f t h e p r o p e r t y . We loan experimented w i t h s e v e r a l s p e c i f i c a t i o n s of the e f f e c t o f h o u s e h o l d on lender decisions including income as a continuous income variable, several income categories with dummy variables, requested loan to income r a t i o , several c a t e g o r i e s of the requested to loan i n c o m e r a t i o w i t h d u m m y v a r i a b l e s , a n d a v a r i a b l e e q u a l to t h e p o s i t i v e v a l u e s of the r e q u e s t e d l o a n to i n c o m e r a t i o m i n u s . 2 . 5 a n d z e r o w h e n t h i s d i f f e r e n c e is n e g a t i v e . Since the l a t t e r v a r i a b l e c a p t u r e d t h e e f f e c t of i n c o m e b e t t e r t h a n of the o t h e r s , the equations containing it a r e r e p o r t e d here. R i s k of l o s s t o t h e l e n d e r a n d , h e n c e , t h e p r o b a b i l i t y of v e r s e a c t i o n , s h o u l d r i s e a s t h e a m o u n t of t h e r e q u e s t e d r i s e s r e l a t i v e to e i t h e r i n c o m e o r a p p r a i s e d v a l u e . adloan Ideally, these two financial measures should be supplemented by r e p r e s e n t i n g the stability of the a p p l i c a n t ' s any measures income, his/her 1-5 c r e d i t h i s t o r y , or h i s / h e r n e t w e a l t h . U n f o r t u n a t e l y , the C a l i - f o r n i a d a t a s e t d o e s n o t i n c l u d e a n y of t h i s i n f o r m a t i o n . a d d i t i o n , n o i n f o r m a t i o n is a v a i l a b l e o n the a p p l i c a n t ' s In rela- t i o n s h i p w i t h t h e l e n d i n g bank."*" N e i g h b o r h o o d c h a r a c t e r i s t i c s a r e i n c l u d e d to c o n t r o l for r i s k of l o s s in t h e v a l u e of p r o p e r t y r e s u l t i n g f r o m h o u s i n g market externalities. A l t h o u g h it w o u l d b e i d e a l to include direct m e a s u r e s of t h e s e e x t e r n a l i t i e s s u c h a s w h e t h e r o r n o t the subject p r o p e r t y is a d j a c e n t to a v a c a n t b u i l d i n g , t h i s is g e n e r a l l y i m p o s s i b l e b e c a u s e the r e q u i s i t e i n f o r m a t i o n is unavailable. Therefore, neighborhood conditions are proxied by m e a s u r e s of the i n c o m e of r e s i d e n t s , c h a n g e in i n c o m e a n d p o p u l a t i o n , a n d in a few a r e a s s a l e s p r i c e , c h a n g e in s a l e s and v a c a n c y r a t e s . price R i s k of l o s s s h o u l d b e l o w e r in n e i g h b o r - h o o d s w i t h a l a r g e r p r o p o r t i o n of h i g h i n c o m e r e s i d e n t s . g e n e r a l , n e i g h b o r h o o d s w i t h l a r g e r i n c r e a s e s in a v e r a g e In income and p o p u l a t i o n s h o u l d h a v e r i s i n g p r o p e r t y v a l u e s and less r i s k of l o s s in v a l u e . l a r g e r r i s k of High vacancy rates should also signal a loss. T h e m e a s u r e s of n e i g h b o r h o o d c h a r a c t e r i s t i c s a r e c a l c u l a t e d for t h e c e n s u s t r a c t s c o n t a i n i n g t h e s u b j e c t property. This is t r u e for t h e f r a c t i o n of h o u s e h o l d s w i t h h i g h income (FHI) in a l l m e t r o p o l i t a n a r e a s u s i n g 1970 c e n s u s d a t a w i t h four e x c e p t i o n s . F H I for t h e A n a h e i m - S a n t a A n a - G a r d e n Grove, S a c r a m e n t o , San D i e g o a n d S a n J o s e m e t r o p o l i t a n a r e a s is c a l c u lated at the census tract level f r o m a s p e c i a l c e n s u s in Other supplemental variables from local surveys, such as 1975. sales 1-6 p r i c e , vacancy r a t e , and more recent income and p o p u l a t i o n are also calculated at the census tract level (see T a b l e A m a j o r s o u r c e of c u r r e n t d a t a o n i n c o m e a n d p o p u l a t i o n data, 3-1). is federal income tax returns which have been summarized at the ZIP c o d e l e v e l f o r n e a r l y a l l t h e m e t r o p o l i t a n a r e a s u n d e r study. T h e ZIP c o d e l e v e l of a g g r e g a t i o n is l e s s d e s i r a b l e t h a n t h e c e n sus tract level b e c a u s e it includes a larger g e o g r a p h i c area as a r e s u l t , is a l e s s a c c u r a t e m e a s u r e o f t h e c o n d i t i o n of m a r k e t in t h e i m m e d i a t e n e i g h b o r h o o d surrounding the to a p p r a i s e d v a l u e r a t i o ) b e c a u s e i n f o r m a t i o n o n i n t e r e s t The other two m o d i f i c a t i o n up) a r e s o m e w h a t a m b i g u o u s . (loan rate loans. T w o of t h e f o u r l e n d e r a c t i o n s h a v e c l e a r m e a n i n g : a s a p p l i e d for a n d d e n i a l . the property. The California model only includes one requested term a n d m a t u r i t y p e r i o d a r e o n l y a v a i l a b l e for g r a n t e d and, approved (modification down and One of the four m u s t b e s e l e c t e d a s t h e r e f e r e n c e to w h i c h t h e o t h e r t h r e e w i l l b e compared. S i n c e it is i m p o r t a n t t h a t t h i s r e f e r e n c e a c t i o n a c l e a r m e a n i n g in r e l a t i o n to a l l o t h e r a c t i o n s , t h e job t o a p p l i c a t i o n s t h a t a r e a p p r o v e d a s a p p l i e d for falls (i.e., approval w i t h the loan-to-appraised value and loan amount requested the have by borrower). T h e l i k e l i h o o d of a l e n d e r d e c i d i n g to d e n y a n application for a c o n v e n t i o n a l m o r t g a g e l o a n s h o u l d i n c r e a s e a s an a p p l i c a n t ' s r e q u e s t e d l o a n to i n c o m e r a t i o i n c r e a s e s a n d a s the q u a l i t y of the c o l l a t e r a l d e c r e a s e s ( e . g . , a s the loan-to-appraised value ratio increases). requested Differences in t h e risk of loss a s s o c i a t e d w i t h the b o r r o w e r and the s u b j e c t erty m a y b e o f f s e t , to some e x t e n t , by m o d i f i c a t i o n s terms of the m o r t g a g e prop- in t h e (i.e., interest r a t e , m a t u r i t y and down 3-7 Table 3-11 G e o g r a p h i c A g g r e g a t i o n a n d Y e a r of for t h e N e i g h b o r h o o d Study Area** FHI A n a h e i m - S a n t a AnaGarden Grove CT7 5 Bakersfield CT70 Fresno Los AngelesLong Beach Los Angeles City Observation Characteristics* Other Income Variables CT75 Population Change Sales Price Variables Vacancy Rate CT7075 NA NA ZIP7576 Z I P 7 0 76 NA NA CT70 ZIP7576 ZIP7076 NA NA CT70 &IP7576 ZIP7076 NA NA CT70 ZIP7576 ZIP7076 CT7377 NA NA NA NA NA NA NA Modesto CT70 Oxnard-Ventura CT70 Sacramento CT75 Salinas-Monterey CT70 ZIP7576 ZIP7076 NA NA CT70 ZIP7576 ZIP7076 NA NA CT75 ZIP7576 CT75 ZIP7076 NA NA CT70 ZIP7576 ZIP7076 NA NA CT75 ZIP7576 ZIP7076 NA CT76 San San San San BernardinoRiversideOntario Diego FranciscoOakland Jose NA ZIP7576 CT75 NA ZIP7076 CT75 Santa Barbara CT70 ZIP7576 ZIP7076 NA NA Santa Rosa CT70 ZIP7576 ZIP7076 NA NA CT7075 CT7677 CT7075 ZIP7076 NA NA Stockton CT75 Vallejo-Napa CT70 NA ZIP7576 * C T i n d i c a t e s c e n s u s t r a c t ; ZIP i n d i c a t e s ZIP C o d e A r e a . T h e n u m b e r s f o l l o w i n g C T a n d Z I P a r e t h e l a s t t w o d i g i t s of t h e y e a r ( s ) of obs e r v a t i o n . C o m p l e t e d e f i n i t i o n s a r e g i v e n in A p p e n d i x A . N A indicates that the data w a s not a v a i l a b l e . ** M e t r o p o l i t a n a r e a in a l l a r e a s e x c e p t t h e C i t y of L o s A n g e l e s . 1-8 payment). U n f o r t u n a t e l y , the only information on i s c h a n g e in t h e r e q u e s t e d loan modification amount. It is m o r e d i f f i c u l t to r e l a t e e a c h of the i n d e p e n d e n t f a b l e s to a l e n d e r s d e c i s i o n downward modification quest to m o d i f y the t e r m s . example, c o u l d b e t h e r e s u l t of a n a p p l i c a n t ' s (e.g. d e s i r e to m a x i m i z e equity as to the a m o u n t of h o u s e h o l d this For vari- re- in h o u s e a n d r e v i s e d plans funds that can be allocated to function). To ascertain whether discrimination race, marital on the b a s i s of sex, status or age of the a p p l i c a n t , or p r o p e r t y loca- t i o n e x i s t s in m o r t g a g e l e n d i n g , v a r i a b l e s a l o n g t h e l i n e s cussed in C h a p t e r 2 are also included in t h e m o d e l s . One disof the d i s t i n c t a d v a n t a g e s of the C a l i f o r n i a over the New York is t h a t t h e incomes'of t h e a p p l i c a n t a n d are reported co-applicant s e p a r a t e l y , w h i c h p e r m i t s a n a l y s i s of tory treatment of secondary income. The variables the r a c i a l c o m p o s i t i o n of the n e i g h b o r h o o d census tracts data discriminameasuring are calculated in t h e c a s e o f t h e f r a c t i o n b l a c k a n d t h e for fraction 2 S p a n i s h in a l l s t u d y a r e a s . for ZIP C o d e a r e a s . The fraction Asian is calculated These racial composition variables based on 1970 data w i t h the following exceptions: Sacramento and San Jose (all t h r e e a t t h e c e n s u s t r a c t l e v e l f o r and Stockton (reduced to two census tract m e a s u r e s Sample are 1976); for 1975). for conven- Characteristics T h e s a m p l e s h a v e b e e n l i m i t e d to a p p l i c a t i o n s tional mortgages on single family residences owner-occupied. Applications intended for f e d e r a l l y a s s i s t e d to b e mortgages have b e e n excluded because the involvement of a third p a r t y , government, substantially affects the decision-making the process, 1-9 and the Loan Register does not identify which actor was the decision. making In a d d i t i o n , t h e r e a r e n o t e n o u g h o b s e r v a t i o n s analyze separately such applications. Multifamily and non-owner- occupied properties are excluded because the Loan Register t a i n s i n s u f f i c i e n t i n f o r m a t i o n to c o n t r o l for t h e i r i n c o m e a s a f a c t o r in the l e n d i n g p r o c e s s . to con- investment Applications that i n d i c a t e d t h e y w e r e for r e f i n a n c i n g o r for h o m e i m p r o v e m e n t loans have also been excluded because they do not involve a property transaction and the Loan Registry generally lacks the n e c e s s a r y to a n a l y z e these d e c i s i o n s . c e n t a g e of t h e f o r m s w e r e a f f e c t e d . (after e l i m i n a t i n g A g a i n , only a small The final sample forms with critical nonresponses) m a r i z e d in T a b l e 3 - 2 . Multinomial logit models are for e v e r y m e t r o p o l i t a n a r e a in e a c h information per- sizes are sum- estimated year. RESULTS T h e m u l t i n o m i a l l o g i t e s t i m a t e s of l e n d e r b e h a v i o r a r e r e p o r t e d in A p p e n d i x B . (Complete variable definitions are pre- s e n t e d in A p p e n d i x A . ) The following discussion presents the i m p l i c a t i o n s of t h e s e r e s u l t s for a t y p i c a l a p p l i c a t i o n a n d variations in i t s key characteristics. W e have defined the typical application as having a req u e s t e d l o a n a m o u n t t h a t is l e s s t h a n t w o a n d o n e h a l f the applicant household's annual income times (82 t o 96 p e r c e n t of all applications). T h e t y p i c a l a p p l i c a t i o n is a l s o f r o m an all-white household (68 t o 93 p e r c e n t of a l l a p p l i c a t i o n s ) , an a p p l i c a n t b e t w e e n t h e a g e s of 35 a n d 44 (22 t o 29 p e r c e n t of 3-10 Table 3-11 Number of Observations by Metropolitan Area and California Savings and Loan Study Area* Year: Associations 1977 1978 16,672 12,542 Bakersfield 1,722 1,646 Fresno 3,173 2,850 38,398 34,792 14,060 13,662 Modesto 1,885 1,558 Oxnard-Ventura 4,631 3,970 Sacramento 5,163 4,884 Salinas-Monterey 1,860 1,530 San Bernardino-Riverside-Ontario 2,606 2,038 San Diego 7,628 7 , 508 San Francisco-Oakland 24,766 21,608 San Jose 9,887 7,691 Anaheim-Santa Ana-Garden Los Angeles-Long Los Angeles Grove Beach City Santa Barbara 1,401 1,254 Santa Rosa 3 , 419 3 , 307 Stockton 2,432 2,381 Vallejo-Napa 1,884 1,866 * M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y of L o s A n g e l e s . 1-11 all applications), a male-female couple with the female cant beyond childbearing age (22 t o 35 p e r c e n t o f a l l tions) , and with no secondary income of a l l a p p l i c a t i o n s ) . appli- applica- (83 t o 86 p e r c e n t percent These characteristics were selected be- c a u s e t h e y d e s c r i b e a h o u s e h o l d w h i c h is l e a s t l i k e l y t o b e t a r g e t of d i s c r i m i n a t i o n , if a n y e x i s t s . Therefore, they n o t a l w a y s r e p r e s e n t a p l u r a l i t y of a l l a p p l i c a t i o n s . do The o f a p p l i c a n t a n d t h e a g e of t h e w o m a n c h a r a c t e r i s t i c s a r e lected from a d e s i r e to c o m p a r e c h i l d b e a r i n g to the age se- nonchildbearing women. T h e t y p i c a l a p p l i c a t i o n is a l s o d e f i n e d t o h a v e t h e aver- a g e v a l u e s of a l l t h e c o n t i n u o u s v a r i a b l e s for a p p l i c a t i o n s the metropolitan area being studied: requested loan to ap- praised value ratio, fraction high income households, income and p o p u l a t i o n c h a n g e , age of n e i g h b o r h o o d , and racial sition of n e i g h b o r h o o d . 3-3. compo- These values are summarized in T a b l e In a d d i t i o n , t h e b u i l d i n g is a s s u m e d t o b e n e w (8 to 38 p e r c e n t o f a l l a p p l i c a t i o n s ) , a n d t h e p r o p e r t y is l o c a t e d a in in suburb. The treatment accorded applications with characteristics different than the typical application are compared to the treatment received by the typical application. The treatment is m e a s u r e d b y t h e p r o b a b i l i t y of a g i v e n d e c i s i o n s u c h a s 3 d e n i a l or d o w n w a r d m o d i f i c a t i o n . Table 3-3 M e a n V a l u e s of Continuous Variables by California M e t r o p o l i t a n Area: Metropolitan Area I N C 1 9 7 0 D I N C 7 67 5 DINC7570 DHH7675 RLTOINC RLTOAV FHI Anaheim-Santa AnaGarden Grove 0.071 0.76 0.6l Bakersfield 0.013 0.81 0.26 14 . 10 0.91 3.43 Fresno 0.036 0.80 0.20 13 .14 0.88 0.061 0.78 0.31 14 .42 Modesto 0.016 0.79 0.17 NA Oxnard-Ventura 0.059 0.76 0.31 Los Angeles-Long Beach Sacramento 0 . 032 0.78 0.42 Salinas-Monterey 0.086 0.78 0.20 0.030 0.79 0.23 San BernardinoRiverside-Ontario San Diego 0.080 0.79 0.39 San Francisco-Oakland 0.072 0.77 0.33 San Jose^ 0. 073 0.76 0.50 0.138 0.74 0.24 Rosa Q Stockton 0.048 0.76 0.17 0.014 0.78 0.23 Vallejo-Napa 0 . 040 0.78 0.22 Santa Barbara Santa a 18 . 1 4 b 14 .63 a 13 . 4 3 b a FBLACK FSPANISH FASIAN 5.74° 0..06 0.01 0 .09 0.01 0.86 2.65 0..11 0.06 0. 09 0.01 2.64 -0.16 3.55 0..14 0.01 0 .13 0.02 1.10 1.62 -0.15 1.87 0..15 0.04 0 .12 0.02 NA NA NA NA 0..19 0.003 0 .07 NA 1.07 1.09 1.30 0..06 0.02 0 .13 0.02 1.62° 0 .13 . 0.02 0 .03 0.03 NA NA 4.85° 2.12° NA NA 10.36 2.98 0.39 1.91 0..16 0.06 0 .14 0.04 1.23 2.36 1.42 2.28 0..13 0.03 0 .11 0.01 0.98 5.31 0.99 3.17 0 .10 , 0.02 0 .09 0.01 15 .59 1.09 2.19 0.56 2.07 0..21 0.06 0 .10 0.03 15 .44 1.12 2.28 1.34 8.72 0..08 0.02 0 .09 0.04 10 .90 0.77 2.11 0.13 -2.48 0..16 0.02 0 .13 0.01 NA NA m NA NA 0 ..22 0.004 0 .05 NA NA NA NA NA 1.25 0..15 0.02 [ NA NA m. NA NA 0..17 0.05 0 .07 13 . 01 a PRE194 0 0.83 12 .84 3 DHH7570 1977 13 . 8 2 b 0..04 ] NA a) T h i s d a t a i n t h e s e m e t r o p o l i t a n a r e a s a r e b a s e d o n a 1 9 7 5 s u r v e y i n s t e a d of t h e 1 9 7 0 c e n s u s . b ) T h i s d a t a i s b a s e d o n a 1 9 7 5 s u r v e y w i t h c e n s u s t r a c t d e t a i l i n s t e a d o f t h e 1 9 7 6 ZIP C o d e v a l u e s f r o m t h e I::S f i l e s . c) T h i s d a t a is b a s e d o n a 1 9 7 5 o r 1 9 7 6 s u r v e y a n d t h e 1 9 7 0 c e n s u s w i t h c e n s u s t r a c t v a l u e s i n s t e a d of t h e 1 9 7 5 IRS a n d 1 9 7 0 c e n s u s i n f o r m a t i o n w i t h ZIP C o d e area v a l u e s . d) M e a n v a l u e of t h e f r a c t i o n o f d w e l l i n g u n i t s v a c a n t is 0 . 0 5 2 for S a n J o s e . e) T h e m e a n v a l u e s of a d d i t i o n a l v a r i a b l e s for Stoc;;ton a r e : A v e r a g e s a l e s p r i c e (1977) $43.32 thousand A v e r a g e c h a n g e in s a l e s p r i c e ( 1 9 7 7 - 1 9 7 6 ) 7.80 F r a c t i o n v a c a n t 1975 0.047 C h a n g e in p e r c e n t v a c a n t ( 1 9 7 5 - 1 9 7 0 ) 0.87 1-13 In g e n e r a l , w e r e p o r t c o m p a r i s o n s in t e r m s of t h e ratio of t h e p r o b a b i l i t y o f a g i v e n d e c i s i o n for an a p p l i c a t i o n with c e r t a i n c h a r a c t e r i s t i c s to t h e p r o b a b i l i t y o f t h a t d e c i s i o n for t h e t y p i c a l a p p l i c a t i o n . T h e p r o b a b i l i t i e s of each d e c i s i o n f o r t h e t y p i c a l a p p l i c a t i o n a r e p r e s e n t e d in T a b l e s 3-4 a n d 3 - 5 for 1977 a n d 1 9 7 8 , r e s p e c t i v e l y . siderably across metropolitan areas. They vary con- It is for t h i s r e a s o n that r a t i o s m u s t b e u s e d to c o m p a r e t h e d i f f e r e n t i a l i m p a c t o f d i s crimination measures on outcomes across areas. S i n c e t h e d e n i a l o f a n a p p l i c a t i o n is c l e a r l y a n d e c i s i o n , the following discussion focuses on these adverse results. Although downward modification has a somewhat ambiguous meaning, t h e m e a s u r e s o f d i s c r i m i n a t i o n a r e u n l i k e l y to b e s t r o n g l y r e l a t e d w i t h t h e t y p e s of a p p l i c a n t s w h o r e v i s e t h e i r loan amounts downward. requested Therefore, downward modification a r e s u m m a r i z e d b u t s h o u l d b e i n t e r p r e t e d c a u t i o u s l y as of a d v e r s e Financial results evidence action. Characteristics The financial characteristics s e r v e t h e p u r p o s e of l i n g f o r t h e r i s k of l o s s a s s o c i a t e d w i t h t h e control- creditworthiness of t h e a p p l i c a n t , t h e v a l u e of t h e p r o p e r t y , a n d t h e cor- requested 3-14 Table 3-11 P r o b a b i l i t y of V a r i o u s O u t c o m e s for Typical Application Study A r e a in C a l i f o r n i a : a Denial Anaheim-Santa the 1977 Modification Down Up Ana- Garden Grove 1.49 2.94 4.13 Bakersfield 0.87 Fresno 4.41 2.00 1.16 Los Angeles-Long Beach 3.57 4.36 6.37 Los Angeles City 2.47 6.19 4.84 Modesto 3.57 [4 Oxnard-Ventura 2.39 1.83 0.85 Sacramento 2.56 3.17 1.13 Salinas-Monterey 2.91 [< 0.54 2.42 0.85 San Diego 2.35 3.68 4.45 San Francisco-Oakland 2.54 5.54 0.88 San Jose 1.75 2.62 1.18 Santa Barbara 2.81 [< Santa Rosa 0.94 0.83 Stockton 1.71 [< Vallejo-Napa 1.74 0.54 San 3.99 0.42 > ] ^ ] 4.89 Bernardino-RiversideOntario 5.14 0.77 1.76 a) M e t r o p o l i t a n a r e a in a l l c a s e s e x c e p t t h e C i t y o f L o s 2.56 Angeles. 3-15 Table 3-11 P r o b a b i l i t y of V a r i o u s O u t c o m e s for Typical Application Study A r e a in C a l i f o r n i a : a Denial the 1978 Modification Down Up Anaheim-Santa AnaGarden Grove 3.34 4.11 Bakersfield 1.83 [<* Fresno 6.06 3.91 1.35 3 . 34 7.22 2 . 58 3.03 7.01 2.27 Modesto 2.94 [4— Oxnard-Ventura 1.90 5.49 2.34 Sacramento 2.72 4.74 1.60 Los Angeles-Long Los Angeles Beach City Salinas-Monterey San Bernardino-RiversideOntario 12.04 [< 3.02 4.49 4.62 4.50 —— > ] — >] —— > 1 1.16 3.01 2.12 San Diego 2.11 5.19 3.34 San Francisco-Oakland 3.53 4 . 06 3.14 San Jose 2.37 2.45 3.00 Santa Barbara 2.53 [ < — 3.05 Santa Rosa 3.03 0.81 Stockton 2.01 Vallejo-Napa 1.01 a ) M e t r o p o l i t a n a r e a s in a l l c a s e s >] — 1.61 0.50 1.90 except the City of — — 0.76 Los Angeles. 1-16 loan terms. These variables have the expected relationship lender b e h a v i o r and are highly significant across to equations. T a b l e 3 - 6 p r e s e n t s d e n i a l r a t i o s for t h e t y p i c a l application w i t h v a r i a t i o n s in i t s f i n a n c i a l c h a r a c t e r i s t i c s that m a k e it m o r e l i k e l y to b e d e n i e d . should As a result, we expect all t h e r a t i o s in t h e t a b l e t o b e g r e a t e r t h a n o n e , as m o s t of a r e ; o n l y o n e is l e s s t h a n o n e (Santa B a r b a r a in 1 9 7 7 ) . T h e r e q u e s t e d l o a n to a p p r a i s e d v a l u e r a t i o the most consistent variable; them (RLTOAV) is it h a s a p o s i t i v e c o e f f i c i e n t in all the denial and downward modification equations, and a negat i v e c o e f f i c i e n t in a l l t h e u p w a r d m o d i f i c a t i o n e q u a t i o n s . All b u t one of the c o e f f i c i e n t s a r e large and very significant; the e x c e p t i o n is t h e d e n i a l e q u a t i o n f o r t h e S a l i n a s - M o n t e r e y p o l i t a n a r e a in 1 9 7 8 . T h e s e results indicate t h a t an metro- applica- t i o n is m o r e l i k e l y to b e d e n i e d o r m o d i f i e d d o w n , a n d less l i k e l y to b e m o d i f i e d u p , t h e h i g h e r is t h e r e q u e s t e d l o a n r e l a t i v e t o t h e a p p r a i s e d v a l u e of t h e property. T h e c o e f f i c i e n t s o f t h e r e q u e s t e d l o a n to i n c o m e variable (RLTOINC) indicate t h a t amount ratio applications are more likely to b e d e n i e d or m o d i f i e d d o w n t h e m o r e t h i s r a t i o e x c e e d s 2.5. T h e RLTOINC c o e f f i c i e n t s are s t a t i s t i c a l l y s i g n i f i c a n t at the f i v e or l e s s p e r c e n t l e v e l in a l l t h e m o d i f i e d d o w n and all b u t five of the d e n i a l e q u a t i o n s . In o n e o f t h e d e n i a l e q u a t i o n s t h e c o e f f i c i e n t is s t a t i s t i c a l l y at the ten percent level. equations I t is n o t s t a t i s t i c a l l y five significant significant a t t h e t e n or l e s s p e r c e n t l e v e l in t h e 1 9 7 7 e q u a t i o n s for M o d e s t o , San Diego, Santa Barbara and Stockton metropolitan the areas. 3-17 Table 3-11 Denial Ratios for S e v e r a l D i f f e r e n t Relative to the Typical A p p l i c a n t 1977 and 1978 Applications (TA) i n California: a TA with higher R L T O I N C (+1) ^ ^ TA with higher R L T O A V (+P.1* ^ ^ Anaheim-Santa AnaGarden Grove 2 .36** 2. 26** 1. 98** 1. 52** Bakersfield 4 .27** 7 . 39** 1. 74** 2. 37** Fresno 1 .56** 2. 00** 1. 55** 1. 27** 2 .46** 2. 03** 1. 77** 1. 62** 1 ^ 97** 1. 72** 1 . 75** 1. 79** Modesto 1 .88 1. 92** 1. 39** 1. 60** Oxnard-Ventura 2 .64** 3. 20** 2. 03** 1.77** Sacramento 2 .28** 4. 09** 2. 43** 2. 17** Salinas-Monterey 1 .60** 2 . 05** 1. 93** 1 . 12 5 .77** 3. 31** 1 . 58** 3. 03** Study Areas b Los Angeles-Long Los Angeles San Beach City Bernardino-RiversideOntario San Diego 1 .33 1 . 86** 1 . 49 ** 1. 63** San Francisco-Oakland 2 .17** 2. 58** 1 . 66** 1. 85** San Jose 2 .59** 2.20** 1. 97** 2 . 11** Santa Barbara 0 .97 2. 86** 2. 69** 1. 81** Santa Rosa 2 .60** 2 . 79** 1. 93** 2. 79** Stockton 1 .30 4 . 03** 2 . 01** 2. 13** Vallejo-Napa 3 .98** 2 . 06* 3. 34** 2. 96** a) T h e r a t i o i s e q u a l t o t h e p r o b a b i l i t y t h a t a n a p p l i c a t i o n w i t h the indicated characteristics will be denied divided b y t h e p r o b a b i l i t y t h a t t h e t y p i c a l a p p l i c a t i o n (TA) w i l l b e denied. A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e c o e f f i c i e n t of R L T O I N C or R L T O A V is s t a t i s t i c a l l y s i g n i f i c a n t a t t h e f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t it is s i g n i f i c a n t a t t h e f i v e or l e s s p e r c e n t l e v e l . b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y of L o s A n g e l e s . 1-18 A t least one of these two f i n a n c i a l c o n t r o l v a r i a b l e s (RLTOAV and RLTOINC) has a large and s t a t i s t i c a l l y s i g n i f i c a n t impact on t h e l e n d i n g d e c i s i o n in t h e d i r e c t i o n p r e d i c t e d b y t h e theoretical d i s c u s s i o n in C h a p t e r 2 in e a c h m e t r o p o l i t a n a r e a for e a c h year. In f a c t , b o t h v a r i a b l e s a r e s t a t i s t i c a l l y s i g n i f i c a n t w i t h the e x p e c t e d s i g n s in a l l b u t o n e o f t h e m o d e l s w h e r e t h e d a t a is s u f f i c i e n t to s e p a r a t e d o w n w a r d a n d u p w a r d m o d i f i c a t i o n s ; D i e g o m e t r o p o l i t a n a r e a f o r 1 9 7 7 is t h e Neighborhood the San exception. Characteristics The neighborhood characteristics have been included c o n t r o l for t h e e f f e c t o f h o u s i n g m a r k e t e x t e r n a l i t i e s future value of the p r o p e r t y securing the l o a n . The c i e n t s of t h e s e v a r i a b l e s a r e n o t c o n s i s t e n t a c r o s s to on the coeffimetropoli- tan a r e a s , and are sometimes inconsistent across time within the same metropolitan a r e a . The average income and the in i n c o m e o v e r a r e c e n t y e a r in a n a r e a c o n t a i n i n g t h e have the most consistent coefficients. change property The average income has t h e e x p e c t e d n e g a t i v e r e l a t i o n s h i p w i t h t h e l i k e l i h o o d of d e n i a l in 15 of 26 c a s e s . ships are statistically A l l b u t t w o of t h e n e g a t i v e significant relation- (five p e r c e n t l e v e l ) o n l y t h r e e of t h e p o s i t i v e r e l a t i o n s h i p s a r e while statistically significant. C o n t r a r y t o e x p e c t a t i o n s , t h e c h a n g e in i n c o m e between 1 9 7 5 a n d 1 9 7 6 is p o s i t i v e l y r e l a t e d to t h e l i k e l i h o o d of denial in 19 of 22 c a s e s a n d s t a t i s t i c a l l y s i g n i f i c a n t in 13 of them. Two of the three n e g a t i v e r e l a t i o n s h i p s are statistically 1-19 significant. T h i s s u g g e s t s t h a t any r e c e n t c h a n g e in p r o p e r t y v a l u e s , e v e n if i t is a n i n c r e a s e , is v i e w e d b y l e n d e r s a s an indication of h i g h e r risk of loss. The v a r i a b l e r e p r e s e n t i n g the fraction of h o u s e h o l d s with h i g h i n c o m e in t h e c e n s u s t r a c t g e n e r a l l y h a s t h e e x p e c t e d t i v e r e l a t i o n s h i p to t h e l i k e l i h o o d o f d e n i a l (19 o u t of 34 O n l y 8 of t h e s e n e g a t i v e c o e f f i c i e n t s a r e s t a t i s t i c a l l y a n d s i x of t h e p o s i t i v e o n e s a r e s i g n i f i c a n t negacases). significant, (ten p e r c e n t level). T h e i n c o m e c h a n g e b e t w e e n 1970 a n d 1 9 7 5 a n d t h e c h a n g e in h o u s e h o l d s b e t w e e n 1 9 7 5 a n d 1 9 7 6 v a r i a b l e s for t h e a r e a con- taining the subject property have coefficients that are posi- tive approximately as often as they are n e g a t i v e . Coefficients o f e i t h e r s i g n a r e e q u a l l y l i k e l y to b e s t a t i s t i c a l l y c a n t for t h e s e t w o variables. T h e c h a n g e in h o u s e h o l d s b e t w e e n 1 9 7 0 a n d 1 9 7 5 h o w e v e r , is n e g a t i v e m o r e o f t e n positive. variable, (17 o u t of 26 c a s e s ) t h a n i t is In a d d i t i o n , n i n e of t h e n e g a t i v e c o e f f i c i e n t s o n l y four of the p o s i t i v e ones are s i g n i f i c a n t level). signifi- (ten percent The negative coefficients indicate that mortgage p l i c a t i o n s a r e m o r e l i k e l y to b e d e n i e d if t h e y a r e and ap- secured b y p r o p e r t i e s l o c a t e d in a r e a s t h a t h a v e e x p e r i e n c e d a d e c l i n e in p o p u l a t i o n o v e r a p e r i o d of f i v e y e a r s . Population changes o v e r a s h o r t e r t i m e p e r i o d h a v e no c o n s i s t e n t r e l a t i o n s h i p t h e l i k e l i h o o d of denial. In a f e w m e t r o p o l i t a n a r e a s , w e w e r e a b l e t o i n c l u d e t i o n a l m e a s u r e s of n e i g h b o r h o o d c h a r a c t e r i s t i c s . The addi- average s a l e s p r i c e w a s p o s i t i v e l y r e l a t e d to the c h a n c e of d e n i a l to in 1-20 t h r e e of t h e f o u r c a s e s w h e r e it w a s a v a i l a b l e ; were statistically significant. t w o of these T h e c h a n g e in s a l e s p r i c e iable had statistically significant coefficients in a l l var- four c a s e s , b u t t h e y w e r e p o s i t i v e e q u a l l y a s o f t e n as t h e y w e r e negative. The vacancy rate also had mixed results. It h a d an e x - pected p o s i t i v e r e l a t i o n s h i p w i t h the l i k e l i h o o d of d e n i a l t w o of f o u r c a s e s , a n d o n e o f t h e s e p o s i t i v e c o e f f i c i e n t s the only statistically significant one among the four. In b o t h y e a r s , t h i s v a r i a b l e was that had a rising vacancy rate. of t h e c o e f f i c i e n t s w a s s t a t i s t i c a l l y s i g n i f i c a n t a t t h e percent change indicated t h a t a p p l i c a t i o n d e n i a l w a s m o r e l i k e l y if t h e p r o p e r t y l o c a t e d in a n e i g h b o r h o o d was In t h e S t o c k t o n m e t r o p o l i t a n a r e a , w e a l s o h a d a m e a s u r e of t h e in t h e v a c a n c y r a t e . in One five level. A t least one of the n e i g h b o r h o o d c h a r a c t e r i s t i c has a statistically significant variables (five p e r c e n t l e v e l ) coeffi- c i e n t w i t h t h e e x p e c t e d r e l a t i o n s h i p to t h e l i k e l i h o o d o f d e n i a l for e a c h y e a r in a l l t h e l a r g e m e t r o p o l i t a n a r e a s : heim-Santa Ana-Garden Grove, Los Angeles-Long San Diego, San Francisco-Oakland Ana- Beach,Sacramento, and San J o s e . The performance is m o r e m i x e d f o r t h e s m a l l e r m e t r o p o l i t a n a r e a s ; s o m e h a v e a significant expected relationship in n e i t h e r y e a r . in o n l y o n e y e a r and In t h e M o d e s t o , S a n t a R o s a , a n d metropolitan areas, we had only one neighborhood Vallejo-Napa characteristic (FHI) b e c a u s e n o n e o f t h e m o r e r e c e n t s o u r c e s o f d a t a geocoded IRS i n f o r m a t i o n ) provided information others (e.g., for t h e s e areas. 1-21 Sex T h e d e n i a l a n d d o w n w a r d m o d i f i c a t i o n r a t i o s for 17 s t u d y a r e a s in e a c h of t w o y e a r s a r e p r e s e n t e d in T a b l e s 3-7 to 3 - 1 0 . Four t y p e s of a p p l i c a t i o n s a r e c o m p a r e d to the t y p i c a l tion: m a l e - f e m a l e a p p l i c a t i o n s w i t h the w o m a n of applica- childbearing a g e a n d t h e a p p l i c a n t b e t w e e n 25 a n d 34 y e a r s of a g e (MFCB25-34); f e m a l e o n l y a p p l i c a t i o n s w i t h n o w o m a n of c h i l d b e a r i n g age (FONLYNCB); female only applications w i t h at least one woman of c h i l d b e a r i n g a g e and the a p p l i c a n t b e t w e e n 25 and 34 y e a r s of a g e (FONLYCB25-34); and male only applications (MONLY). of t h e s e f o u r h o u s e h o l d t y p e s r e s e m b l e s the t y p i c a l in a l l o t h e r Each application characteristics. In t h e c a s e of h o u s e h o l d s w i t h w o m e n of c h i l d b e a r i n g age, w e a l t e r e d t h e a g e of t h e a p p l i c a n t to m a k e it c o n s i s t e n t w i t h h a v i n g a w o m a n of c h i l d b e a r i n g a g e . This was more critical in t h e c a s e of t h e f e m a l e o n l y t h a n in the m a l e - f e m a l e appli- c a t i o n s b e c a u s e the; a p p l i c a n t in t h e l a t t e r h o u s e h o l d t y p e is u s u a l l y t h e m a l e a n d h e is 3-4 y e a r s o l d e r on a v e r a g e t h a n female. A s a r e s u l t , it w o u l d n o t b e u n r e a s o n a b l e to the illus- t r a t e a m a l e - f e m a l e t y p i c a l a p p l i c a t i o n w i t h a w o m a n of childbearing age (MFCB); h o w e v e r , t h i s h o u s e h o l d less frequently than the MFCB25-34 o n e . One type occurs consequence of c o m b i n i n g sex a n d a g e c o e f f i c i e n t s for two h o u s e h o l d (MFCB25-34 and FONLYCB25-34) is t h a t t h e i r d e n i a l a n d m o d i f i c a t i o n r a t i o s d e p e n d on b o t h f a c t o r s . types downward When the age coef- ficient materially alters the ratio, additional footnotes b e e n u s e d to a l e r t t h e r e a d e r . have A n y r e a d e r w i s h i n g to e x a m i n e a d d i t i o n a l s e x a n d a g e i n t e r a c t i o n s c a n d o so w i t h t h e h e l p of 3-22 Table 3-11 Denial Ratios b y Sex for the Typical California Application: T_ Study Area MFNCB C and MFCB 25-34 Anaheim- Santa AnaGarden Grove 1.00 1.30* Bakersfield 1.00 1.14 Fresno 1.00 Los AngelesLong Beach Los Angeles 1977 FONLYNCB a FONLYCB and 25-34 MONLY 1.25 1.50 1.23 0.00** 0.48 0 .19** 1.21 0.55 0.83 1.07 1.00 0.61** 0.62** 0.72** 0.69** 1.00 0.97 1.10 0.84 0.89 Modesto 1.00 0.42** 0.40 ' 0.91 1.14 Oxnard-Ventura 1.00 0.59* 1.50 0.30 0.76 Sacramento 1.00 1.16 0.71 0.79 0.90 Salinas-Monterey 1.00 1.20 1.15 1.47 0.95 1.00 i.oi 1.11 0.00** 1.73 2.43** 1.03 1.96** 1.08 0.85 1.18 0.56** 0.42** 0.64** 1.06 1.15 0.59 1.39 0.71 1.06 0.07** 0.14 San San San San City BernardinoRiverside-Ontario Diego FranciscoOakland Jose e e d 1.00 0.92 1 . 00 1. 0 5 1.00 0.56** Santa Barbara 1.00 1.90 Santa Rosa 1.00 1.38 e g d Stockton 1.00 0.37 Vallejo-Napa 1.00 0.22** e 0.89 1.09 d 1.00 0.41* a ) T h e r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n w i t h t h e indicated characteristics w i l l be denied divided by the probability t h a t t h e t y p i c a l a p p l i c a t i o n w i l l b e d e n i e d . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r o f t h e r a t i o is s t a t i s t i c a l l y s i g n i f i cantly d i f f e r e n t than the denominator at the five-to-ten percent l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i ficant at the five or less percent level. 3-23 Table 3-7 (continued) b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y o f L o s A n g e l e s . c ) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . It is t h e b a s e for c a l c u l a t i n g the d e n i a l r a t i o s . The other a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in o n e o r m o r e c h a r a c t e r i s t i c s . S e e T a b l e 3-4 for t h e p r o b a b i l i t y of d e n i a l f o r t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . d ) S i n c e t h e r a t i o f o r M F C B o r F O N L Y C B for t h e 35 to 44 y e a r o l d a g e r a n g e o f t h e t y p i c a l a p p l i c a t i o n is g r e a t e r t h a n o n e , it is t h e 25 to 34 y e a r o l d a g e c o e f f i c i e n t t h a t m a k e s t h e r a t i o in t h e table less t h a n , or c l o s e r t o , o n e . The MFCB or FONLYCB coeffic i e n t , h o w e v e r , is n o t s t a t i s t i c a l l y s i g n i f i c a n t a t t h e t e n or less percent level. e) S i n c e t h e r a t i o for M F C B or F O N L Y C B for t h e 35 t o 44 y e a r o l d a g e r a n g e of t h e t y p i c a l a p p l i c a t i o n is l e s s t h a n o n e , it is the 25 to 34 y e a r o l d a g e c o e f f i c i e n t t h a t m a k e s t h e r a t i o in t h e t a b l e g r e a t e r t h a n o n e . T h e M F C B o r F O N L Y C B c o e f f i c i e n t is n o t s t a t i s t i c a l l y s i g n i f i c a n t a t t h e t e n or l e s s - p e r c e n t l e v e l . f) S a m e s i t u a t i o n a s in n o t e (d) e x c e p t t h e M F C B o r F O N L Y C B c o e f f i c i e n t is s t a t i s t i c a l l y s i g n i f i c a n t a t t h e t e n o r l e s s p e r c e n t level. g) S a m e s i t u a t i o n a s n o t e (e) e x c e p t t h e M F C B o r F O N L Y C B r a t i o for t h e 35 t o 44 a g e r a n g e o f t h e t y p i c a l a p p l i c a t i o n w a s s l i g h t l y larger than one. 3-24 Table 3-11 D e n i a l Ratios by Sex for the Typical California Application: S t u d y Area' 3 MFNCB C and MFCB 25-34 1978 FONLYNCB a FONLYCB and 25-34 MONLY Anaheim-Santa AnaGarden Grove 1 . 00 1.24 1.34 0.86 Bakersfield 1.00 1.61 1.05 0.80 Fresno 1 . 00 1.21 1.08 0.83 0.77 1.00 0.76** 0.84 0.55** 1.08 1.00 0.92 0 . 87 0.39** 1.20* Modesto 1 . 00 1.35** 0.45 1.79* 0.68 Oxnard-Ventura 1.00 0.77** 1.26 1.40 1.00 1.17 1.08* Los AngelesLong Beach Los Angeles City Sacramento Salinas-Monterey San BernardinoRiverside-Ontario 1.00 0.89 1.00 0.89 1.00 0.82 f d f San Diego 1.00 1.12 San Francisco-Oakland 1.00 0.72** San Jose 1.00 0.82 d 1.00 d d 0.35* 1.66** 0.86 0.93 2.95* 2 . 00* 1.53 1.36 1 . 61 1.23 0.92 0.77* 0.95 0.69 0.46* 0.96 e 0.88 Santa Barbara 1.00 0.92 2.47* 1.07 Santa Rosa 1.00 0.63** 0.39** 0.41** 0.58** Stockton 1.00 1.21 2.65* 0.99 0.96 Vallejo-Napa 1.00 1.76 2 . 38 0.00** 1.78 0.71 a) T h e r a t i o is e q u a l t o t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n w i t h the indicated characteristics w i l l be denied divided by the proba b i l i t y that the t y p i c a l a p p l i c a t ion w i l l b e d e n i e d . A single a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r o f t h e r a t i o is s t a t i s tically significantly d i f f e r e n t than the denominator at the fivet o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l . 3-25 Table 3-8 (continued) b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y of L o s Angeles. c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . It is the b a s e for calculating the denial r a t i o s . The other applicat i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in o n e o r m o r e characteristics. See Table 3-5 for the p r o b a b i l i t y of d e n i a l f o r t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . d) See note (d), T a b l e 3 - 7 , for explanation. e) S e e n o t e (e), T a b l e 3 - 7 , for explanation. f) S e e n o t e (f), T a b l e 3 - 7 , f o r explanation. g) S e e n o t e (g), T a b l e 3 - 7 , for explanation. 3-26 Table 3-11 Downward Modification Ratios by Sex for the T y p i c a l C a l i f o r n i a A p p l i c a t i o n : , Study Area MFNCB MFCB and 25-34 1977 a FONLYNCB FONLYCB and 25-34 1 . 02 0 . 92 MONLY Anaheim-Santa AnaGarden Grove 1 . 00 0. 8 4 Fresno 1 . 00 0. 81 9- 3 5 * * 0 .41 1 . 27 1 . 00 0 . 89** 0 . 97 0 .90 0 . 83** 1 . 00 0. 60** 0 . 73** 0 .52** 0 . 94 Oxnard-Ventura 1 . 00 0. 71 1 . 19 0 .21** 0 .70 Sacramento 1 . 00 0. 8 2 0 . 92 0 .43* 1 . 09 1. 00 0 . 45 1 . 39 0 .42 0 . 82 1 . 00 0 . 89 1 . 00 0 .99 0 . 78 1 . 00 0 . 67* 0 . 54** 0 .49** 0. 67** 1 . 00 0. 51** 0 . 94 0 .39** 0. 74** 1 . 00 1. 4 2 2 . 49** 2 . 15 0 .79 1 . 00 1 . 56 3 . 46 1 . 20 2. 92** Los AngelesLong Beach Los Angeles San San San San City BernardinoRiverside-Ontario Diego FranciscoOakland Jose Santa Rosa Vallejo-Napa d d e d 1 . 24 a) T h e r a t i o is e q u a l t o t h e p r o b a b i l i t y t h a t a n a p p l i c a t i o n w i t h t h e indicated characteristics w i l l be modified downward divided by the probability that the typical application will be modified downward. A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r o f t h e r a t i o is statistically significantly d i f f e r e n t than the denominator at the five-to-ten percent level. T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l . b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y o f L o s A n g e l e s . c ) T h i s i s t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . I t is t h e b a s e for c a l c u l a t i n g the d o w n w a r d m o d i f i c a t i o n r a t i o s . The other a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in o n e o r m o r e characteristics. S e e T a b l e 3-4 for the p r o b a b i l i t y of d o w n w a r d m o d i f i c a t i o n f o r t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . d) See n o t e (d), T a b l e 3 - 7 , for e x p l a n a t i o n . e) S e e n o t e ( e ) , T a b l e 3 - 7 , f o r e x p l a n a t i o n . f) S e e n o t e ( f ) , T a b l e 3 - 7 , f o r e x p l a n a t i o n . g) S e e n o t e ( g ) , T a b l e 3 - 7 , f o r e x p l a n a t i o n . 3-27 Table 3-10 Downward Modification Ratios by Sex for the T y p i c a l California A p p l i c a t i o n : Study Area b MFNCB Anaheim-Santa AnaGarden Grove Fresno 1.00 MFCB and 25-34 0.82 d FONLYNCB 1978 a FONLYCB and 25-34 0.90 0.57 0.99 0.91 MONLY 0.80* d 1.00 0.71 1.00 0.63** 0.87 0.62** 0.82** 1.00 0.66** 0.76** 0.39** 0.73** Oxnard-Ventura 1.00 0.71 0.93 0.49 0.76 Sacramento 1.00 0.71** 0.71 0.64 0.85 1.00 0.94 0.56 0.52 0.60* 1.00 0.73 0.71 0.46 0.87 1.00 0.55** 0.63** 0.48** 0.77** 1.00 1.03 0.90 0.70 0.83 1.00 1.35* 2.81** 0.78 2.35** 1.00 0.22** 1.50 0.32 0.57 Los AngelesLong Beach Los Angeles San San City BernardinoRiverside-Ontario Diego San FranciscoOakland San Jose Santa Rosa Vallejo-Napa d 1.00 Oakland a) T h e r a t i o is e q u a l t o t h e p r o b a b i l i t y t h a t a n a p p l i c a t i o n w i t h t h e indicated c h a r a c t e r i s t i c s w i l l be modified downward divided by the probability that the typical application will be modified downward. A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r o f t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t than the d e n o m i n a t o r at the f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t the d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l . b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y of L o s A n g e l e s . c ) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . I t is t h e b a s e for c a l c u l a t i n g t h e d o w n w a r d m o d i f i c a t i o n r a t i o s . T h e o t h e r a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in o n e o r m o r e characteristics. See T a b l e 3-5 for the p r o b a b i l i t y of d o w n w a r d m o d i f i c a t i o n for t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . d) S e e n o t e (d), T a b l e 3 - 7 , for e x p l a n a t i o n . e) S e e n o t e (e), T a b l e 3 - 7 , for e x p l a n a t i o n . f) S e e n o t e (f), T a b l e 3 - 7 , f o r e x p l a n a t i o n . g) S e e n o t e (g), T a b l e 3 - 7 , f o r e x p l a n a t i o n . 1-28 the d e n i a l and d o w n w a r d m o d i f i c a t i o n ratios for applications from households of different ages w h i c h are discussed in a l a t e r section. W h e n t h e d e n i a l r a t i o is g r e a t e r t h a n o n e , t h e e v i d e n c e is c o n s i s t e n t w i t h a l l e g a t i o n s of d i s c r i m i n a t i o n a g a i n s t t h a t house- hold type. less A c c o r d i n g to T a b l e s 3 - 7 a n d 3 - 8 , d e n i a l r a t i o s than one occur more frequently than denial ratios greater o n e for e a c h of t h e f o u r h o u s e h o l d t y p e s . than In a d d i t i o n , m o r e o f the ratios less than one are based on statistically coefficients than are the ratios greater than significant one. The tables of denial ratios indicate that male-female cations w i t h a w o m a n of c h i l d b e a r i n g age and an a p p l i c a n t 25 and 34 (MFCB25-34) are statistically between significantly more t o b e d e n i e d in t h e A n a h e i m - S a n t a A n a - G a r d e n G r o v e desto likely (1977) a n d M o - (1978) m e t r o p o l i t a n a r e a s t h a n an o t h e r w i s e s i m i l a r 4 application. appli- typical T h e r a t i o s a r e 1.30 a n d 1 . 3 5 , r e s p e c t i v e l y . m a l e - f e m a l e h o u s e h o l d s w i t h a w o m a n of c h i l d b e a r i n g a g e s i g n i f i c a n t l y m o r e l i k e l y t o b e d e n i e d in t h e S a c r a m e n t o a n d S a n B e r n a r d i n o - R i v e r s i d e - O n t a r i o (1978) m e t r o p o l i t a n 5 w i t h r a t i o s of 1 . 4 8 a n d 1 . 1 2 , Older, (MFCB) (1978) areas, respectively. F e m a l e only a p p l i c a t i o n s w i t h no w o m e n of c h i l d b e a r i n g (FONLYNCB) are m o r e than t w i c e as likely to be d e n i e d than t y p i c a l a p p l i c a t i o n in S a n B e r n a r d i n o - R i v e r s i d e - O n t a r i o San Diego (1977), Santa Barbara (1978), and Stockton m e t r o p o l i t a n areas; all four coefficients are significant. age the (1978), (1978) statistically T h e d e n i a l r a t i o s f o r t h e f i r s t t h r e e of f o u r s t u d y a r e a s a r e a l s o g r e a t e r t h a n o n e in t h e o t h e r are these year, 1-29 b u t the underlying coefficients are not statistically significant for t h a t y e a r . F e m a l e o n l y a p p l i c a t i o n s w i t h a t l e a s t o n e w o m a n of child- b e a r i n g a g e a n d an a p p l i c a n t b e t w e e n 25 and 34 y e a r s of a g e (FONLYCB 2 5 - 3 4 ) a r e s t a t i s t i c a l l y s i g n i f i c a n t l y m o r e l i k e l y b e d e n i e d in the M o d e s t o (1978), Sacramento nardino-Riverside-Ontario ( 1 9 7 8 ) , and S a n B e r - (1978) m e t r o p o l i t a n a r e a s . The r a t i o s of 1 . 7 9 , 1.08 and 2 . 0 0 , r e s p e c t i v e l y , i n d i c a t e large differentials to in t w o of t h e t h r e e s t u d y denial relatively areas. The tables also indicate that male only households (MONLY) have a significantly harder time having their applications ap- p r o v e d t h a n t h e t y p i c a l a p p l i c a t i o n in the C i t y of L o s A n g e l e s (1978) a n d t h e S a c r a m e n t o tan a r e a s . (1978) a n d S a n D i e g o (1977) metropoli- T h e c h a n c e of d e n i a l is 20 to 96 p e r c e n t m o r e likely for m a l e o n l y a p p l i c a t i o n s t h a n the t y p i c a l a p p l i c a t i o n in t h e s e t h r e e s t u d y a r e a s in t h e i n d i c a t e d y e a r s . T h e San D i e g o MONLY d e n i a l r a t i o is a l s o g r e a t e r t h a n o n e in 1978 b u t the c o e f f i c i e n t is n o t s t a t i s t i c a l l y underlying significant. The downward modification results are even more inconsis- t e n t w i t h sex d i s c r i m i n a t i o n a l l e g a t i o n s t h a n a r e t h e d e n i a l results. O n l y 18 of t h e 96 d o w n w a r d m o d i f i c a t i o n r a t i o s (Tables 3-9 a n d 3 - 1 0 ) a r e g r e a t e r t h a n o n e c o m p a r e d to 57 of the 136 denial ratios. F u r t h e r m o r e , o n l y f i v e of t h e d o w n w a r d modifi- c a t i o n r a t i o s in e x c e s s of o n e a r e b a s e d on s t a t i s t i c a l l y nificant sex coefficients. F o u r of t h e s e f i v e o c c u r in t h e S a n t a R o s a area. sig- F e m a l e o n l y a p p l i c a t i o n s w i t h n o w o m a n of metropolitan childbearing 1-30 age ( F O N L Y N C B ) a r e m o r e t h a n t w i c e a s l i k e l y to b e m o d i f i e d down- w a r d t h a n t h e t y p i c a l a p p l i c a t i o n in 1 9 7 7 a n d 1 9 7 8 . Male-female a p p l i c a t i o n s w i t h a w o m a n of c h i l d b e a r i n g a g e a n d a n applicant b e t w e e n 25 a n d 34 y e a r s o f a g e (MFCB25-34) and male only appli- c a t i o n s a r e 1 . 3 5 a n d 2 . 3 5 t i m e s a s l i k e l y to b e m o d i f i e d w a r d a s t h e t y p i c a l a p p l i c a t i o n in down- 1978. T h e f i f t h d o w n w a r d m o d i f i c a t i o n r a t i o t h a t is significantly a b o v e o n e o c c u r s in t h e V a l l e j o - N a p a m e t r o p o l i t a n a r e a in 1978. M a l e o n l y a p p l i c a t i o n s a r e n e a r l y t h r e e t i m e s a s l i k e l y to b e m o d i f i e d d o w n w a r d as the t y p i c a l application. M a n y a l l e g a t i o n s of s e x d i s c r i m i n a t i o n a s s e r t that lenders d i s c o u n t secondary income, especially when the wage e a r n e r is f e m a l e . Denial and downward modification ratios for t w o - w o r k e r h o u s e h o l d s b y s e x a r e c o m p a r e d to t h e o n e w o r k e r t y p i c a l a p p l i c a t i o n in T a b l e s 3 - 1 1 to 3 - 1 4 . t r i b u t e s 50 p e r c e n t of t h e h o u s e h o l d income. Each worker con- In g e n e r a l , these r e s u l t s i n d i c a t e t h a t i n c o m e f r o m a s e c o n d w o r k e r is f a v o r e d the lender decision process. Perhaps two sources of income d u c e the v a r i a n c e of income and h e n c e , the c r e d i t r i s k . of t h e d e n i a l a n d d o w n w a r d m o d i f i c a t i o n r a t i o s a r e l e s s in re- Most than one. W h e n t h e s e x o f t h e a p p l i c a n t is e x a m i n e d , t w o t y p e s of applications have denial ratios greater than one more often than less than o n e . female These are applications from male-female and o n l y h o u s e h o l d s p r o v i d e d there are no w o m e n of c h i l d b e a r i n g (MFNCB a n d F O N L Y N C B , r e s p e c t i v e l y ) . H o w e v e r , v e r y f e w of s e c o n d a r y i n c o m e c o e f f i c i e n t s r e s p o n s i b l e for t h e s e r a t i o s age the in 3-31 Table 3-11 D e n i a l R a t i o s for Applications w i t h 50 P e r c e n t S e c o n d a r y I n c o m e b y Sex R e l a t i v e to t h e T y p i c a l A p p l i c a t i o n ; 1977 MFCB Study Area MFNCB a FONLYCB and 25-34 FONLYNCB Anaheim-Santa AnaGarden Grove 1.34** 0.99 1.66** Bakersfield 0.66 0.58 0.00 Fresno 1.41 1.04 0.60** 0.55 C i t y of Los Angeles 0.66 Modesto and 25-34 MONLY 1 . 03 0.44** 0.25 0.12° 0.78 0.90 1.21 0.37** 0.63° 0.81 0.63** 0.71 0.54** 0.81 0.81 0.33° 0.32 0.73 2.27* Oxnard-Ventura 1.29 0.96 1.95 0.49 0.86 Sacramento 1.02 0.76* 0.72 0.51* 0.64* Salinas-Monterey 1.32 0.68* 1.48 0.82* 0.56* 1.05 1.59 1.17 0.00 1.02 1.44* 2.47° 1.61* 2.16° 1.33 0.65** 1.42 0.52** 0.84** 0.61 0.55 0. 34° 0.40 Los San San San San AngelesLong Beach BernardinoRiverside-Ontario Diego FranciscoOakland Jose C C C C 3.36* C 0.53° Santa Barbara 2.43** 0.95 2.50** 0.57 0.15** Santa Rosa 1.80 0.90 1.04 0.92 1.68 Stockton 1.48 0.34 1.06 0.98 0.60 Vallejo-Napa 0.23** 0.38 0.24 0.58° C C 0. 0 2 C a ) T h e r a t i o is e q u a l to t h e p r o b a b i l i t y t h a n a n a p p l i c a t i o n w i t h t h e indicated c h a r a c t e r i s t i c s w i l l be denied d i v i d e d by the p r o b a b i l i t y t h a t t h e t y p i c a l a p p l i c a t i o n w i l l b e d e n i e d . A s i n g l e a s t e r i s k (*) indicates that the underlying secondary income coefficients that account for the d i f f e r e n c e between the numerator and the denominator 3-32 Table 3-11 a) (continued) (cont'd) of t h e r a t i o a r e s t a t i s t i c a l l y s i g n i f i c a n t a t t h e f i v e t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l . T h e t y p i c a l a p p l i c a t i o n is d e s c r i b e d in t h e t e x t . It h a s n o s e c o n d a r y i n c o m e a n d is t h e b a s e for c a l c u l a t i n g t h e d e n i a l ratios. The other applications involve variations from the typic a l o n e in o n e or m o r e c h a r a c t e r i s t i c s . S e e T a b l e 3-4 for t h e p r o b a b i l i t y o f d e n i a l f o r t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y o f L o s Angeles. c) T h e s u b s t a n t i a l d i f f e r e n c e of t h i s r a t i o f r o m 1.00 is l a r g e l y d u e to s t a t i s t i c a l l y s i g n i f i c a n t s e x o r a g e c o e f f i c i e n t s a n d n o t t h e c o e f f i c i e n t s o f t h e s e c o n d a r y i n c o m e Mv a r i a b l e s . Howe v e r , if o n e o r m o r e a s t e r i s k s a p p e a r w i t h a c " , t h e s e c o n d a r y income coefficients are also statistically significant. See T a b l e s 3 - 7 to 3 - 1 0 a n d 3 - 1 5 to 3 - 1 8 for a s u m m a r y of t h e s e x and age r e s u l t s . 3-33 Table 3-11 D e n i a l R a t i o s for Applications w i t h 50 P e r c e n t S e c o n d a r y I n c o m e b y S e x Relative to the T y p i c a l A p p l i c a t i o n ; Study Area MFNCB and MFCB 25-34 1978 FONLYNCB a FONLYCB and 2 5 - 3 4 MONLY Anaheim-Santa AnaGarden Grove 1.44* 0.55** 1.91* 0.38** 1.11 Bakersfield 1.56 0.62** 1.65 0.31** 0.62 Fresno 1.17 0.68 1.26 0.49 0.34* 0.71** 0.54** 0.60** 0.39** 0.81** 0.78* 0.55** 0.67* 0.23** Modesto 1.23 0.57 0.53 0.76 0.39 Oxnard-Ventura 1.69 0.68° 2.16 1.21 1.13 Sacramento 1.14 1.07 1.34 1.29 1.81° Salinas-Monterey 1.09 0.51** 0.93 0.54** 1.07 San Bernardino- \ Riverside-Ontario 1.17 1.03 3.42 2.56° 0.36** San 1.44* 0.99 1.96* 1.42 1.12 0.93 0.64° 1.05 0.59° 0.99 0.57** 0.57**° 0.39** 0.32**° 0.99 Los AngelesLong Beach C i t y of Los San San Angeles Diego FranciscoOakland Jose C C 1.07 Santa Barbara 1.26 0.53 3.07° 0.61 0.73 Santa Rosa 0.61* 0.67° 0.24*° 0.44° 0.71° Stockton 0.49 0.72 1.33° 0.59 0.92 Vallejo-Napa 1 . 36 0.56 2.83 0.00° 1.20 a) T h e r a t i o i s e q u a l to t h e p r o b a b i l i t y t h a n a n a p p l i c a t i o n w i t h t h e indicated characteristics w i l l be denied divided by the probability t h a t t h e t y p i c a l a p p l i c a t i o n w i l l b e d e n i e d . A s i n g l e a s t e r i s k (*) indicates that the underlying secondary income coefficients that a c c o u n t f o r t h e d i f f e r e n c e b e t w e e n t h e n u m e r a t o r a n d d e n o m i n a t o r of 3-34 Table 3-12 a) (continued) ( c o n t ' d ) t h e r a t i o a r e s t a t i s t i c a l l y s i g n i f i c a n t a t the f i v e - t o t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e y a r e s i g n i f i c a n t a t the five or less p e r c e n t l e v e l . The typical app l i c a t i o n is d e s c r i b e d in t h e t e x t . It h a s n o s e c o n d a r y i n c o m e a n d is t h e b a s e f o r c a l c u l a t i n g t h e d e n i a l r a t i o s . T h e o t h e r a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in o n e or more characteristics. S e e T a b l e 3 — 5 f o r t h e p r o b a b i l i t y of d e n i a l f o r t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y o f L o s c) S e e f o o t n o t e (c) t o T a b l e 3-11. Angeles. 3-35 Table 3-11 D o w n w a r d M o d i f i c a t i o n R a t i o s for Applications w i t h 50 P e r c e n t S e c o n d a r y I n c o m e b y Sex R e l a t i v e to the T y p i c a l A p p l i c a t i o n : Study Area b MFNCB MFCB and 25-34 1977 FONLYNCB a FONLYCB and 25-34 MOKLY Anaheim-Santa AnaGarden Grove 1 . 38** 0 . 58* 1 . 40** 0 . 63* 1 .09 Fresno 0 . 84 0 . 59 0. 30° 0 . 29 0 .74 0 . 95 0 . 79 0 . 92 0 . 81 0 .78 0 . 65** 0 . 48** 0 . 47** 0 . 40** 0 .74** 0 . 92 0 . 79 1 . 09 0 . 23 Los AngelesLong Beach C i t y of L o s Angeles Oxnard-Ventura Sacramento San San San San BernardinoRiverside-Ontario Diego Francisco-Oakland Jose Santa Rosa Vallejo-Napa c 1 .06 0 . 79 0 . 41** 0 . 73 0 . 21* * 0 . 74 0 . 23* 1 . 04 0 . 21* 1 . 28 0 . 41** 1 . 27 0 . 46** 0 . 64** 0 . 74 0. 37** 0.52° C 0. 34**° 0 . 70 0. 27** 0.39 1 . 50* 0 . 80** 3. 68*° 1. 23 1 . 34 2 . 80 4 . 58 2 . 15 C C C 1 .23 2 .50* 0 .91 C 0 .51**° 0 . 64° 1 .94** 7 .19 * * C a ) T h e r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n w i t h t h e indicated c h a r a c t e r i s t i c s will be downward m o d i f i e d divided by the probability that the typical application will be downward m o d i f i e d . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e u n d e r l y i n g s e c o n d a r y income c o e f f i c i e n t s t h a t a c c o u n t for the d i f f e r e n c e b e t w e e n the num e r a t o r and d e n o m i n a t o r of the ratio are s t a t i s t i c a l l y significant a t t h e f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l . T h e t y p i c a l a p p l i c a t i o n is d e s c r i b e d in t h e t e x t . It h a s n o s e c o n d a r y i n c o m e a n d is t h e b a s e for c a l c u l a t i n g t h e d o w n w a r d modification ratios. The other applications involve variations f r o m t h e t y p i c a l o n e in o n e o r m o r e c h a r a c t e r i s t i c s . See Table 3-4 for t h e p r o b a b i l i t y o f d o w n w a r d m o d i f i c a t i o n for t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y o f L o s A n g e l e s . c ) S e e f o o t n o t e (c) t o T a b l e 3 - 1 1 . 3-36 Table 3 - 1 1 D o w n w a r d M o d i f i c a t i o n R a t i o s for Applications w i t h 50 P e r c e n t S e c o n d a r y I n c o m e b y Sex R e l a t i v e to t h e T y p i c a l A p p l i c a t i o n ; . 1978 a MFNCB MFCB and 25-34 Anaheim-Santa AnaGarden Grove 0 . 84 0 . 52** 0 . 76 0 . 36** 0 .52** Fresno 1 . 61 0.81° 1 . 59* 1 . 05 1 .64* 0 . 66** 0.58° 0 . 57** 0. 57° Study Area Los AngelesLong Beach C i t y of Los 0 . 47 0.24**° 0 .66 0 . 73* 0 . 91 0 . 51 0 . 82 0 .63 0 . 51* 0 . 44* 0 . 28* 0 . 25* 0 .15** 0 . 82 0.54** 0.34**° 0 .58** 0 . 50 Sacramento Diego 0 . 78° c 0.35**° Oxnard-Ventura San MONLY 0.23** 0.40** BernardinoRiverside-Ontario C FONLYCB and 25-34 0 . 47** 0. 62** San Angeles FONLYNCB C 0 . 58 C C 0 .58** San Francisco-Oakland 0 . 80* 0.48° 0.49* San Jose 1. 41** 0 . 46** 1 . 26** 0 . 31** 0 .68 0 . 90 1. 51° 2. 52° 0 . 88 1 .75° 0 . 45 1 . 06 0 . 60 1 . 51 0 .00** Santa Rosa Vallejo-Napa 0.42 0 .79 a) T h e r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t a n a p p l i c a t i o n w i t h t h e indicated characteristics w i l l be downward modified divided by the probability that the typical application will be downward modified. A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e u n d e r l y i n g s e c o n d a r y inc o m e c o e f f i c i e n t s t h a t a c c o u n t for t h e d i f f e r e n c e b e t w e e n t h e num e r a t o r and d e n o m i n a t o r of the r a t i o are s t a t i s t i c a l l y s i g n i f i c a n t a t t h e f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s that they are significant at the five or less p e r c e n t level. The t y p i c a l a p p l i c a t i o n is d e s c r i b e d in t h e t e x t . It h a s n o s e c o n d a r y i n c o m e a n d is t h e b a s e for c a l c u l a t i n g t h e d o w n w a r d m o d i f i c a t i o n ratios. The other applications involve variations from the typical o n e in o n e o r m o r e c h a r a c t e r i s t i c s . See T a b l e 3-5 for the probab i l i t y of d o w n w a r d m o d i f i c a t i o n f o r t h e t y p i c a l a p p l i c a t i o n in e a c h area. b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y o f L o s A n g e l e s . c) S e e f o o t n o t e (c) t o T a b l e 3 - 1 1 . 1-37 excess of one are statistically significant at the ten level. percent The f o l l o w i n g p a r a g r a p h s summarize the cases of ratios larger than one that are based on statistically cant secondary income those signifi- coefficients. M a l e - f e m a l e a p p l i c a n t s w i t h no w o m a n of c h i l d b e a r i n g age (MFNCB) w i t h t w o e q u a l i n c o m e s a r e 1.34 to 2 . 4 3 t i m e s as likely to b e d e n i e d than are t y p i c a l a p p l i c a n t s w i t h no secondary c o m e in t h e A n a h e i m - S a n t a A n a - G a r d e n G r o v e Diego (1978), and Santa Barbara in- (1977 a n d 1 9 7 8 ) , S a n (1977) m e t r o p o l i t a n areas. T h e s e t y p e s o f a p p l i c a n t s a r e a l s o 1 . 3 8 to 1 . 5 0 t i m e s a s to receive downward m o d i f i c a t i o n s than the typical 6 likely applicant w i t h only o n e w o r k e r in the A n a h e i m - S a n t a A n a - G a r d e n Grove (1977) , San Jose Female (1978) a n d S a n t a R o s a (1977) m e t r o p o l i t a n a r e a s . o n l y h o u s e h o l d s w i t h n o w o m e n of c h i l d b e a r i n g a g e (FONLYNCB) c e i v e e s s e n t i a l l y t h e s a m e t r e a t m e n t in t h e s e m e t r o p o l i t a n and the Fresno (1978) Applications re- areas area. from h o u s e h o l d s w i t h w o m e n of c h i l d b e a r i n g w h e t h e r m a l e - f e m a l e or female o n l y , who have two w o r k e r s age, earning e q u a l i n c o m e s a r e a p p r o x i m a t e l y 1 . 5 0 t i m e s a s l i k e l y to b e d e n i e d t h a n t h e t y p i c a l a p p l i c a t i o n w i t h o n l y o n e w o r k e r in o n l y one metropolitan area: San Diego (1977). Male only applications with two workers earning equal c o m e a r e m o r e t h a n t w i c e as l i k e l y to b e d e n i e d t h a n t h e a p p l i c a t i o n w i t h o n l y o n e w o r k e r in t h e M o d e s t o Bernardino-Riverside-Ontario typical (1977) a n d S a n metropolitan areas. These appli- c a n t s a r e a l s o 1 . 6 4 t o 7 . 1 9 t i m e s a s l i k e l y to b e d o w n w a r d f i e d in t h e F r e s n o (1978) , S a n (1977), Santa Rosa (1977) a n d V a l l e j o - N a p a in- modi- Bernardino-Riverside-Ontario (1977) metropolitan 1-38 areas. A g e of Applicant The d e n i a l and downward m o d i f i c a t i o n ratios for of v a r i o u s a g e s a r e p r e s e n t e d applicants in T a b l e s 3 - 1 5 to 3 - 1 8 . The n i a l r a t i o s i n d i c a t e t h a t t h e t y p i c a l a p p l i c a n t w h o is 35-44 y e a r s o l d is t h e m o s t l i k e l y to b e d e n i e d ; n e a r l y a l l t h e r a t i o s for t h e o t h e r f o u r a g e c a t e g o r i e s 5 4 , a n d o v e r 54) a r e l e s s t h a n 1 . 0 0 . (under 2 5 , 2 5 - 3 4 , 45- oldest applicants (over 5 4 ) . half significant. The downward modification ratios are substantially o n e for t h e y o u n g e s t a p p l i c a n t s denial In a d d i t i o n , n e a r l y the ratios below one are statistically de- below (under 25) a n d a b o v e o n e for T h i s is t h e o n l y i d e n t i f i a b l e t e r n in t h e d o w n w a r d m o d i f i c a t i o n r e s u l t s . It i n d i c a t e s the pat- that a p p l i c a n t s f r o m p e r s o n s o v e r 54 y e a r s o f a g e a r e m o r e l i k e l y receive downward modifications than are applications in t h e i r r e q u e s t e d loan from similarly situated persons amount between 35 a n d 4 4 , and t h a t t h e r e v e r s e is t r u e f o r a p p l i c a t i o n s persons under to from 25. Race T a b l e s 3 - 1 9 to 3 - 2 2 p r e s e n t d e n i a l a n d d o w n w a r d tion ratios for t y p i c a l a p p l i c a t i o n s from d i f f e r e n t groups that are otherwise similar. modificaracial The denial ratios provide strong and c o n s i s t e n t e v i d e n c e that m e m b e r s of m i n o r i t y receive unfavorable treatment from California associations. savings and T h e c l e a r e s t case of d i s c r i m i n a t o r y exists for b l a c k s . Applications groups loan treatment f r o m b l a c k s a r e 1 . 5 4 to 7.82 3-39 Table 3-11 Denial Ratios by Age of the A p p l i c a n t for T y p i c a l A p p l i c a t i o n s : Study Areas ALT 2 5 A25-34 1977 A35-44° A45-54 AGE 5 5 4 Anaheim-Santa AnaGarden Grove 0.85 1.12 1.00 0.83 0.87 Bakersfield 0.90 1.40 1.00 1.04 1.83 Fresno 0.87 1.05 1.00 0.81 1.14 0.61** 1.08 1.00 0.68** 0.66** 0.75 1.01 1.00 0.61** 0.56** Modesto 0.60 0.74 1.00 0.50** 0.23** Oxnard-Ventura 0.69 0.83 1.00 0.49** 0.17** Sacramento 1.03 1.02 1.00 1.30 1.38 Salinas-Monterey 0.40* 1.12 1.00 0.76 0.41* 0.74 1.18 1.00 0.98 0 .55 Los AngelesLong Beach C i t y of L o s San Angeles BernardinoRiverside-Ontario San Diego 0.72 0.89 1.00 0.87 0.88 San Francisco-Oakland 0.63** 1.09 1.00 0.89 0.81 San Jose 1.04 0.92 1.00 0.63** 0.21** Santa Barbara 0.80 1.87* 1.00 0.66 0.76 Santa Rosa 0.99 1.05 1.00 1.74* 1.04 Stockton 0.19** 0.26** 1.00 0.31** 0.34* Vallejo-Napa 1.85 0.46** 1.00 0.53 1.41 a) T h e r a t i o is e q u a l t o t h e p r o b a b i l i t y t h a t a n a p p l i c a t i o n w i t h t h e indicated c h a r a c t e r i s t i c s will be denied divided by the probability t h a t t h e t y p i c a l a p p l i c a t i o n w i l l b e d e n i e d . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r of t h e r a t i o is s t a t i s t i c a l l y s i g n i f i cantly different than the denominator at the five-to-ten percent l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i ficant at the five or less percent l e v e l . 3-40 Table 3-15 (continued) b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t the C i t y of Los Angeles. c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in the t e x t . It is t h e b a s e f o r c a l c u l a t i n g t h e d e n i a l r a t i o s . T h e o t h e r applicat i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in o n e or more characteristics. S e e T a b l e 3-4 for the p r o b a b i l i t y of denial for t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . 3-41 Table 3-11 D e n i a l R a t i o s b y A g e of t h e A p p l i c a n t for T y p i c a l A p p l i c a t i o n s : S t u d y Areas' Garden 3 Grove ALT25 A25-34 1978 A35-44 a c A45-54 AGE55 0.80 1.15* 1.00 0.89 0.72** Bakersfield 0.70 0.76 1.00 1.04 0.78 Fresno 0.95 0.76* 1.00 0.92 0.85 0.69** 0.88** 1.00 0.89** 0.80** 0.94 0.90** 1.00 0.85* 1.00 Modesto 0.80 0.62* 1.00 . 1.09 1.75 Oxnard-Ventura 1.56 1.12 1.00 1.05 0.57** Sacramento 0.83 0.60** 1.00 1.28 1.05 Salinas-Monterey 0.67 0.71 1.00 0.55** 0.79 0.80 0.73 1.00 1.37 1.89 Los AngelesLong Beach C i t y of Los San Angeles BernardinoRiverside-Ontario San Diego 0.93 1.10 1.00 1.43** 0.94 San Francisco-Oakland 0.78* 0.87** 1.00 1.02 0.79* San Jose 0.89 0.78** 1.00 0.66** 0.83 Santa Barbara 0.71 1.06 1.00 0.53 1.03 Santa Rosa 0.84 1.06 1.00 1.18 0.64* Stockton 0 . 37* 1.15 1.00 0.75 0.45* Vallejo-Napa 0.22** 0.86 1.00 1.06 0.00** a) T h e r a t i o is e q u a l t o t h e p r o b a b i l i t y t h a n a n a p p l i c a t i o n w i t h the indicated c h a r a c t e r i s t i c s w i l l be denied divided by the p r o b a b i l i t y t h a t t h e t y p i c a l a p p l i c a t i o n w i l l b e d e n i e d . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r o f t h e r a t i o is s t a t i s t i c a l l y s i g n i f i cantly d i f f e r e n t than the denominator at the five-to-ten percent l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i ficant at the five or less p e r c e n t l e v e l . 3-42 Table 3-16 (continued) b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y o f L o s Angeles. c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . It is t h e b a s e for c a l c u l a t i n g t h e d e n i a l r a t i o s . T h e o t h e r a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in o n e o r m o r e c h a r a c t e r i s t i c s . S e e T a b l e 3 - 5 f o r t h e p r o b a b i l i t y of d e n i a l for t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . 3-43 Table 3-11 D o w n w a r d M o d i f i c a t i o n R a t i o s b y A g e of t h e A p p l i c a n t for T y p i c a l A p p l i c a t i o n s ; Study Areas ALT 25 A25-34 1977 A35-44 a C A45-54 AGE 5 5 Anaheim-Santa AnaGarden Grove 0.43** 0.69** 1.00 0.96 1.18 Fresno 0.54* 0.82 1.00 0.34** 1.05 0.90 0.96 1.00 1.41** 1.40** 0.90 0.78** 1.00 1.08 1.18 Oxnard-Ventura 0.47** 0.86 1.00 1.13 0.81 Sacramento 0.51* 0.80* 1.00 0.92 0.99 0.88 0.52** 1.00 0.88 1.53 Los AngelesLong Beach C i t y of L o s San Angeles BernardinoRiverside-Ontario San Diego 0.91 0.99 1.00 1.30 1.15 San Franciso-Oakland 0.79 0.73** 1.00 0.90 0.94 San Jose 1.04 0.78** 1.00 1.01 0.80 0.91 1.72** 1.00 0.49* 1.63 0.33* 0.70 1.00 1.00 3.63** Santa Rosa Vallejo-Napa a) T h e r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t a n a p p l i c a t i o n w i t h t h e indicated c h a r a c t e r i s t i c s w i l l be downward m o d i f i e d divided by the probability that the typical application will be downward modified. A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r o f t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t than the d e n o m i n a t o r at the f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e or l e s s p e r c e n t l e v e l . b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y o f L o s Angeles. c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . b a s e for c a l c u l a t i n g t h e d o w n w a r d m o d i f i c a t i o n r a t i o s . a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in characteristics. S e e T a b l e 3-4 for t h e p r o b a b i l i t y o f m o d i f i c a t i o n for t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . It is t h e The other o n e or m o r e downward 3-44 Table 3-11 Downward M o d i f i c a t i o n R a t i o s b y A g o of for T y p i c a l A p p l i c a t i o n s : Study Areas ALT25 A25-34 the A p p l i c a n t 1978 A35-44 a c A45-54 AGF.55 Anaheim-Santa AnaGarden Grove o . 49** 0.82** 1.00 0.70** 1.23 Fresno 0.59* 0.61** 1.00 0.98 1.00 Los AngelesLong Beach 0.73** 0.78** 1.00 0.96 1.06 C i t y of L o s A n g e l e s 0.77* 0.78** 1.00 0.86* 0.94 Oxnard-Ventura 0.52* 0.73* 1.00 0.85 1.16 Sacramento 0.59** 0.94 1.00 1.01 1.00 1.01 1.12 1.00 1.63* 0-96 San BernardinoRiverside-Ontario San Diego 0.72* 0.67 1.00 1.19 1.17 San Francisco-Oakland 0.54** 0.80** 1.00 1.14 1.05 San Jose 0.74 0.97 1.00 0.95 1.00 0.62 0.75 1.00 1 . 30 1.17 0.00** 1.28 1.00 2.31** 2.91** Santa Rosa Vallejo-Napa a) T h e r a t i o is e q u a l t o t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n w i t h t h e indicated characteristics w i l l be downward modified divided by the probability that the typical application will be downward m o d i f i e d . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r of t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t than the d e n o m i n a t o r # a t the f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t the d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l . b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y o f L o s Angeles. c ) T h i s is the t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . b a s e for c a l c u l a t i n g t h e d o w n w a r d m o d i f i c a t i o n r a t i o s . a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in characteristics. S e e T a b l e 3 - 5 for t h e p r o b a b i l i t y of m o d i f i c a t i o n for t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . It is t h e The other one or m o r e downward 3-45 Table 3-11 D e n i a l R a t i o s b y R a c e of Applicant(s) for T y p i c a l A p p l i c a t i o n s : Study Areas b White c Black 1977 a u^ntji Minority Spanish Asian 1 . 15 1 . 31 5 . 75** 5. 95** Anaheim-Santa AnaGarden Grove 1 . 00 0.00** 1 . 20 Bakersfield 1 . 00 7.82** 2. 14 Fresno 1 . 00 3.13** 1 . 62* 1 . 38 2 . 39** 1 . 00 1.54** 1 . 16* 0 . 83 1.3l 1 . 00 2.77** 1 . 08 0 . 85 1 . 75* Los AngelesLong Beach C i t y of Los Angeles Modesto 1 . 00 Oxnard-Ventura 1 . 00 2.04 Sacramento 1 . 00 2.03 Salinas-Monterey 1 . 00 2.70* 1 . 00 2.72 San BernardinoRiverside-Ontario d e 1 . 08- e e f e 2 . 88** 1 . 50 0 . 64 1 . 35 1 . 29 1 . 19 1 . 70 1 . 89* 0 . 28* 1 . 94* 0 . 85 0 . 73 0 .71 San Diego 1 . 00 2.47** 1 . 01 0 . 87 0 . 83 San Francisco-Oakland 1 . 00 1.56** 1 . 01 0 . 98 1 . 37* San Jose 1 . 00 4.16** 1 . 71** 1 . 64** 1 . 21 1 . 54 0 . 00** 2 . 12 d Santa Barbara 1 . 00 Santa Rosa 1 . 00 1.76 1 . 39 3 . 13* 2 . 00 Stockton 1 . 00 7.29** 2 . 52* 2 .44 1 . 81 Vallejo-Napa 1 . 00 4.92** 1 . 58 2.69 e 2 . 09 a) T h e r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n w i t h the indicated c h a r a c t e r i s t i c s w i l l be denied divided by the probability t h a t t h e t y p i c a l a p p l i c a t i o n w i l l b e d e n i e d , A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r of t h e r a t i o is s t a t i s t i c a l l y s i g n i f i cantly d i f f e r e n t than the denominator at the five-to-ten percent l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t the d i f f e r e n c e is s i g n i ficant at the five or less p e r c e n t l e v e l . 3-46 Table 3-15 (continued) b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y of L o s Angeles. c ) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . the b a s e for c a l c u l a t i n g the denial r a t i o s . The other t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in o n e or characteristics. S e e T a b l e 3-4 for t h e p r o b a b i l i t y o f f o r t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . It is applicamore denial d) G r o u p e d t o g e t h e r w i t h other m i n o r i t i e s due to the limited b e r of o b s e r v a t i o n s o n t h i s t y p e of h o u s e h o l d . e) T h e n u m e r a t o r is s t a t i s t i c a l l y s i g n i f i c a n t l y l a r g e r t h a n d e n o m i n a t o r a t the ten percent one-tail l e v e l . numthe f) G r o u p e d t o g e t h e r w i t h w h i t e s d u e to t h e l i m i t e d n u m b e r o f o b servations. 3-47 Table 3-11 D e n i a l R a t i o s by Race of Applicant(s) for T y p i c a l A p p l i c a t i o n s : Study Areas b White C Black 1978 Spanish Anaheim-Santa AnaGarden Grove 1.00 2.37** 1. 2 9 Bakersfield 1.00 4.15** Fresno 1.00 1.81 1.00 1.00 Los AngelesLong Beach C i t y of Los Angeles a 6 Asian LIl^JL Minority 0 ..75* 1..29 0 ..47* 1 . 31 0 .,00** 1 . 28 0 . 76 1 ., 51 1.69** 1 . 04 0 . 79* * 1 . 50** 2.12** 1. 28** 1 . 11 1 . 57* 6 Modesto 1.00 Oxnard-Ventura 1.00 1.34 1 . 60* 0 . 97 1 . 51 Sacramento 1.00 3.44** 1 . 66* 0 . 97 2 . 11** Salinas-Monterey 1.00 2.12** 1. 69** 1 . 25 2 . 46** 1.00 4.27** 1. 5 4 0 . 75 0 . 43 San BernardinoRiverside-Ontario d 1 . 27 ' e f 1 . 40 San Diego 1.00 1.95* 1 . 05 1 . 32 1 . 21 San Francisco-Oakland 1.00 1.59** 1 . 29** 1. 1 6 e 1 . 19 San Jose 1.00 2.67** 1 . 22 0 . 76 1 . 79* 1 . 12 0 . 95 3 . 60** Santa Barbara 1 . 00 Santa Rosa 1.00 0.67 o : 69 0 . 49 0 . 00** Stockton 1.00 0.38 0 . 78 0 . 50 0 . 40 Vallejo-Napa 1.00 2.65 2 . 20 1 . 35 0 . 00** d e a) T h e r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t a n a p p l i c a t i o n w i t h the indicated c h a r a c t e r i s t i c s will be denied divided by the probability t h a t t h e t y p i c a l a p p l i c a t i o n w i l l b e d e n i e d . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r o f t h e r a t i o is s t a t i s t i c a l l y s i g n i f i cantly different than the denominator at the five-to-ten percent l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i ficant at the five or less percent level. 3-48 Table 3-15 (continued) b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y o f L o s Angeles. c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . the base for c a l c u l a t i n g the denial r a t i o s . The other t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in o n e or characteristics. S e e T a b l e 3 - 5 for t h e p r o b a b i l i t y o f for t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . It is applicamore denial d) S e e f o o t n o t e (d) to T a b l e 3-19. e) S e e f o o t n o t e (e) to T a b l e 3-19. f) S e e f o o t n o t e (f) t o T a b l e 3-19. 3-49 Table 3 - 1 1 D o w n w a r d M o d i f i c a t i o n Ratios by Race of for Typical A p p l i c a t i o n s : Study Areas b White c Black Applicant(s) 1977 a Spanish Asian uunfcjj. Minority Anaheim-Santa AnaGarden Grove 1.00 0.95 0.82 1.25 1.15 Fresno 1.00 0.45 0.81 0.88 1.67 1.00 0.74** 0.98 1.06 1.05 1.00 0.40** 1.19 0.94 1.19 Oxnard-Ventura 1.00 1.32 1.08 1.14 1.76 Sacramento 1.00 0.00** 0.80' 0.79 1.53 1.00 0.39 1.02 1.36 0.00** Los AngelesLong Beach C i t y of Los San Angeles BernardinoRivers ide-Ontario e San Diego 1.00 0.59 1.65** 0.63 0.61 San Francisco-Oakland 1.00 0.78 1.10 1.05 0.75* San Jose 1.00 1.15 1.15 0.97 0.76 1.00 1.44 0.79 0.00** 1.61 1.00 2.23 2.11 2.07 1.53 Santa Rosa Vallejo-Napa a ) T h e r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n w i t h t h e indicated c h a r a c t e r i s t i c s w i l l be d o w n w a r d m o d i f i e d divided by the probability that the typical application will be modified downward. A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r o f t h e r a t i o is statistically significantly different than the denominator at the f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t the d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e or l e s s p e r c e n t l e v e l . b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y o f L o s A n g e l e s . c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . It is t h e b a s e for c a l c u l a t i n g the d o w n w a r d m o d i f i c a t i o n r a t i o s . The other a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in o n e o r more characteristics. S e e T a b l e 3-4 for t h e p r o b a b i l i t y o f d o w n w a r d m o d i f i c a t i o n for t h e t y p i c a l a p p l i c a t i o n in e a c h area.. d) S e e f o o t n o t e (d) to T a b l e 3 - 1 9 . e) S e e f o o t n o t e (e) t o T a b l e 3 - 1 9 . f) S e e f o o t n o t e (f) to T a b l e 3 - 1 9 . 3-50 Table 3-11 Downward Modification Ratios by Race of for T y p i c a l A p p l i c a t i o n s : Study Areas b White c Applicant(s) 1978 a U L I i e i Black Spanish Asian Minority Anaheim-Santa AnaGarden Grove 1 . 00 0 . 53 1 . 11 0 . 91 0 .87 Fresno 1 . 00 Q . 77 1 . 18 0 . 47 0 .86 1 . 00 0 . 69** 1 . 07 1 . 05 1 .07 C i t y of L o s A n g e l e s 1 . 00 0 . 87 1 . 04 1 . 05 1 . 12 Oxnard-Ventura 1 . 00 0 . 89 1 . 16 1 . 46 0 .98 Sacramento 1 . 00 1 . 29 1 . 28" 1 . 16 1 .00 1 . 00 3. 30** 1 . 08 2.ooe 2 .38' Los San AngelesLong Beach BernardinoRiverside-Ontario San Diego 1 . 00 1 . 01 1. 11 1 . 23 0 .86 San Francisco-Oakland 1 . 00 0 . 93 0 . 84 0 . 96 0 .84 San Jose 1 . 00 1 . 09 0 . 61* 0 . 72 0 .76 1 . 00 0 . 98 0 . 74 3 . 22** 1 .17 1 . 00 3 . 71** 0 . 57 2.0 9 Santa Rosa Vallejo-Napa 6 1 .17 a) T h e r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n w i t h t h e indicated characteristics will be downward modified divided by the probability that the typical application will be modified downward. A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r o f t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t than the d e n o m i n a t o r at the f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l . b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y of L o s A n g e l e s . c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . It is t h e b a s e for c a l c u l a t i n g t h e d o w n w a r d m o d i f i c a t i o n r a t i o s . T h e o t h e r a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in o n e o r more characteristics. S e e T a b l e 3-5 for t h e p r o b a b i l i t y of d o w n w a r d m o d i f i c a t i o n for t h e t y p i c a l a p p l i c a t i o n in e a c h area. d) S e e f o o t n o t e (d) t o T a b l e 3 - 1 9 . e) S e e f o o t n o t e (e) t o T a b l e 3 - 1 9 . f) S e e f o o t n o t e (f) t o T a b l e 3 - 1 9 . 1-51 times as likely to b e d e n i e d than s i m i l a r l y situated w h i t e plicants. This pattern of ratios greater than o n e holds a l l t h e m e t r o p o l i t a n a r e a s in n e a r l y e v e r y y e a r . ap- for The only ex- c e p t i o n s a r e in t h e A n a h e i m - S a n t a A n a - G a r d e n G r o v e (1977), Santa Rosa areas. (1978) a n d S t o c k t o n These large differentials (1978) m e t r o p o l i t a n in t h e t r e a t m e n t of b l a c k are generally statistically significant; applicants 24 of t h e 27 denial r a t i o s in e x c e s s o f o n e a r e s i g n i f i c a n t a t t h e t e n p e r c e n t tail level. In t w o m e t r o p o l i t a n a r e a s (Modesto and Santa oneBar- b a r a ) t h e b l a c k a n d o t h e r m i n o r i t y a p p l i c a n t s h a d to b e g r o u p e d together because of limited observations. In t h e s e c a s e s , a s w e l l , t h e c o m b i n e d c o e f f i c i e n t is g r e a t e r t h a n o n e in a l l s a m p l e s a n d h i g h l y s i g n i f i c a n t in two. T h e d e n i a l r a t i o e v i d e n c e is a l s o c o n s i s t e n t w i t h allega- tions that mortgage lenders discriminate against Spanish other minority applicants: four 30 o f t h e 34 d e n i a l and ratios for S p a n i s h a p p l i c a n t s a n d 27 of t h e 34 for o t h e r m i n o r i t y plicants are greater than o n e . A p p r o x i m a t e l y half of r a t i o s in e x c e s s of o n e a r e s t a t i s t i c a l l y these significant at ten percent two-tail level; three more are significant at ten p e r c e n t o n e - t a i l level. ap- the the Spanish applicants are as much as 2 . 5 t i m e s a s l i k e l y to b e d e n i e d t h a n s i m i l a r l y s i t u a t e d white a p p l i c a n t s ; o t h e r m i n o r i t i e s a r e a s m u c h a s 5.9 t i m e s a s likely to b e denied. Applications from Asians receive more favorable treatment than similarly situated w h i t e applicants as often as they ceive less favorable treatment. Since very few of these re- 1-52 differentials are statistically significant at the two-tail p e r c e n t level, it appears that similarly situated Asian white applicants receive equal treatment with regard cision to d e n y an a p p l i c a t i o n . The only results ten and to a d e - consistent w i t h d i s c r i m i n a t i o n a g a i n s t A s i a n a p p l i c a n t s o c c u r in t h e B a k ersfield (1977), San Francisco-Oakland and Santa Rosa (1977) m e t r o p o l i t a n (1978), San Jose (1977) areas. The d o w n w a r d m o d i f i c a t i o n ratios in Tables 3 - 2 1 and are g r e a t e r than one a p p r o x i m a t e l y as frequently as they less than o n e for all r a c e s . In a d d i t i o n , v e r y few o f differentials are statistically significant. in t h e d e c i s i o n to m o d i f y a r e q u e s t e d l o a n a m o u n t The statistically significant exceptions are: in t h e S a n B e r n a r d i n o - R i v e r s i d e - O n t a r i o are these Therefore, is l i t t l e e v i d e n c e t h a t m i n o r i t i e s a r e d i s c r i m i n a t e d 3-22 there against downward. black (1978) a n d applicants Vallejo-Napa (1978) m e t r o p o l i t a n a r e a s ; S p a n i s h a p p l i c a n t s in t h e C i t y of Los Angeles (1977) a n d t h e S a n D e i g o (1977) m e t r o p o l i t a n A s i a n a p p l i c a n t s in t h e S a n B e r n a r d i n o - R i v e r s i d e - O n t a r i o Santa Rosa (1978) a n d V a l l e j o - N a p a a n d o t h e r m i n o r i t i e s in t h e S a n (1978) m e t r o p o l i t a n (1978) m e t r o p o l i t a n area; (1978), areas; Bernardino-Riverside-Ontario area. Redlining T h r e e t y p e s of r e d l i n i n g a l l e g a t i o n s h a v e b e e n specific n e i g h b o r h o o d s that community-based or other analyzed: organiza- t i o n s h a v e a l l e g e d to b e r e d l i n e d , o l d e r n e i g h b o r h o o d s , largely minority neighborhoods. and 1-53 Property location. Information containing allegations that specific neighborhoods are redlined by mortgage lenders w a s av a i l a b l e to us for Los A n g e l e s C o u n t y and the c i t i e s of and Sacramento. Oakland In a d d i t i o n to e x a m i n i n g t h e s e s p e c i f i c allega- t i o n s , w e a l s o c o m p a r e d l e n d i n g p r a c t i c e s in t h e c e n t r a l city(s) t o t h o s e in t h e s u r r o u n d i n g s u b u r b s b e c a u s e o f g e n e r a l tions that lenders favor the suburbs over the older allega- central cities. The d e n i a l and downward m o d i f i c a t i o n ratios for Los neighborhoods are presented in T a b l e 2 - 2 3 . In g e n e r a l , t h e r e - s u l t s a r e i n c o n s i s t e n t w i t h a l l e g a t i o n s t h a t t h e 12 hoods are redlined. Angeles neighbor- There a r e , h o w e v e r , some important and tistically significant exceptions. The denial and sta- modification r a t i o s a r e g r e a t e r t h a n o n e for t h e L o n g B e a c h - S o u t h w e s t a n d Pedro neighborhoods in b o t h y e a r s , w i t h t h r e e of t h e f o u r ratios being based on statistically significant Los Angeles County suburbs. In a d d i t i o n , t h e d e n i a l s i g n i f i c a n t d i f f e r e n t i a l s in t h e E a s t Heights-Echo Park (1978) a n d P o m o n a L.A.-Boyle (1977) n e i g h b o r h o o d s . (1977), Pacoima-San Fernando and 1978), and Venice-Santa Monica (1978) n e i g h b o r h o o d s . e v e r , t h e d o w n w a r d m o d i f i c a t i o n r a t i o s for t h e p o r t i o n of C i t y of L o s A n g e l e s t h a t is n o t a l l e g e d to b e r e d l i n e d a r e s i s t e n t w i t h r e d l i n i n g in b o t h y e a r s . the on ilarly, the downward modification ratios support redlining g a t i o n s for the C o v i n a - A z u s a one- ratios are c o n s i s t e n t w i t h r e d l i n i n g allegations and are based statistically denial (ten p e r c e n t t a i l l e v e l ) d i f f e r e n t i a l s b e t w e e n t h e s e n e i g h b o r h o o d s and San T h e r e f o r e , the Simalle(1977 Howthe also redlining con- 3-54 Table 3-11 Denial and Downward Modification Ratios Property Location: Los Angeles-Long Beach Denial by SMSA a 1977 1978 Downward 1977 Compton 0.00** 1.04 2.88 1.80 Covina-Azusa 0.00** 1.08 2.62** 0.07** 0.57 1.61** 0.77 1.10 1.30 0.18** 0.30** 1.19 1.94 Neighborhood Modification 1978 Allegedly red^ lined neighborhoods East L.A.-Boyle Heights-Echo Park Highland Park Long BeachSouthwest 1.39 2.48 1.56 PacoimaSan Fernando 0.59 0.97 2.46** 1.58** 1.17 1.15 1.50 0.64 Pomona 1.99 1.38 0.82 0.92 San Pedro 1.47 2.00** 1.52 1.23 South Central L.A. 1.17 0.86 0.61** 1.19 Venice-Santa Monica 1.24 1.09 0.54 2.47** 1.07 0.54 3.82 1.17 R e s t of t h e C i t y of Long Beach 0.96 0.68** 0.84 0.58** Rest of the City of L o s A n g e l e s 1.04 0.93 1.30** 1.09** Rest of Los c Angeles County 1.00 1.00 1.00 1.00 ^ d PasadenaNorth Central West Covina Other areas 3-55 Table 3-23 (continued) a) T h e r a t i o is e q u a l to the p r o b a b i l i t y t h a t an a p p l i c a t i o n w i t h the indicated characteristics will be denied or modified divided b y t h e p r o b a b i l i t y t h a t the t y p i c a l a p p l i c a t i o n w i l l b e d e n i e d o r m o d i f i e d . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t the n u m e r a t o r of t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t t h a n the d e n o m i n a t o r a t t h e f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e or less percent level. b) T h e r e d l i n i n g a l l e g a t i o n s a r e d e r i v e d f r o m W h e r e T h e M o n e y Is: M o r t g a g e L e n d i n g , L o s A n g e l e s C o u n t y (Los A n g e l e s : The Center for N e w C o r p o r a t e P r i o r i t i e s , 1 9 7 5 ) . T h i s r e p o r t is reprinted in H e a r i n g s o n t h e H o m e M o r t g a g e D i s c l o s u r e A c t of 1 9 7 5 , U.S. S e n a t e , C o m m i t t e e o n B a n k i n g , H o u s i n g and U r b a n A f f a i r s , 9 4th C o n g r e s s , 1 s t S e s s i o n (May 5 - 8 , 1 9 7 5 ) . c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in the t e x t . It is the b a s e for c a l c u l a t i n g t h e d e n i a l o r m o d i f i c a t i o n r a t i o s . The other applications involve variations from the typical one in o n e o r m o r e c h a r a c t e r i s t i c s . S e e Tables 3-4 a n d 3 - 5 for t h e p r o b a b i l i t y o f d e n i a l or m o d i f i c a t i o n for t h e t y p i c a l a p p l i c a t i o n in a r e a - y e a r . d) T h e n u m e r a t o r is s t a t i s t i c a l l y s i g n i f i c a n t l y l a r g e r t h a n the denominator at the ten percent one-tail level. 1-56 results are mixed for Los Angeles County. The Los Angeles City model has essentially the same results except that the South Central L.A. denial ratio for 1977 and downward modification ratio for 1978 and the East L.A.-Boyle Heights-Echo Park downward modification ratio while still greater than one are based on statistically significant differentials relative to the rest of the City of Los Angeles instead of suburban L o s Angeles County. 7 The denial and modification ratios by property location in the Sacramento and San Francisco-Oakland metropolitan areas are presented in Tables 3-24 and 3-25. There is no evidence that applications for mortgages on properties in the two neighborhoods alleged to be redlined have a statistically significantly higher chance of denial or downward modification than otherwise similar applications on suburban properties. Central city denial and downward modification r a t i o s the typical application are presented in Table 3-26. for Only six of these ratios indicate that either denial or downward m o d i f i cation is statistically significantly more likely for mortgage applications on central city properties than for similar applications on suburban properties. These central cities are: Santa Ana (1978 denial ratio), Bakersfield Ventura (1977 denial r a t i o ) , (1978)denial and downward modification ratios), Monterey (1977 denial ratio) and San Jose (1978 denial ratio). At the same time, there are 21 ratios indicating that applications on central city properties receive statistically significantly more favorable treatment than similar applications on s u b u r b a n 3-57 Table 3-24 Denial and Downward Modification Ratios by Property Location: Sacramento SMSA Denial Neighborhood Downward 1977 Modification 1978 1977 1978 0.69 0.28** 1.03 0.46 0.76* 0.40** 0.69** 0.66** 1.00 1.00 1.00 1.00 A l l e g e d l y r.ed, lined neighborhood Old Sacramento Other areas Rest of City Sacramento R e s t of t h e C Sacramento SMSA a) T h e r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t a n a p p l i c a t i o n w i t h the indicated c h a r a c t e r i s t i c s w i l l be denied or modified divided b y the p r o b a b i l i t y that the typical application w i l l be denied o r m o d i f i e d . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r o f t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t t h a n t h e d e n o m i n a t o r a t t h e f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s percent level. b) T h e r e d l i n i n g a l l e g a t i o n is d e r i v e d f r o m D e n n i s D i n g e m a n s , R e s i dential Mortgage Lending Patterns: A C a s e S t u d y of S a c r a m e n t o in 1 9 7 6 ( D a v i s , C a l i f o r n i a : U n i v e r s i t y of C a l i f o r n i a Institute of G o v e r n m e n t a l A f f a i r s , 1978) c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . It is t h e b a s e for c a l c u l a t i n g t h e d e n i a l o r m o d i f i c a t i o n r a t i o s . The o t h e r a p p l i c a t i o n s involve v a r i a t i o n s from the typical one in o n e o r m o r e c h a r a c t e r i s t i c s . S e e T a b l e s 3-4 a n d 3 - 5 f o r t h e p r o b a b i l i t y o f d e n i a l o r m o d i f i c a t i o n for t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a - y e a r . 3-58 Table 3-11 D e n i a l a n d D o w n w a r d M o d i f i c a t i o n R a t i o s by Property Location: San Francisco-Oakland Denial Neighborhoods SMSA Downward 1977 Modification 1978 1977 1978 0.85 0.65* 0.48** 1.37 Alameda City 0.38** 0.88 0.62 0.93 Berkeley 0.97 1.13 0.24** 1.34 East Oakland 0.57** 0.84 0.46** 1.25 West Oakland 0.80 0.77 0.00** 0.64 1.00 0.86 0.47** 0.90 Contra Costa County 0.80** 0.72** 0.64** 0.93 Marin County 0.90 0.96 0.76** 1.68** 0.81* 0.56** 1.07 0.86* 1.00 1.00 1.00 1.00 A l l e g e d l y red^ lined neighborhood Central Oakland Other areas R e s t of A l a m e d a County San F r a n c i s c o San Mateo C o u n t y 0 a) T h e r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n with t h e i n d i c a t e d c h a r a c t e r i s t i c s w i l l b e d e n i e d or m o d i f i e d divided b y t h e p r o b a b i l i t y t h a t t h e t y p i c a l a p p l i c a t i o n w i l l be denied or m o d i f i e d . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t the numerator of t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t than the d e n o m i n a t o r a t the f i v e - t o - t e n p e r c e n t l e v e l . T w o asterisks (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i f i c a n t at the five or less percent level. b) T h e r e d l i n i n g a l l e g a t i o n is d e r i v e d from W1 i l l i a m M . Frej, "Disc r i m i n a t o r y L e n d i n g P r a c t i c e s in O a k l a n d / in H e a r i n g s on the H o m e M o r t g a g e D i s c l o s u r e A c t of 1 9 7 5 , U . S . S e n a t e , Committee on B a n k i n g , H o u s i n g a n d U r b a n A f f a i r s , 94th C o n g r e s s , 1st Session (May 5 - 8 , 1 9 7 5 ) . c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in the t e x t . It is t h e b a s e for c a l c u l a t i n g the d e n i a l or m o d i f i c a t i o n ratios. T h e o t h e r a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m t h e typical one in o n e o r m o r e c h a r a c t e r i s t i c s . See T a b l e s 3-4 a n d 3-5 for the p r o b a b i l i t y of d e n i a l or m o d i f i c a t i o n for the t y p i c a l applica t i o n in e a c h a r e a - y e a r . 3-59 Table 3-11 Denial and Downward Modification Ratios t h e T y p i c a l A p p l i c a t i o n in the C e n t r a l for City(s) R e l a t i v e to t h e S u b u r b s Denial Metropolitan Area Downward Modification 1977 1978 1977 1978 0.64* 0.84 0.51** 0.90 1.42** 0.79 1.15 1.04 0.55** 0.60** 0.93 0.61** Bakersfield 2 .21** 1.23 NA NA Fresno 0.63** 0.79* 1.06 0.91 Modesto 0.52** 0.49** NA NA Anaheim-Santa AnaGarden Grove A B C Oxnard-Ventura A B 0.78 0.65 0.76 1.68* 0.62 0.97 Salinas-Monterey A B 0.40** 3.13** 0.86 0.21** NA NA San BernardinoR i v e r s i d e - O n t a r io A B C 0.53 0.78 2.45 0.14** 0.17** 0 . 80 0.20** 0.38** 0.59 1.72 0.30** 0 .84 0.55 1. 47* NA NA San Diego 1.02 0.76** 0.77** 0.80** San Jose 0.67** 1.53** 1.14 0 . 89 Santa Barbara 1.09 0.51 NA NA Santa Rosa 1.03 1.15 0.69 0. 84 0.30** 1.16 NA NA 1.04 0.82 1.10 0.71 1.60 0.79 Stockton Vallejo-Napa a) A B 0.67 0 . 68 T h e r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n with the i n d i c a t e d c h a r a c t e r i s t i c s w i l l b e d e n i e d or m o d i f i e d divided by the p r o b a b i l i t y t h a t the t y p i c a l a p p l i c a t i o n w i l l be denied o r m o d i f i e d . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t the numerator of t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t than the d e n o m i n a t o r at t h e f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e five or less p e r c e n t l e v e l . T h e t y p i c a l a p p l i c a t i o n is d e s c r i b e d in the text. It is t h e b a s e for c a l c u l a t i n g t h e d e n i a l o r m o d i f i c a t i o n ratios. 3-60 Table 3-26 (continued) (cont'd) T h e o t h e r a p p l i c a t i o n s i n v o l v e v a r i a t i o n s from the t y p i c a l o n e in o n e or m o r e c h a r a c t e r i s t i c s . S e e T a b l e s 3-4 and 3 - 5 for t h e p r o b a b i l i t y o f d e n i a l o r m o d i f i c a t i o n for the t y p i c a l a p p l i c a t i o n in e a c h a r e a - y e a r . b) T h e t h r e e l e t t e r s r e f e r to the m e t r o p o l i t a n a r e a s w i t h m o r e t h a n o n e c e n t r a l c i t y . In t h e s e c a s e s , A r e f e r s to the f i r s t c i t y in t h e n a m e of t h e m e t r o p o l i t a n a r e a , F to th° second, a n d C to t h e t h i r d . 3-61 properties. Age of Neighborhood. The allegation that older neighbor- hoods are redlined is one of the most difficult to analyze because the age of the neighborhood may have high spurious correlations with objective measures of risk of loss arising from housing market externalities (e.g., adjacent vacant buildings). We have attempted to control these objective factors through the neighborhood characteristics variables. This approach is reasonably successful and evidence of multicollinearity is absent, probably due to the large sample sizes. Another problem confronting the age of neighborhood analysis is the possibility of a spurious correlation with the condition of the building being used as security for the loan. Including the age of the specific building should remove this. We have done this in Cali- fornia with no evidence of a remaining multicollinearity probg lem. The inclusion of the age of the building variables strengthens the interpretation of the age of neighborhood variable (PRE1940) as a redlining measure. However, it is important to emphasize that the age of building results cannot be interpreted as a measure of the extent to which old buildings may be discriminated against because the building age results are probably strongly correlated with the remaining economic life of the building. The denial and downward modification ratios for typical applications on buildings of various ages are presented in Tables 3-27 to 3-30. These results illustrate the importance of including these variables. Applications for mortgages on 3-62 Table 3-11 D e n i a l R a t i o s by B u i l d i n g for T y p i c a l A p p l i c a t i o n s : Study A r e a b Age 1977 a New° BA1-9 AnaheimSanta AnaGarden Grove 1 . 00 0 . 82** 0. 91 1 . 34* 2. 5 4 * * 2 . 23** Bakersfield 1 . 00 1 . 63 0 . 96 0. 93 3 . 57** 0. 00** 1 1 . 61** Fresno 1 . 00 0 . 66** 0. 76 1 . 06 1 . 38 1 . 49 2 . 36** Los AngelesLong Beach 1 . 00 0 . 50** 0 . 74** 0 .57** 0 .7g** 0. 85** 1 . 04 C i t y of Los Angeles 1 . 00 0 . 53** 0 . 67** 0 . 63** 1 . 02 1 . 15 1 . 26 Modesto 1 . 00 0. 83 1 . 53 2 . 45** 1 . 44 1 . 99 6 . 14** Oxnard-Ventura 1 . 00 0 . 53** 0 . 49** 0 . 77 1 . 62 0. 94 2 . 57 Sacramento 1 . 00 0. 66** 0. 71** 0 . 84 2 . 31** 1 . 60 1 . 86 SalinasMonterey 1 . 00 0. 83 0 . 52* 1 . 38 1 . 52 1 . 29 2 . 77 San BernardinoRiversideOntario 1 . 00 2 . 26** 2 . 74** 2 . 31* 4 . 31** 1 5 . 10** 1 0 . 13** San Diego 1 . 00 0 . 48** 0 . 51** 0 . 53** 0 .63 1 . 03 0. 56 San FranciscoOakland 1 . 00 0. 63** 0. 84* 0 . 80** 0 . 98 0. 84 1. 05 San 1 . 00 1 . 21 1 . 11 2 . 04** 2 . 17** 2 . 39** 4 . 55** Jose BA10-19 BA20-29 BA30-39 BA40-49 BAGE50 4 .40** Santa Barbara 1 . 00 0. 44* 0 . 64 0. 57 0 . 66 0. 40 0. 16** Santa Rosa 1 . 00 0 . 75 1 . 21 1 . 62 1 . 12 3 . 59** 3. 81** Stockton 1 . 00 0. 68 1 . 73 1 . 66 2 . 06 2. 66 0 .00** Vallejo-Napa 1 . 00 0. 58 1 . 29 1 . 26 0 .76 4 . 15** 0. 0 0 * * a) T h e r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n with the i n d i c a t e d c h a r a c t e r i s t i c s w i l l b e d e n i e d d i v i d e d b y the probability t h a t t h e t y p i c a l a p p l i c a t i o n w i l l b e d e n i e d . A s i n g l e a s t e r i s k (*) 3-63 Table 3-27 (continued) ( c o n t ' d ) i n d i c a t e s t h a t t h e n u m e r a t o r of t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t t h a n t h e d e n o m i n a t o r a t the fivet o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l . b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y of L o s Angeles. c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . the b a s e for c a l c u l a t i n g the d e n i a l r a t i o s . The other t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in o n e or characteristics. S e e T a b l e 3-4 f o r t h e p r o b a b i l i t y of f o r t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . It is applicamore denial 3-64 Table 3-28 D e n i a l R a t i o s by B u i l d i n g A g e for T y p i c a l A p p l i c a t i o n s : , Study Area 1978 a N e w or 1 Y e a r O l d ° B A 2 - 1 0 B A 1 1 - 2 0 B A 2 1 - 3 0 B A 3 1 - 4 0 BA41-50 BAGE51 AnaheimSanta AnaGarden Grove 1.00 0.61** 0.85* 0.80 1.66 1.77* 1.01 Bakersfield 1.00 0.80 0.97 0.91 1.26 1.73 1.14 Fresno 1.00 0.81 0.78 0.86 1.04 0.83 0.66 1.00 1.08 1.12 1.17** 1.24** 1.44** 1.77** 1.00 0.92 0.78* 1.07 1.20 1.28** 1.32** Modesto 1.00 1.33 2.20** 2.41** 3.61** 2.10* 0.00** Oxnard-Ventura 1.00 0.83 1.21 1.64 1.24 2.54 4.04** Sacramento 1.00 0.63** 0.94 1.13 1.45 2.00** 3.02** S a lM io nn at se -r e y San BernardinoRiverside- 1.00 0.51** 0.54** 0.84 0.42** 1.20 0.68 1.00 0.78 1.45 1.31 5.96** 14.09** 4.29* 1.00 1.32** 1.32 1.13 2.25** 1.65* 2.32** 1.00 0.82** 0.85** 0.81** 0.91 1.14 1.50** San Jose 1.00 1.08 1.30* 0.95 0.95 1.51 1.16 Santa Barbara 1.00 1.65 1.29 1.09 4.17** 3.21** 6.28** Santa Rosa 1.00 1.03 1.20 1.65** 2.90** 4.41** 4.20** Stockton 1.00 0.53** 1.65 1.01 0.58 0.32* 0.67 Vallejo-Napa 1.00 0.63 0.38* 1.03 0.96 0.49 1.02 Los Angeles- Long Beach C i t y of L o s Angeles OntarioSan Diego San Francisco- Oakland 3-65 Table 3-28 (continued) a) T h e r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n w i t h the indicated characteristics w i l l be denied divided by the probability that the typical application will be d e n i e d . A single a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r of t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t than the d e n o m i n a t o r at the fivet o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l . b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y of L o s Angeles. c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . t h e b a s e for c a l c u l a t i n g t h e d e n i a l r a t i o s . T h e o t h e r t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in o n e or characteristics. S e e T a b l e 3.5 for t h e p r o b a b i l i t y of for t h e t y p i c a l a p p l i c a t i o n in e a c h area. It is applicamore denial 3-66 Table 3-11 Downward Modification Ratios by Building for T y p i c a l A p p l i c a t i o n s : Study Areas b New c BA1-9 1977 Age a BA10-19 BA20-29 BA30-39 BA40-49 BAGE50 AnaheimSanta AnaGarden Grove 1 . 00 0 . 84** 0 . 76** 0 . 76* 0 . 10** 0 .4 1 * * 0 .89 Fresno 1 . 00 1 . 26 1 . 07 1 . 48 1 . 15 2 . 29* 3 . 76 1 . 00 0 . 66** 0 . 53** 0 . 43** 0. 60** 0. 61** 0 .65 C i t y of L o s Angeles 1 . 00 0 . 83* 0 . 67** 0 . 55** 0 . 67** 0 . 65** 0 .95 Oxnard-Ventura 1 . 00 1 . 20 1 . 13 1 . 42 3. 62** 2 . 09 0 .00 Sacramento 1 . 00 0 . 95 0 .89 1 . 12 1 . 41 1 . 10 0 .99 1 . 00 0 . 88 1 . 25 0 . 87 1 . 91 0 . 80 2 ..25 1 . 00 0 . 71** 0 . 55** 0 . 59** 0 . 60* 0 . 95 1 . 19 1 . 00 0 . 93 0 . 75** 0 . 67** 0 . 83 0 . 89 0 .93 1 . 00 1 . 07 0 .96 0 . 79 1 . 13 1 . 51 1 .73 1 . 00 1 . 07 1 . 76* 1 . 47 1 . 36 1 . 46 1 .01 1 . 00 0 . 60* 0 . 89 0 . 68 0. 91 0 . 23* 1 . 17 Los San San San San AngelesLong Beach BernardinoRiversideOntario Diego FranciscoOakland Jose Santa Rosa Vallejo-Napa a) T h e r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n w i t h the i n d i c a t e d c h a r a c t e r i s t i c s w i l l b e m o d i f i e d d o w n w a r d d i v i d e d b y the probability that the typical application will be modified d o w n w a r d . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r of t h e r a t i o is statistically significantly different than the denominator at the f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e or l e s s p e r c e n t l e v e l . b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y of L o s Angeles. c ) Tfiis is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . b a s e for c a l c u l a t i n g the d o w n w a r d m o d i f i c a t i o n r a t i o s . a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in characteristics. S e e T a b l e 3-4 f o r t h e p r o b a b i l i t y of m o d i f i c a t i o n for t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . It is the The other o n e or m o r e downward 3-67 Table 3-11 D o w n w a r d M o d i f i c a t i o n R a t i o s by B u i l d i n g for T y p i c a l A p p l i c a t i o n s : Study Areas 1978 Age a , N e w or 1 C Y e a r 0 1 d B A 2 - 1 0 B A 1 1 - 2 0 B A 2 1 - 3 0 B A 3 1 - 4 0 BA41-50 BAGE51 AnaheimSanta AnaGarden Grove 1 . 00 0. 93 0 . 86 1 . 15 1 . 07 1 . 55 1 . 87 Fresno 1 . 00 0 . 82 0 . 54** 0 . 82 0. 62 0 . 91 0. 97 Los AngelesLong Beach 1 . 00 0. 69** 0 . 67** 0. 62** 0. 67** 0 . 61** 0 . 70 C i t y of L o s Angeles 1 . 00 0. 94 0 . 92 0 . 63** 0 . 78** 0 . 87 0. 7 6 Oxnard-Ventura 1 . 00 0. 68** 0 . 65** 0. 98 1 . 25 0 . 74 1 . 78 Sacramento 1 . 00 0. 94 1 . 03 1 . 19 0. 83 0 . 80 1 . 47 1 . 00 0 . 99 1 . 30 1 . 41 3 . 54** 1 . 20 1 . 52 1 . 00 0 . 87* 0 . 78* 1 . 08 1 . 71** 1 . 67** 1 . 34 1 . 00 0 . 79** 0 . 79** 0. 91 0 .84* 1 . 26* 1 . 18 1 . 00 0 . 82* 1 . 05 1 . 15 0. 65 1 . 80 0 . 88 1 . 00 2 . 09** 2 . 99 ** 1 . 89* 2 . 64** 3. 7 9 * * 0. 58 1 . 00 1 . 34 1 . 09 0 . 51 1 . 06 1 . 52 2. 50 San San San San BernardinoR i v e r s ideOntario Diego FranciscoOakland Jose Santa Rosa Vallejo-Napa a) T h e r a t i o is e q u a l t o t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n w i t h the i n d i c a t e d c h a r a c t e r i s t i c s w i l l b e m o d i f i e d d o w n w a r d d i v i d e d by the probability that the typical application will be modified downward. A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t the n u m e r a t o r of the r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t t h a n t h e d e n o m i n a t o r a t the f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t the d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e or l e s s p e r c e n t level. b) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y of L o s A n g e l e s . c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in the t e x t . b a s e for c a l c u l a t i n g t h e d o w n w a r d m o d i f i c a t i o n r a t i o s . a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m the t y p i c a l o n e in characteristics. S e e T a b l e 3 - 5 for t h e p r o b a b i l i t y of m o d i f i c a t i o n for t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . It is the The other o n e or m o r e downward 3-68 older buildings (over 30 y e a r s ) a r e m u c h m o r e l i k e l y to b e d e n i e d than similar applications on new b u i l d i n g s . It is a l s o interest- ing t h a t a p p l i c a t i o n s o n b u i l d i n g s t h a t a r e 1 to 9 y e a r s o l d significantly l e s s l i k e l y to b e d e n i e d t h a n s i m i l a r are applications on new b u i l d i n g s . The downward modification ratios indicate a similar but weaker pattern. T h e d e n i a l a n d d o w n w a r d m o d i f i c a t i o n r a t i o s for applications o n p r o p e r t i e s l o c a t e d in o l d e r n e i g h b o r h o o d s a r e p r e s e n t e d Table 3-31. T h e r e a d e r s h o u l d n o t e t h a t an o l d e r neighborhood h a s b e e n t a k e n a s o n e w i t h 10 m o r e p e r c e n t a g e p o i n t s o f built before 1940 in housing ( P R E 1 9 4 0 ) t h a n an a v e r a g e n e i g h b o r h o o d . cations on p r o p e r t i e s Appli- in o l d e r n e i g h b o r h o o d s a r e m o r e l i k e l y to b e denied than similar applications on properties in n e w e r neighborhoods in 20 o f t h e 34 c a s e s , a n d t h e d i f f e r e n t i a l is s t a t i s t i c a l l y n i f i c a n t in 8 of t h e s e 20 c a s e s . A c c o r d i n g t o t h e s e r e s u l t s , an a d d i t i o n a l 10 p e r c e n t a g e p o i n t s in t h e P R E 1 9 4 0 v a r i a b l e increases t h e c h a n c e s o f d e n i a l b y 9 t o 33 p e r c e n t . The significant o c c u r in t h e f o l l o w i n g m e t r o p o l i t a n a r e a s : Anaheim-Santa Garden Grove (1977 a n d 1 9 7 8 ) , B a k e r s f i e l d and 1 9 7 8 ) , San F r a n c i s c o - O a k l a n d sig- (1978) , F r e s n o (1978) a n d San J o s e increases Ana- (1977 (1977 a n d The downward m o d i f i c a t i o n ratios show a more mixed 1978). pattern. O l d e r n e i g h b o r h o o d s a r e a b o u t a s l i k e l y to r e c e i v e f a v o r a b l e as u n f a v o r a b l e t r e a t m e n t w i t h r e g a r d to a d e c i s i o n to m o d i f y a requested loan a m o u n t d o w n w a r d . T h e r e a r e f o u r c a s e s of t i s t i c a l l y s i g n i f i c a n t a d v e r s e t r e a t m e n t of o l d e r Anaheim-Santa Ana-Garden Grove neighborhoods: (1977), Los Angeles-Long (1977 a n d 1 9 7 8 ) a n d V a l l e j o - N a p a (1977). sta- Beach 3-69 Table 3 - 1 1 Denial and Downward Modification Ratios Typical Applications Older (+0.10 a d d e d to P R E 1 9 4 0 ) in Neighborhoods Denial Study Area for 3 Downward 1977 Modification 1978 1977 1978 Anaheim-Santa AnaGarden Grove 1.12** 1.18** Bakersfield 1.13 1.33** NA NA Fresno 1.09** 1.15** 0.98 1.03 0. 92** 1.01 1.08** 1.05** 0.89** 1.02 1.00 0.97** Modesto 0.99 0.88* NA Oxnard-Ventura 1.01 0.92 0.76** 0.96 Sacramento 0.99 1.05 1.01 0.99 Salinas-Monterey 0.99 0.93 NA NA BernardinoRiverside-Ontario 0.69** 0.78** 0.89 0.73** San Diego 0.99 1.00 1.00 0.98 San Francisco-Oakland 1.01 1.04** 1.01 0.97* San Jose 1.09** 1.23** 1.04 0.92 Los AngelesLong Beach C i t y of Los San Angeles 1.20** 0.95 NA Santa Barbara 1.18 0.92 NA NA Santa Rosa 0.93 1.03 0.97 0.93 Stockton 1.15 1.09 NA NA Vallejo-Napa 1.10 1.07 a) 1.20** 1.04 T h e r a t i o is e q u a l t o t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n w i t h the indicated c h a r a c t e r i s t i c s w i l l be denied or m o d i f i e d divided by the p r o b a b i l i t y that the t y p i c a l application w i l l be denied or m o d i f i e d . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t the n u m e r a t o r of t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t t h a n t h e d e n o m i n a t o r a t t h e f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e or l e s s 3-70 Table 3-28 (continued) ( c o n t ' d ) p e r c e n t l e v e l . T h e t y p i c a l a p p l i c a t i o n is d e s c r i b e d in t h e t e x t . I t h a s e a c h a r e a ' s m e a n v a l u e of P R E 1 9 4 0 a n d is t h e b a s e for c a l c u l a t i n g t h e d e n i a l o r m o d i f i c a t i o n r a t i o s . The other applications involve variations from the typical one in o n e o r m o r e c h a r a c t e r i s t i c s . S e e T a b l e s 3-4 a n d 3 - 5 for t h e p r o b a b i l i t y o f d e n i a l o r m o d i f i c a t i o n for t h e t y p i c a l a p p l i c a t i o n in"each a r e a . See T a b l e 3-3 for the m e a n v a l u e s of P R E 1 9 4 0 . b) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y of L o s Angeles. 3-71 R a c i a l C o m p o s i t i o n of the N e i g h b o r h o o d . r a c i a l c o m p o s i t i o n of the neighborhood T h e e f f e c t of is i l l u s t r a t e d b y i n g t h e l i k e l i h o o d of d e n i a l a n d d o w n w a r d m o d i f i c a t i o n cal applications the compar- for in a n e i g h b o r h o o d w i t h a r e l a t i v e l y h i g h typicon- c e n t r a t i o n of a m i n o r i t y p o p u l a t i o n to the r e s p e c t i v e likelihood in a n e i g h b o r h o o d w i t h a n a v e r a g e v a l u e of the r a c i a l composi- tion variables. T h e r e l a t i v e l y h i g h v a l u e u s e d in t h e s e simula- t i o n s is t h e m a x i m u m v a l u e in t h e s a m p l e m i n u s t w o s t a n d a r d de- v i a t i o n s , p r o v i d i n g t h e r e s u l t is g r e a t e r t h a n t h e m e a n . The m e a n and simulation values are summarized The in T a b l e 3 - 3 2 . denial and downward modification ratios by racial composition t h e n e i g h b o r h o o d a r e p r e s e n t e d in T a b l e s 3 - 3 3 to 3 - 3 6 . sults vary by r a c e , y e a r , and metropolitan a r e a . on properties The higher chances of d e n i a l or downward m o d i f i c a t i o n than have similar minorities. The following paragraphs describe the statistically (ten p e r c e n t l e v e l ) t w o - t a i l significant differentials. M o r t g a g e a p p l i c a t i o n s a r e m o r e l i k e l y to b e d e n i e d n e i g h b o r h o o d s t h a n in l a r g e l y w h i t e n e i g h b o r h o o d s geles-Long Beach (1978) , M o d e s t o Salinas-Monterey (1977) , S a n D i e g o (1977) m e t r o p o l i t a n a r e a s . in b l a c k in t h e L o s A n - (1977) , O x n a r d - V e n t u r a (1977) , (1977 a n d 1 9 7 8 ) , and S a n Applications in b l a c k a r e m o r e l i k e l y to b e m o d i f i e d d o w n w a r d in t h e L o s Beach re- Applications l o c a t e d in b l a c k o r S p a n i s h n e i g h b o r h o o d s a p p l i c a t i o n s in n e i g h b o r h o o d s w i t h m e a n v a l u e s o f of (1977) a n d S a n F r a n c i s c o - O a k l a n d Jose neighborhoods Angeles-Long (1978) m e t r o p o l i t a n areas. S p a n i s h n e i g h b o r h o o d s r e c e i v e a d v e r s e t r e a t m e n t in t h e d e c i s i o n t o d e n y a m o r t g a g e a p p l i c a t i o n in t h e B a k e r s f i e l d (1978), 3-72 Table 3-11 V a l u e s of R a c i a l C o m p o s i t i o n V a r i a b l e s Used in t h e S i m u l a t i o n s R e p o r t e d in T a b l e s 3 - 3 3 to 3 - 3 6 FBLACK Study Area M S FSPANISH M S FASIAN M S Anaheim-Santa AnaGarden Grove 0..01 0., 36 0 .09 0 .46 c c Bakersfield 0..06 0..73 0 . 09 0 . 48 c c Fresno 0..01 0..83 0 . 13 0 . 27 c c 0,.04 0..76 0 . 12 0 . 76 0.02 0 . 14 0..06 0..68 0 . 11 0 . 67 0.02 0 .14 Modesto 0.. 003 0..20 0 .07 0 . 34 d d Oxnard-Ventura 0..02 0..15 0 . 13 0 .67 c c Sacramento 0.. 02 0.. 50 0 . 03 0 . 29 Salinas-Monterey 0..06 0..33 0 . 14 0 . 44 Los Angeles-Long C i t y of L o s San Beach Angeles BernardinoRiverside-Ontario 0.03 0.25 c c c c • 0..03 0..62 0 . 11 0 . 74 San Diego 0 ..02 0..71 0 . 09 0 .54 0.01 0.05 San Francisco-Oakland 0..06 0 ..75 0 . 10 0 . 75 0.03 0.49 San Jose 0..02 0..15 0 . 09 0 . 51 0.04 0.24 0 ..02 0.. 08 0 . 13 0 . 25 c c 0 . 05 0 . 09 d d Santa Barbara Santa Rosa c c Stockton 0..02 0..37 Vallejo-Napa 0,.05 0,.74 .04 0 . 07 0 .22 0 . 12 -> ] d d a) T h e c o l u m n l a b e l e d M is t h e m e a n v a l u e a n d the o n e l a b e l e d S is the v a l u e u s e d for t h e s i m u l a t i o n s r e p o r t e d in T a b l e s 3 - 3 3 to 3 - 3 6 . T h e s e S v a l u e s a r e e q u a l to t h e m a x i m u m v a l u e in t h e s a m p l e m i n u s two standard deviations. b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y o f L o s A n g e l e s . c) M a x i m u m v a l u e m i n u s t w o s t a n d a r d d e v i a t i o n s is l e s s t h a n t h e m e a n value. d) D a t a u n a v a i l a b l e . 3-73 Table 3-11 Denial Ratios by Racial Composition Neighborhood Study for T y p i c a l A p p l i c a t i o n s Area TA° Anaheim-Santa Ana-Garden (TA): FBLACK 1977 a FSPANISH FASIAN 1.00 3.38 0.62** e Bakersfield 1.00 2 . 45 0.15* e Fresno 1.00 0.93 1.02 e 1.00 0.52** 1.27 1.70** 1.00 0.34** 1.26 0 .98 Modesto 1.00 4.45* 6.13** d Oxnard-Ventura 1.00 8.63** 0.06** e Sacramento 1.00 0.61 1.34 Salinas-Monterey 1.00 2.41** 1.41 e 1.00 5.61 1.90 e Los Angeles-Long C i t y of L o s San Beach Angeles Bernardino-RiversideOntario Grove of 2.33** San Diego 1.00 2.61* 1.33 0 . 88 San Francisco-Oakland 1.00 0.73* 0.50** 0.08** San Jose 1.00 2.88** 2.74** 0.26** Santa Barbara 1.00 0.90 1.36** e Santa Rosa 1.00 e 1.63** d Stockton 1.00 0.20 [ Vallejo-Napa 1.00 1.13 1.00 6 .6 6 * * > ] d a ) S e e T a b l e 3 - 3 2 f o r t h e v a l u e s of F B L A C K , F S P A N I S H a n d F A S I A N . The r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n w i t h t h e indicated characteristics w i l l be denied divided by the probability t h a t t h e t y p i c a l a p p l i c a t i o n w i l l b e d e n i e d , A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r of t h e r a t i o is s t a t i s t i c a l l y s i g n i f i cantly d i f f e r e n t than the denominator at the five-to-ten percent l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t the d i f f e r e n c e is s i g n i ficant at the five or less percent level. b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y of L o s Angeles. 3-74 Table 3-28 (continued) c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . It is the b a s e for c a l c u l a t i n g t h e d e n i a l r a t i o s . T h e o t h e r a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m the t y p i c a l o n e in o n e o r m o r e c h a r a c t e r i s t i c s . S e e T a b l e 3-4 for t h e p r o b a b i l i t y o f d e n i a l for t h e typi c a l a p p l i c a t i o n in e a c h a r e a . d) D a t a unavailable. e) M a x i m u m v a l u e m i n u s t w o s t a n d a r d d e v i a t i o n s value. is l e s s t h a n t h e m e a n 3-75 Table 3-11 Denial Ratios by Racial Composition Neighborhood S t u d y Area* for T y p i c a l A p p l i c a t i o n s 5 TA° Anaheim-Santa Ana-Garden (TA): FBLACK 1978 a FSPANISH FASIAN 1.00 1.36 0.55** e Bakersfield 1.00 0.72 2.43** e Fresno 1.00 0.35 0.88 e 1.00 1.18* 1.02 1. 00 C i t y of L o s A n g e l e s 1.00 1.09 0.93 0.79** Modesto 1.00 1.63 0.74 d Oxnard-Ventura 1.00 0.25 4.82 e Sacramento 1.00 2.23 0.27** Salinas-Monterey 1.00 0.85 0.46* e 1.00 0.33 3.13** e Los Angeles-Long San Beach Bernardino-RiversideOntario Grove of 2.09** San Diego 1.00 1.11* 1.00 0 . 87 San Francisco-Oakland 1.00 1.19 1. 34 0 .19** San Jose 1.00 0.60** 1 . 30* 0.42** 0.81 0.93 e Santa Barbara 1.00 Santa Rosa 1.00 e 1.27** d Stockton 1.00 1.19 [ 4 — 1 .94 - - > 1 Vallejo-Napa 1.00 0.31 0.99 d a) S e e T a b l e 3 - 3 2 for t h e v a l u e s of F B L A C K , F S P A N I S H a n d F A S I A N . The r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n w i t h the ind i c a t e d c h a r a c t e r i s t i c s w i l l b e d e n i e d d i v i d e d by the p r o b a b i l i t y t h a t t h e t y p i c a l a p p l i c a t i o n w i l l b e d e n i e d . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r of the r a t i o is s t a t i s t i c a l l y signif i c a n t l y d i f f e r e n t t h a n the d e n o m i n a t o r a t the f i v e - t o - t e n percent l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is signif i c a n t a t t h e f i v e or l e s s p e r c e n t l e v e l . b) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y of L o s Angeles. 3-76 Table 3-28 (continued) c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . It is the b a s e f o r c a l c u l a t i n g the d e n i a l r a t i o s . T h e o t h e r a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in o n e o r m o r e c h a r a c t e r i s t i c s . S e e T a b l e 3-5 for t h e p r o b a b i l i t y of d e n i a l for t h e typi c a l a p p l i c a t i o n in e a c h area. d) D a t a unavailable. e) M a x i m u m v a l u e m i n u s t w o s t a n d a r d d e v i a t i o n s is l e s s t h a n t h e m e a n value. 3-77 Table 3-35 D o w n w a r d M o d i f i c a t i o n R a t i o s by R a c i a l C o m p o s i t i o n of Neighborhood Study A r e a for T y p i c a l A p p l i c a t i o n s b TA° (TA) : 1977 a FBLACK FSPANISH 1 . 00 0 . 65 0 . 83 e 1 . 00 0 . 00** 1 . 25** G 1 . 00 1 . 37** 1 . 27** 1.12 C i t y of L o s A n g e l e s 1 . 00 1 . 80** 0 . 96 0.43 Oxnard-Ventura 1 . 00 0 .11** 2 . 15 e Sacramento 1 . 00 1 . 63 0 .04** 1 . 00 1 . 13 2 .18 Anaheim-Santa Ana-Garden Fresno Los Angeles-Long San Beach Bernardino-RiversideOntario Grove FASIAN 0 . 98 e San Diego 1 . 00 1 . 11 0 .28** 1.17 San Fransisco-Oakland 1 . 00 0 . 81 0 .58** 0.27 San Jose 1 . 00 0 . 51** 1 . 00 0 . 54 Santa 1 . 00 e 0 . 87 d 1 . 00 0 .08 0 . 84 d Rosa Vallejo-Napa a) S e e T a b l e 3 - 3 2 for t h e v a l u e s of F B L A C K , F S P A N I S H a n d F A S I A N . The r a t i o is e q u a l to t h e p r o b a b i l i t y t h a t an a p p l i c a t i o n w i t h the ind i c a t e d c h a r a c t e r i s t i c s w i l l b e m o d i f i e d d o w n w a r d d i v i d e d by the p r o b a b i l i t y t h a t t h e t y p i c a l a p p l i c a t i o n w i l l be m o d i f i e d downward. A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r of the r a t i o , is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t t h a n t h e d e n o m i n a t o r at the f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s that the d i f f e r e n c e is s i g n i f i c a n t a t the f i v e or less p e r c e n t l e v e l . b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t the C i t y of L o s Angeles. c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in the t e x t . It is the b a s e for c a l c u l a t i n g the d o w n w a r d m o d i f i c a t i o n r a t i o s . The other a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m the t y p i c a l o n e in one or more characteristics. S e e T a b l e 3-4 for the p r o b a b i l i t y of downward m o d i f i c a t i o n for the t y p i c a l a p p l i c a t i o n in e a c h a r e a . d) D a t a unavailable. e) Maximum value minus two standard deviations is less than the mean value. 3-78 Table 3-35 Downward Modification Ratios by Racial Composition Neighborhood S t u d y Area* for T y p i c a l A p p l i c a t i o n s 3 TA° (TA): 1978 of a FBLACK FSPANISH FASIAN 1.00 1.04 1.11 e 1.00 0.94 0.60* e 1.00 0.99 0.90 1 . 16* 1 . 00 0.89 0.62** 0.80** Oxnard-Ventura 1.00 0.04 1.30 Sacramento 1.00 0.51 0.78 1.00 2.60 0.57 Anaheim-Santa Ana-Garden Fresno Los Angeles-Long C i t y of L o s San Beach Angeles Bernardino-RiversideOntario Grove e 1.11 e San Diego 1.00 1.09 0.77** 1.12 San Francisco-Oakland 1.00 1.38** 0.75 1.49 San Jose 1.00 0.87 1.70** 1.01 1.00 e Santa Rosa Vallejo-Napa 1.00 0.25 1.07 d 1.32** d a) S e e T a b l e 3 - 3 2 f o r t h e v a l u e s of F B L A C K , F S P A N I S H a n d F A S I A N . The r a t i o is d q u a l t o t h e p r o b a b i l i t y t h a t a n a p p l i c a t i o n w i t h t h e indicated c h a r a c t e r i s t i c s w i l l be modified downward divided by the probability that the typical application w i l l be modified d o w n w a r d . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r of t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t t h a n the d e n o m i n a t o r a t t h e f i v e - t o - t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e s t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e or l e s s p e r c e n t l e v e l . b ) M e t r o p o l i t a n a r e a s in a l l c a s e s e x c e p t t h e C i t y of L o s Angeles. c) T h i s is t h e t y p i c a l a p p l i c a t i o n d e s c r i b e d in t h e t e x t . b a s e for c a l c u l a t i n g t h e d o w n w a r d m o d i f i c a t i o n r a t i o s . a p p l i c a t i o n s i n v o l v e v a r i a t i o n s f r o m t h e t y p i c a l o n e in characteristics. S e e T a b l e 3 - 5 for t h e p r o b a b i l i t y of m o d i f i c a t i o n for t h e t y p i c a l a p p l i c a t i o n in e a c h a r e a . It is the The other one or more downward d) D a t a unavailable. e) Maximum value minus two standard deviations is less than the mean value. 3-79 Modesto Jose (1977) , S a n B e r n a r d i n o - R i v e r s i d e - O n t a r i o (1977 a n d 1 9 7 8 ) , S a n t a B a r b a r a and 1978). ( 1 9 7 8 ) , San (1977), and Santa Rosa In t h e S t o c k t o n m e t r o p o l i t a n a r e a , a p p l i c a t i o n s other minority neighborhoods, which includes Spanish a r e m o r e l i k e l y to b e d e n i e d in 1 9 7 7 . Downward a r e a l s o m o r e l i k e l y in S p a n i s h n e i g h b o r h o o d s (1977), Los A n g e l e s - L o n g Beach Vallejo-Napa (1978) m e t r o p o l i t a n households, in t h e Fresno (1978), and areas. in A s i a n n e i g h b o r h o o d s a r e l i k e l y t o b e d e n i e d t h a n t h o s e in w h i t e n e i g h b o r h o o d s Angeles-Long Beach politan areas. in modifications (1977), San Jose Applications on properties (1977) , a n d S a c r a m e n t o more in t h e (1977 a n d 1 9 7 8 ) Los metro- D o w n w a r d m o d i f i c a t i o n s a r e m o r e l i k e l y in t h e Asian neighborhoods of the Los Angeles-Long Beach politan (1977 (1978) metro- area. SUMMARY The d e c i s i o n s of California savings and loan on applications for c o n v e n t i o n a l m o r t g a g e s on houses being purchased associations single-family for o w n e r - o c c u p a n c y a r e a n a l y z e d u s i n g a m u l t i v a r i a t e s t a t i s t i c a l technique known as the m u l t i n o m i a l git. in g e n e r a l , f o u r p o s s i b l e o u t c o m e s a r e c o n s i d e r e d taneously: approved as applied for, approved after the re- A l e n d e r ' s d e c i s i o n is v i e w e d a s a f u n c t i o n of t h e f i n a n c i a l c h a r a c t e r i s t i c s of t h e the loan, and the p r o p e r t y , and housing m a r k e t borrower, externalities t h a t m a y a f f e c t t h e f u t u r e v a l u e of t h e p r o p e r t y . simul- increasing the requested loan amount, approved after decreasing quested loan amount, and denial. lo- Lending in 3-80 sixteen metropolitan areas is analyzed for 1977 and 1978. The race, sex, and age of the applicant and the location of the property are also included to determine whether they affect mortgage lending decisions after controlling for objective factors. The objective factors such as the ratios of requested loan to income and to appraised value play a major role in mortgage lending. teria. The vast majority of decisions are based on these criHowever, there is some strong evidence that certain types of applicants are arbitrarily discriminated against by California savings and loan associations. We interpret a sig- nificantly higher chance of denial or downward modification as evidence of discrimination. The following paragraphs summarize our findings on each possible basis of discrimination examined in this chapter. Sex. There is little evidence of sex discrimination. Households are divided into five categories on the basis of the sex of the applications: male-female nonchildbearing, male- female childbearing, female only nonchildbearing, female only childbearing, and male only. The latter four types are compared to the first which is viewed as least likely to be a target of discrimination. There is evidence consistent with the allega- tion that each of these four are discriminated against in at least one metropolitan area. However, there is no consistent pattern across metropolitan areas or time. There is no evidence of discrimination in the denial or downward modification decisions on the basis of sex in the Bakersfield, Oxnard-Ventura, Salinas-Monterey, and San Francisco-Oakland metropolitan areas. The only evidence of sex discrimination in the Fresno metropolitan area is that the income of a second worker in male only or 3-81 f e m a l e o n l y n o n c h i l d b e a r i n g h o u s e h o l d s is d i s c o u n t e d . In qeneral, i n c o m e f r o m a s e c o n d w o r k e r is a c c o r d e d a p r e m i u m in t h e lending process. Male-female childbearing households receive less favorable treatment than similar male-female nonchildbearing households the Anaheim-Santa Ana-Garden Grove ropolitan areas. (1977) a n d M o d e s t o mento Rosa (1978), and is d i s c o u n t e d in o n l y o n e a r e a : t r e a t m e n t in t h e S a n B e r n a r d i n o - R i v e r s i d e - O n t a r i o Diego (197 7), S a n t a B a r b a r a (1978), Santa Rosa San Die- (1978) m e t r o p o l i t a n a r e a s . heim-Santa Ana-Garden Grove San Jose ropolitan the Sacramento In a d d i t i o n , t h e i n c o m e f r o m a in t h e A n a - (1977), and Santa Rosa (1978), (1977) from male only households are more likely is d i s c o u n t e d in L o s A n g e l e s C i t y (1978), San Diego metropolitan areas. (1978) (1977) a n d V a l l e j o - N a p a In a d d i t i o n , t h e i n c o m e of s e c o n d for m a l e o n l y h o u s e h o l d s in t h e F r e s n o (1977), San Bernardino-Riverside-Ontario (1977) a n d V a l l e j o - N a p a Stock- met- areas. be denied or modified downward Age. (1978), San (1977 a n d 1 9 7 8 ) , S a n D i e g o (1978), Santa Barbara Applications desto adverse (1978), and s e c o n d w o r k e r in t h i s h o u s e h o l d t y p e is d i s c o u n t e d sa Santa (1977). Female only nonchildbearing households receive ton receive T h e i n c o m e f r o m a s e c o n d w o r k e r in e i t h e r t y p e of childbearing household go met- (1978), Sacra- (1978) , a n d S a n B e r n a r d i n o - R i v e r s i d e - O n t a r i o (1978). (1978) Female only childbearing households l e s s f a v o r a b l e t r e a t m e n t f r o m l e n d e r s in M o d e s t o in (1977) m e t r o p o l i t a n and (1977) workers (197 8), M o - (1977), Santa areas. C o n t r a r y t o a l l e g a t i o n s of d i s c r i m i n a t i o n to against Ro- 3-82 o l d e r a p p l i c a n t s , t h o s e b e t w e e n 35 a n d 44 y e a r s o l d a r e l i k e l y to b e d e n i e d t h a n o l d e r o r y o u n g e r a p p l i c a n t s . more However, o l d e r a p p l i c a n t s a r e s u b s t a n t i a l l y m o r e l i k e l v to b e m o d i f i e d f downward than the younger Race. applicants. The evidence of racial discrimination consistent across metropolitan areas and time. is s t r o n g and Applications from b l a c k s are 1.54 to 7.82 times as likely to be denied than from similarly situated w h i t e s . Spanish and other m i n o r i t y ing Asians) are also h e a v i l y d i s c r i m i n a t e d against. those (exclud- Spanish appli- c a n t s are as m u c h as 2.5 times as likely to be denied than simi- l a r l y s i t u a t e d w h i t e s ; o t h e r m i n o r i t i e s a r e as m u c h a s 5.9 times a s l i k e l y to b e d e n i e d . Applications from Asians receive more favorable treatment than similarly situated whites as often they receive less favorable treatment. H o w e v e r , t h e r e is e v i d e n c e t h a t m i n o r i t i e s a r e d i s c r i m i n a t e d a g a i n s t in the s i o n to m o d i f y a r e q u e s t e d l o a n a m o u n t d o w n w a r d p r i o r t o Redlining. as little deciapproval. T h r e e t y p e s of r e d l i n i n g h a v e b e e n analyzed: s p e c i f i c n e i g h b o r h o o d s t h a t h a v e b e e n a l l e g e d to b e redlined, older neighborhoods, and largely minority neighborhoods. Information containing allegations that specific neighbor- h o o d s are r e d l i n e d w a s a v a i l a b l e to us for Los A n g e l e s and the cities of O a k l a n d and S a c r a m e n t o . County The results do not s u p p o r t t h e r e d l i n i n g a l l e g a t i o n s for O a k l a n d a n d S a c r a m e n t o a r e m i x e d for L o s A n g e l e s C o u n t y . T h e d e n i a l r e s u l t s for a t least one year are c o n s i s t e n t w i t h a l l e g a t i o n s that the neighbor- h o o d s of Long B e a c h - S o u t h w e s t , San P e d r o , East L . A . - B o y l e Echo Park, and Pomona are redlined. and The downward Heights- modification 3-83 r e s u l t s are also c o n s i s t e n t with the a l l e g a t i o n s that the A z u s a , Pacoima-San Fernando and Venice-Santa Monica are redlined. Covina- neighborhoods The evidence does not support the redlining gations for the C o m p t o n , Highland P a r k , P a s a d e n a - N o r t h alle- Central, S o u t h C e n t r a l L . A . , a n d W e s t C o v i n a n e i g h b o r h o o d s , b u t is o c c a s i o n a l l y c o n s i s t e n t w i t h a r e d l i n i n g h y p o t h e s i s in a r e a s are n o t alleged to be that redlined. A c o m p a r i s o n o f l e n d i n g p r a c t i c e s on c e n t r a l c i t y to t h o s e o n s u b u r b a n p r o p e r t i e s properties i n d i c a t e d t h a t the c e n t r a l city properties generally received more favorable treatment than suburban the ones. A p p l i c a t i o n s o n o l d e r b u i l d i n g s a r e m u c h m o r e l i k e l y to b e d e n i e d than similar a p p l i c a t i o n s on new b u i l d i n g s , b u t these sults do not necessarily indicate that older buildings are re- being a r b i t r a r i l y d e n i e d m o r t g a g e s b e c a u s e t h e a g e v a r i a b l e is p r o b a b l y s e r v i n g a s a m e a s u r e of t h e r e m a i n i n g e c o n o m i c l i f e of building. It is i m p o r t a n t to i n c l u d e t h e b u i l d i n g a g e the measure b e c a u s e it i n s u r e s t h a t t h e a g e of n e i g h b o r h o o d v a r i a b l e is n o t a p r o x y for t h e e c o n o m i c l i f e of t h e Applications on properties building. l o c a t e d in o l d e r neighborhoods are m o r e likely to b e d e n i e d w i t h s i g n i f i c a n t d i f f e r e n t i a l s in the A n a h e i m - S a n t a A n a - G a r d e n G r o v e , B a k e r s f i e l d , F r e s n o , San Francisco-Oakland, and San Jose metropolitan areas. Older neigh- b o r h o o d s , h o w e v e r , a r e a b o u t as l i k e l y to r e c e i v e f a v o r a b l e as u n f a v o r a b l e t r e a t m e n t in a d e c i s i o n t o m o d i f y t h e r e q u e s t e d loan amount d o w n w a r d prior to approval. A p p l i c a t i o n s f o r m o r t g a g e s in b l a c k o r S p a n i s h neighborhoods h a v e h i g h e r c h a n c e s o f d e n i a l or d o w n w a r d m o d i f i c a t i o n than 3-84 similar applications t i o n s of m i n o r i t i e s . in n e i g h b o r h o o d s w i t h a v e r a g e concentra- The significant differentials between predominately black and largely white neighborhoods occur the Los Angeles-Long B e a c h , M o d e s t o , Oxnard-Ventura, Salinas- M o n t e r e y , San D i e g o , San F r a n c i s c o - O a k l a n d , and San Jose politan areas. in The significant Spanish differentials metro- occur in t h e B a k e r s f i e l d , F r e s n o , L o s A n g e l e s - L o n g B e a c h , M o d e s t o , San B e r n a r d i n o - R i v e r s i d e - O n t a r i o , San J o s e , Santa Barbara, Santa R o s a , S t o c k t o n , and V a l l e j o - N a p a m e t r o p o l i t a n In a d d i t i o n , a p p l i c a t i o n s o n p r o p e r t i e s areas. in A s i a n neighbor- h o o d s r e c e i v e a d v e r s e t r e a t m e n t in t h e L o s A n g e l e s - L o n g and S a c r a m e n t o m e t r o p o l i t a n areas. Beach 3-85 Footnotes 1. In N e w Y o r k , t h e decision to lend m o d e l s w e r e w i t h and w i t h o u t the net w e a l t h and employment measures. stability T h e f i n d i n g s w e r e v i r t u a l l y u n a f f e c t e d by ing o u t t h e s e 2. estimated leav- variables. In t h e S t o c k t o n m e t r o p o l i t a n a r e a the f r a c t i o n S p a n i s h includes all nonblack 3 also minorities. T h e s e p r o b a b i l i t i e s can b e f r o m t h e l o g i t e s t i m a t e s u s i n g the f o l l o w i n g calculated relationships. Ep . = 1 J j=o (3.1 Xj = Ln(P_./P Q ) = ctj + B . X P .J = exp( j = 1, . . . , c c A3 .)/ [1 + pexp( \ k ) ] k=l P n = 1/[1 + E exp() k ° k=l w h e r e the P j' s a r e )] (3.2 (3.3 (3.4 t h e c o n d i t i o n a l p r o b a b i l i t i e s of the j o u t c o m e g i v e n a v e c t o r of e x p l a n a t o r y v a r i a b l e s (X) , c + 1 r e p r e s e n t s the t o t a l n u m b e r of p o s s i b l e o u t c o m e s , and the probability o f o n e o u t c o m e is a r b i t r a r i l y s e l e c t e d as the r e f e r e n c e b a s e (P ) . 3-86 4. T h e 1978 r a t i o for A n a h e i m - S a n t a A n a - G a r d e n G r o v e is g r e a t e r than one (1.24) b u t n o t s t a t i s t i c a l l y in T a b l e significant. 5. These ratios are not reported 3-8. 6. The 1977 San D i e g o and 1978 Santa B a r b a r a d e n i a l ratios MFNCB are also greater than one but the underlying income coefficients are not statistically 7. secondary significant. T h e C i t y o f L o s A n g e l e s r e s u l t s a r e n o t p r e s e n t e d in text but the underlying equations are reported 8. the in A p p e n d i x We also estimated v e r s i o n s of the m u l t i v a r i a t e m o d e l the building age v a r i a b l e s . for without C o m p a r i s o n of t h e t w o results s u g g e s t s t h a t an a g e of n e i g h b o r h o o d v a r i a b l e w i l l capture a s i g n i f i c a n t p o r t i o n o f t h e e f f e c t of t h e b u i l d i n g variables when these are excluded. B. age CHAPTER 4 T E R M S O F M O R T G A G E L E N D I N G IN CALIFORNIA T h e a v a i l a b i l i t y o f m o r t g a g e s is n o t t h e o n l y e l e m e n t of m o r t g a g e transactions upon w h i c h the discrimination debate fo- cuses; r e p r e s e n t a t i v e s of w o m e n ' s g r o u p s , m i n o r i t y g r o u p s , and community organizations allege that lenders discriminate against certain t y p e s of a p p l i c a t i o n s by c h a r g i n g h i g h e r i n t e r e s t and granting mortgages with shorter terms and lower rates loan-to- value ratios than w a r r a n t e d by the objective characteristics the applications. Although less direct than outright of mortgage d e n i a l , d i s c r i m i n a t i o n of this form can h a v e . e q u a l l y s e r i o u s p l i c a t i o n s for p o t e n t i a l borrowers. W e e x a m i n e d i s c r i m i n a t o r y b e h a v i o r w i t h r e s p e c t to t h e t i n g o f m o r t g a g e t e r m s u s i n g d a t a for f o u r C a l i f o r n i a tan areas: F r e s n o , Los Angeles-Long B e a c h , San land, and San J o s e . set- metropoli- Francisco-Oak- The large number of m o r t g a g e loans granted in b o t h L o s A n g e l e s - L o n g B e a c h a n d S a n F r a n c i s c o - O a k l a n d make t h e m o b v i o u s c h o i c e s for a n a l y s i s ; l a r g e s a m p l e s i z e a s s u r e s equate numbers of a p p l i c a t i o n s est for this s t u d y . im- from the g r o u p s of p r i m a r y ad- inter- F r e s n o is i n c l u d e d a s r e p r e s e n t a t i v e of a r e l a t i v e l y s m a l l m e t r o p o l i t a n a r e a for w h i c h s u f f i c i e n t d a t a are a v a i l a b l e for a l l p a r t s o f t h e t e r m s a n a l y s i s . its In a d d i t i o n , l o c a t i o n in t h e C e n t r a l V a l l e y c o n t r i b u t e s to t h e lity of the results. generalizabi- Finally, San Jose represents a medium- sized metropolitan area undergoing rapid economic growth. For each metropolitan area, separate models were estimated 1977 and for 1978. T h i s c h a p t e r is d i v i d e d i n t o t h r e e s e c t i o n s . The first 1-2 section presents the results of the interest r a t e , maturity r i o d , and l o a n - t o - v a l u e analysis — pe- a n a l y s i s t h a t is l i m i t e d to C a l i f o r n i a b e c a u s e o f t h e a b s e n c e of t h e n e c e s s a r y d a t a in N e w York. T h e s e c o n d s e c t i o n f o c u s e s o n t h e p a t t e r n of d o w n w a r d d i f i c a t i o n , the r e s u l t s of w h i c h can be compared across since similar models have been estimated in N e w Y o r k . charge applicants states for m e t r o p o l i t a n The final section deals w i t h the fees areas lenders for p r o c e s s i n g l o a n a p p l i c a t i o n s . A g a i n , the a n a l y s i s is l i m i t e d to C a l i f o r n i a b e c a u s e of t h e a b s e n c e of f e e d a t a in N e w mo- loan York. INTEREST RATE, MATURITY, AND LOAN-TO-VALUE RATIO C h a p t e r 2 s u m m a r i z e s o u r b a s i c a p p r o a c h to m o d e l i n g the contract interest r a t e , loan-to-value ratio, and maturity for all approved m o r t g a g e s . period Starting from the recognition that t h e t h r e e t e r m s a r e s i m u l t a n e o u s l y d e t e r m i n e d , e a c h t e r m is m o deled as a function of the o t h e r two terms and r e l e v a n t preference, and potential discrimination variables. risk, We begin o u r a n a l y s i s of t h e r e s u l t s w i t h a m o r e d e t a i l e d d i s c u s s i o n of t h e e q u a t i o n s p e c i f i c a t i o n s , p a y i n g p a r t i c u l a r a t t e n t i o n to the identification problem. We then present the results, primarily, b u t not exclusively, on the interest rate focusing findings. T w o e s t i m a t i o n s t r a t e g i e s a r e p o s s i b l e in t h e c o n t e x t of simultaneously determined variables. On the one h a n d , struc- tural equations that explicitly model the simultaneity among e n d o g e n o u s v a r i a b l e s c a n b e e s t i m a t e d d i r e c t l y u s i n g the q u e of t w o - s t a g e l e a s t s q u a r e s , p r o v i d e d the e q u a t i o n s the techni- are 4-3 identified. On the o t h e r , structural e q u a t i o n s can be simpli- f i e d t o r e d u c e d f o r m e q u a t i o n s b y s u b s t i t u t i n g for t h e endogenous v a r i a b l e s , l e a v i n g t h e c o m p l e t e s e t of e x o g e n o u s v a r i a b l e s as t h e o n l y e x p l a n a t o r y v a r i a b l e s in e a c h o f t h e i n d i v i d u a l equations. The two strategies yield identical estimates of the p a r a m e t e r s in e x a c t l y i d e n t i f i e d s y s t e m s . In structural underidentified s y s t e m s , h o w e v e r , o n l y t h e l a t t e r s t r a t e g y is f e a s i b l e and s t r u c t u r a l p a r a m e t e r s c a n b e d e r i v e d w h i l e in overidentified systems, the reduced form approach leads to multiple of t h e s t r u c t u r a l no estimates parameters. U n l e s s t h e y c a n b e u s e d to c a l c u l a t e t h e s t r u c t u r a l para- m e t e r s , r e d u c e d f o r m c o e f f i c i e n t s a r e i n a d e q u a t e for t e s t i n g e x t e n t o f d i s c r i m i n a t o r y b e h a v i o r in t h e s e t t i n g o f terms. mortgage T h i s is i l l u s t r a t e d b y t h e f o l l o w i n g e x a m p l e . Suppose that the reduced form equations imply that, controlling other exogenous explanatory factors, black mortgage the for the applicants are charged lower interest rates than white applicants. By s e l f , this appears to suggest that lenders than discriminate against, such applicants. favor, rather B u t if it is a l s o that black borrowers are given shorter maturity true loans than larly situated w h i t e s , the interest rate finding w o u l d be cult to i n t e r p r e t . diffi- rates a s s o c i a t e d w i t h s h o r t e r m a t u r i t y l o a n s are g e n e r a l l y b e l o w on longer maturity loans. T h e r e l e v a n t q u e s t i o n is n o t inter- that charged w h i t e b o r r o w e r s to offset the fact that interest those whether s i m i l a r l y s i t u a t e d b l a c k s a n d w h i t e s are c h a r g e d t h e s a m e e s t r a t e in g e n e r a l , b u t w h e t h e r t h e y a r e c h a r g e d t h e s a m e simi- In t h i s c a s e , t h e i s s u e is w h e t h e r the e s t r a t e c h a r g e d b l a c k b o r r o w e r s is s u f f i c i e n t l y b e l o w it- interinterest 3-4 r a t e f o r c o m p a r a b l e t y p e s of l o a n s as m e a s u r e d b y t h e appraised value and the maturity loan-to- period. The p r e c e d i n g d i s c u s s i o n emphasizes the importance of estimating structural parameters. Equations 2.7 t o 2.9 in C h a p t e r 2 r e p r e s e n t one such t h r e e - e q u a t i o n structural m o d e l of terms. mortgage T h e t e c h n i q u e o f t w o s t a g e l e a s t s q u a r e s c o u l d , in p r i n - c i p l e , be used to obtain consistent estimates of the b e c a u s e e a c h o f t h e e q u a t i o n s is e i t h e r e x a c t l y o r parameters over-identi1 f i e d a c c o r d i n g t o t h e o r d e r c o n d i t i o n o f identification." " In p a r t i c u l a r , t h e i n t e r e s t r a t e e q u a t i o n is e x a c t l y i d e n t i f i e d be- cause two v a r i a b l e s , the requested maturity re- quested loan-to-appraised value (REQMAT) and the (RLTOAV) a r e e x c l u d e d f r o m e q u a t i o n ; t h e m a t u r i t y e q u a t i o n is o v e r i d e n t i f i e d b e c a u s e the the m a r k e t r a t e of i n t e r e s t ' ( I N T ^ ) , w h e t h e r o r n o t t h e m o r t g a g e is a variable rate mortgage value (VRM), and the requested (RLTOAV) are excluded; loan-to-appraised and the loan-to-value equation is o v e r i d e n t i f i e d b e c a u s e t h e t w o i n t e r e s t r a t e v a r i a b l e s and t h e requested maturity are all excluded. U n f o r t u n a t e l y , d a t a l i m i t a t i o n s p r e v e n t us f r o m the three equation model exactly as s p e c i f i e d . estimating First, we do not know the m a r k e t interest rate because we have no information the timing of the m o r t g a g e c o n t r a c t . Although savings and on loan a s s o c i a t i o n s r e p o r t i n f o r m a t i o n on the m o n t h of the application t h e Loan R e g i s t e r , it w a s deleted from the data m a d e a v a i l a b l e us. A b s e n c e o f t h i s i n f o r m a t i o n is u n f o r t u n a t e ; r i s i n g rates during the study period suggest that a substantial t i o n o f t h e v a r i a n c e o f i n t e r e s t r a t e s on i n d i v i d u a l for to mortgage propor- mortgage 4-5 contracts during any one year could be e x p l a i n e d by a variable r e p r e s e n t i n g t h e m o n t h o f t h e c o n t r a c t a c t i n g as a p r o x y for t h e market interest rate. It should be n o t e d , h o w e v e r , that the ex- clusion of such a variable from the equation does not ily bias the remaining coefficients; it w o u l d bias the c i e n t of a n o t h e r v a r i a b l e o n l y if t h a t v a r i a b l e w e r e with the excluded variable. necessarcoeffi- correlated Since w e have no reason to believe that such correlations are p r e s e n t , especially with respect a n y of t h e d i s c r i m i n a t i o n v a r i a b l e s , t h e p o t e n t i a l b i a s is to likely to be m i n i m a l . The m o r e s e r i o u s p r o b l e m a s s o c i a t e d w i t h the e x c l u s i o n of a m a r k e t i n t e r e s t rate p r o x y v a r i a b l e relates to the issue. identification W i t h o u t t h e m a r k e t r a t e o f i n t e r e s t in t h e m o d e l , t h e loan-to-value and maturity equations become potentially cult to identify. diffi- Although two variables are still excluded each e q u a t i o n , thereby meeting the order condition from for e x a c t iden- t i f i c a t i o n , t h e f a c t t h a t o n e o f t h e t w o v a r i a b l e s in e a c h case has only two values large (zero o r o n e ) m a y l e a d t o u n a c c e p t a b l y standard errors of the e q u a t i o n . done to solve this p o t e n t i a l U n f o r t u n a t e l y , nothing can be problem. The absence of information relating to the b o r r o w e r ' s quested maturity (REQMAT) re- presents a second data problem. t h i s c a s e , w e c a n n o t s i m p l y l e a v e t h e v a r i a b l e o u t of t h e In equa- t i o n ; d o i n g so m i g h t b i a s t h e c o e f f i c i e n t s o f c e r t a i n discrimination variables interest in t h e m a t u r i t y e q u a t i o n a n d w o u l d k e e p t h e rate and loan-to-value equations from being identified. w e h a v e i n t r o d u c e d t h e s i z e of t h e r e q u e s t e d l o a n Hence, (REQLOAN) as 3-6 a p r o x y for t h e r e q u e s t e d m a t u r i t y . Since the larger the amount r e q u e s t e d b y t h e b o r r o w e r , t h e g r e a t e r h i s / h e r i n c e n t i v e is to s p r e a d t h e l o a n o v e r a l o n g e r p e r i o d of t i m e , w e e x p e c t the q u e s t e d m a t u r i t y a n d t h e r e q u e s t e d l o a n to b e p o s i t i v e l y lated, ceteris paribus. re- corre- A g a i n , the use of this a d m i t t e d l y imper- f e c t p r o x y c o u l d l e a d t o l a r g e s t a n d a r d e r r o r s in t h e o t h e r terms equations. A f t e r m a k i n g these two a d j u s t m e n t s , i . e . leaving the market i n t e r e s t rate v a r i a b l e out of the i n t e r e s t rate e q u a t i o n and stituting REQLOAN f o r R E Q M A T in t h e m a t u r i t y e q u a t i o n , w e estimated equations least squares. Chapter 3), risk 2.7 t o 2.9 u s i n g t h e t e c h n i q u e o f t w o have stage Like the California decision-to-lend model (see (RISK) is m e a s u r e d b y a v e c t o r o f f i n a n c i a l a c t e r i s t i c s o f t h e b o r r o w e r a n d t h e p r o p e r t y , a v e c t o r of b o r h o o d c h a r a c t e r i s t i c s , a n d a v e c t o r of b u i l d i n g a g e The discrimination variables char- neigh- dummies. (DISC) a l s o r e p l i c a t e e x a c t l y u s e d in t h e d e c i s i o n - t o - l e n d m o d e l s . those They include variables t h e s e x , r a c e , o r a g e of t h e a p p l i c a n t o r a p p l i c a n t s ; i n c o m e b y i t s e l f a n d i n t e r a c t e d w i t h t h e s e x of t h e for secondary secondary earner; r a c i a l c o m p o s i t i o n and age of the n e i g h b o r h o o d ; t i o n of t h e sub- and loca- property. The results for the four m e t r o p o l i t a n areas (eight samples in t o t a l ) a r e r e p o r t e d in A p p e n d i x B , T a b l e s B - 3 7 t o B - 4 6 . The i n t e r e s t rate e q u a t i o n s are generally satisfactory; cases the strong p o s i t i v e e f f e c t s of the requested loan the requested loan to appraised value in m o s t (REQLOAN) and (RLTOAV) v a r i a b l e s in the other terms equations adequately identify the interest equation. rate 3-7 The maturity period and loan-to-appraised value are less satisfactory. As noted above, these equations rely part on the binary variable rate m o r t g a g e variable their identification. equations (VRM) in for W h e n this v a r i a b l e fails to e x e r t a sig- n i f i c a n t i m p a c t o n t h e c o n t r a c t i n t e r e s t r a t e a n d w h e n the inter- e s t r a t e is an i m p o r t a n t e x p l a n a t o r y v a r i a b l e i n t h e m a t u r i t y loan-to-value e q u a t i o n , the standard error of the maturity loan-to-value equation becomes unacceptably large. This or or occurs m o s t o b v i o u s l y in t h e 19 78 S a n F r a n c i s c o m a t u r i t y e q u a t i o n , w h e r e the equation's large standard error reduces the t-statistics a l l the e x p l a n a t o r y v a r i a b l e s to values w e l l b e l o w 1. of Because t h i s i d e n t i f i c a t i o n p r o b l e m , t h e e q u a t i o n is n o t r e p o r t e d i n appendix (see T a b l e B - 4 4 ) . Although all the other maturity loan-to-value equations have been reported, those with the and large s t a n d a r d e r r o r s in r e l a t i o n to t h e m e a n o f t h e d e p e n d e n t should be interpreted cautiously. of variable In p a r t i c u l a r , t h e S a n Jose . (19 77) l o a n - t o - v a l u e e q u a t i o n s h o u l d b e h e a v i l y d i s c o u n t e d since the p o o r p e r f o r m a n c e of the r e q u e s t e d loan v a r i a b l e in the m a t u r i t y e q u a t i o n m a k e s i t a w e a k i d e n t i f i e r in the loan-to-value equation. Control Variables Endogenous Variables. emerge as statistically Most of the e n d o g e n o u s variables significant explanatory variables, thereby s u p p o r t i n g the view that the three terms are d e t e r m i n e d simulta- neously. summa- r i z e d as The impact directions across equations can be follows: 3-8 INT (%) = f ( M A T , L T O A V , . . . ) + MAT (yrs) = h ( I N T , mixed LTOAV LTOAV,...) + (%) = g ( I N T , M A T , . . . ) mixed w h e r e INT is t h e c o n t r a c t i n t e r e s t M A T is t h e m a t u r i t y rate, period, a n d L T O A V is t h e l o a n - t o - a p p r a i s e d v a l u e ratio. A s i n d i c a t e d b y t h e + s i g n u n d e r M A T in t h e i n t e r e s t equation, the results consistently imply that lenders h i g h e r i n t e r e s t r a t e s o n l o n g e r m a t u r i t y loans-. rate charge This conclusion is b a s e d o n t h e f a c t t h a t s e v e n of t h e e i g h t s a m p l e s y i e l d tistically significant positive coefficients; ple the remaining (Fresno 1977) yields a very small and statistically ficant negative stasam- insigni- coefficient. Somewhat surprisingly, higher loan-to-appraised l e a d to s t a t i s t i c a l l y value ratios s i g n i f i c a n t l y l o w e r i n t e r e s t r a t e s in a l l m e t r o p o l i t a n a r e a s o t h e r t h a n F r e s n o w h e r e in 1 9 7 7 a p o s i t i v e l a t i o n s h i p is f o u n d . This negative relationship requires re- expla- n a t i o n s i n c e i t a p p e a r s to b e i n c o n s i s t e n t w i t h t h e v i e w t h a t the l a r g e r is t h e l o a n a m o u n t in r e l a t i o n t o t h e a p p r a i s e d v a l u e , t h e riskier is t h e l o a n t o t h e l e n d e r . It m i g h t b e , h o w e v e r , t h a t lenders are not particularly concerned about the security o f t h e p r o p e r t y b e c a u s e of t h e r a p i d g r o w t h in h o u s i n g prices. T h e h o u s i n g b o o m w i l l a s s u r e that the sales price of the a t a n y f u t u r e d a t e w i l l b e s u f f i c i e n t to c o v e r t h e loan. house outstanding H e n c e , o n c e t h e l e n d e r d e c i d e s to m a k e t h e l o a n , value profit these 3-9 considerations l e a d h i m / h e r to m a k e the l a r g e s t l o a n consistent with other risk factors. This means that possible lenders w i l l b e w i l l i n g to m a k e t h e l a r g e s t l o a n s in r e l a t i o n to m a r k e t v a l u e p r e c i s e l y in t h o s e s i t u a t i o n s t h a t look m o s t favorable; t h u s , h i g h l o a n - t o - v a l u e r a t i o s m a y b e i n d i c a t i v e of l o w , r a t h e r t h a n h i g h , r i s k to t h e b a n k a n d , c o n s e q u e n t l y , m a y w a r r a n t interest lower rates. S i m i l a r l o g i c m a y e x p l a i n the p o s i t i v e and statistically s i g n i f i c a n t c o e f f i c i e n t s on the l o a n - t o - v a l u e r a t i o in the matur i t y e q u a t i o n a c r o s s a l l e i g h t s a m p l e s ; l e n d e r s a p p a r e n t l y are w i l l i n g to g i v e l a r g e r m a t u r i t y l o a n s to t h o s e s a m e applicants to w h o m t h e y a r e w i l l i n g to m a k e l a r g e l o a n s in r e l a t i o n to appraised value. T h e i m p a c t o n m a t u r i t y l e n g t h of t h e contract interest rate varies across samples. In t h r e e s a m p l e s (Fresno 1977 a n d L o s A n g e l e s - L o n g B e a c h 1977 and 1 9 7 8 ) , it e x e r t s a stat i s t i c a l l y s i g n i f i c a n t n e g a t i v e i m p a c t ; in o n e (San Francisco- O a k l a n d 1 9 7 7 ) , a s i g n i f i c a n t p o s i t i v e i m p a c t ; a n d in the other 2 three, a statistically insignificant impact. The predominant s i g n is n e g a t i v e . In t h e l o a n - t o - v a l u e e q u a t i o n , six of t h e e i g h t rate coefficients are negative (with four of t h e m interest statistically s i g n i f i c a n t ) w h i l e m o s t of the m a t u r i t y c o e f f i c i e n t s a r e insig- nificant. T a k e n t o g e t h e r , t h e r e s u l t s for the e n d o g e n o u s s u g g e s t t h a t the t h r e e m o r t g a g e t e r m s t e n d to b e in the s a m e d i r e c t i o n . variables adjusted T h a t i s , b o r r o w e r s w h o a r e c h a r g e d higher i n t e r e s t r a t e s a r e g i v e n s m a l l e r l o a n s in r e l a t i o n to a p p r a i s e d 3-10 value and shorter maturities than those charged lower rates. interest T h o s e g i v e n h i g h e r l o a n s in r e l a t i o n t o v a l u e a r e charged lower interest rates and given longer m a t u r i t i e s than those s m a l l e r l o a n s in r e l a t i o n to v a l u e . If s h o r t e r m a t u r i t y a r e g r a n t e d , s a y in r e s p o n s e to b o r r o w e r p r e f e r e n c e s , lower interest rates are given loans however, charged. Financial Characteristics. If b o r r o w e r s a n d l e n d e r s expect m o r t g a g e r a t e s to r i s e , v a r i a b l e r a t e m o r t g a g e s s h o u l d h a v e contract interest rates than conventional mortgages. The empiri- c a l r e s u l t s , w h i c h a r e c o n s i s t e n t w i t h t h i s e x p e c t a t i o n in of t h e e i g h t s a m p l e s lower seven (the o n e e x c e p t i o n b e i n g S a n F r a n c i s c o 1977), suggest that interest rates range from age p o i n t s lower on v a r i a b l e late .03 to .23 in percent- mortgages. A s a p r o x y for t h e r e q u e s t e d m a t u r i t y , t h e s i z e of t h e req u e s t e d l o a n is e x p e c t e d to h a v e a p o s i t i v e i m p a c t o n t h e m a t u rity period. With one exception (San J o s e 1 9 7 7 ) , t h e results s u p p o r t e x p e c t a t i o n s , a l t h o u g h in t w o c a s e s t h e c o e f f i c i e n t not statistically s i g n i f i c a n t a t t h e 10 p e r c e n t l e v e l . above, the San Jose result causes identification As is noted difficulties for t h e l o a n - t o - v a l u e e q u a t i o n • Not surprisingly, the requested loan-to-appraised-value i a b l e e n t e r s t h e l o a n - t o - v a l u e e q u a t i o n s p o s i t i v e l y and l a r g e t - s t a t i s t i c s in a l l e i g h t s a m p l e s . of the coefficients l o a n - t o - v a l u e r a t i o l e a d s t o a 9.6 a g e p o i n t d i f f e r e n c e in t h e a c t u a l l o a n - t o - v a l u e with The a v e r a g e of m o s t i n d i c a t e s t h a t a 10 p e r c e n t a g e p o i n t e n c e in t h e r e q u e s t e d var- differpercent- ratio. The final financial characteristic variable, requested loan 3-11 to income ( R L T O I N C ) w h i c h t a k e s o n t h e v a l u e 0 for r a t i o s below 2 . 5 a n d t h e v a l u e of t h e r a t i o i t s e l f m i n u s 2.5 a b o v e 2 . 5 , a p p e a r s in a l l t h r e e s e t s of e q u a t i o n s b u t e x e r t s i t s strongest a n d m o s t c o n s i s t e n t i m p a c t in t h e l o a n - t o - v a l u e e q u a t i o n s . s e v e n o u t of e i g h t o f t h o s e e q u a t i o n s , t h e f i n d i n g t h a t In higher r e q u e s t e d l o a n - t o - i n c o m e ratios lead to lower l o a n - t o - v a l u e t i o s is s t a t i s t i c a l l y significant at the 5 percent level. what surprisingly, requested loan-to-income has a raSome- statistically s i g n i f i c a n t p o s i t i v e i m p a c t in o n l y t h r e e of the e i g h t rate equations, thereby suggesting that the financial interest character- istics of the b o r r o w e r sometimes do not directly influence the contract interest rate. they It should be noted, h o w e v e r , that exert a positive indirect impact through the loan-to-value a b l e w h i c h , it w i l l b e r e c a l l e d , e n t e r s t h e i n t e r e s t r a t e tions with a negative sign. F i n a l l y , the requested A s in t h e equa- loan-to-in- c o m e v a r i a b l e is i n s i g n i f i c a n t in m o s t of t h e m a t u r i t y Neighborhood Characteristics. vari- equations. decision-to-lend m o d e l s , v a r i a b l e s r e p r e s e n t i n g b o t h t h e l e v e l a n d r a t e of change o f n e i g h b o r h o o d c h a r a c t e r i s t i c s a r e i n c l u d e d to c o n t r o l for characteristics that might legitimately influence the c a l c u l a t i o n s a b o u t t h e p r o f i t a b i l i t y of a p a r t i c u l a r loan. M a n y of these v a r i a b l e s are s t a t i s t i c a l l y one or more of the three terms m o d e l s . lender's mortgage significant the fraction of high income The households (FHI) e x h i b i t s t h e m o s t c o n s i s t e n c y a c r o s s s a m p l e s . In a l l i n t e r e s t r a t e e q u a t i o n s , h i g h e r p r o p o r t i o n s of h i g h income in In g e n e r a l , h o w e v e r , v e r y few c o n s i s t e n t p a t t e r n s emerge across the e i g h t s a m p l e s . variable representing those eight house- 3-12 holds l e a d t o l o w e r i n t e r e s t r a t e s ; o n l y in F r e s n o 1978) and San Jose significant. (1977) a r e t h e s e r e s u l t s n o t (1977 and statistically M o r e o v e r , this same v a r i a b l e e n t e r s m o s t of loan-to-value equations with a negative sign as w e l l , not always statistically Building Age. the although significantly. B u i l d i n g a g e t u r n s o u t to b e a statistically s i g n i f i c a n t d e t e r m i n a n t o f m o r t g a g e t e r m s in a l l o f t h e m e t r o politan areas under investigation. Table 4-1 summarizes the f e c t s of b u i l d i n g a g e on i n t e r e s t r a t e s . Each entry shows ef- the p r e d i c t e d d i f f e r e n c e b e t w e e n the i n t e r e s t rate c h a r g e d on a building w i t h the indicated age and that charged on a new build3 ing. Two asterisks (**) i n d i c a t e t h a t t h e r e l e v a n t coefficient is s i g n i f i c a n t a t t h e 5 p e r c e n t l e v e l ; o n e a s t e r i s k (*) the 5-10 percent level. In e v e r y ple other than Fresno by successively The results are striking. indicates 1977, interest rates are increased, larger amounts, as the building age sam- usually increases. To put the table entries into perspective, consider the 39 y e a r o l d e n t r y f o r t h e L o s A n g e l e s - L o n g B e a c h a r e a (1978). This indicates that on average interest rates on buildings 30-39 years b e f o r e 1977 exceed those on new buildings by one third interest rate of 9.75 30- (or o n e y e a r (.33) of o n e p e r c e n t a g e p o i n t . built old) Using an (close to the sample m e a n of 9 . 7 9 ) , a m a - t u r i t y p e r i o d o f 30 y e a r s (close to the s a m p l e m e a n of 29.87), and a $60,000 loan a m o u n t , the 0.33 p e r c e n t h i g h e r i n t e r e s t rate r e s u l t s in a n a d d i t i o n a l p a y m e n t o f $ 1 7 4 p e r y e a r . case, the age of the b u i l d i n g by approximately In t h i s increases the borrower's yearly 3 percent. S i m i l a r l y , in h o u s e s b u i l t payments 40-49 Table 4-1 Impact of Building Age on Interest Rates for Conventional Mortgages on Owner-Occupied Single Family Houses in Four California Metropolitan Areas: Building A g e (yrs) New Fresno 1977 1978 1977 and 1978 a Los Angeles-Long Beach San Francisco-Oakland San Jose 1977 1978 1977 1978 ~ 1977 ^ 1978" (base) BA1-9 -0 .09** - 0 .03 0 .06** 0. 20** 0 .04** 0 .04 0 .01 0 .14** BA10-19 -0 .04** -0 .01 0 .10** 0 . 20** 0 .05** 0 . 08** 0 .02 0 .09** BA20-29 - 0 .03 0 .00 0 .09** 0 . 23** 0 .07** 0 .11** 0 .15 0 .14** BA30-39 0 .02 0 .16** 0 . 16** 0 . 33** 0 .13** 0 .16** 0 .14** 0 . 31** BA40-49 0 .00 0 .17** 0 .25** 0. 64** 0 .14** 0 .22** 0 .23** 0 .28** BAGE50 0 .02 0 .44* 0 .54** 1 . 16** 0 .29** 0 .36** 0 .12 0 .30** a) E a c h e n t r y s h o w s t h e p r e d i c t e d d i f f e r e n c e b e t w e e n t h e i n t e r e s t r a t e c h a r g e d o n an a p p l i c a t i o n w i t h the i n d i c a t e d c h a r a c t e r i s t i c s and t h a t c h a f g e d on an a p p l i c a t i o n w i t h the base characteristics. A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e r e l e v a n t d i f f e r e n c e is s t a t i s t i c a l l y s i g n i f i c a n t a t the f i v e - t o - t e n p e r c e n t l e v e l ( 2 - t a i l e d t e s t ) . T w o a s t e r i s k s (**) i n d i c a t e t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l . b) D u e t o a p r o g r a m m i n g e r r o r in t h e 1 9 7 8 e s t i m a t e s , b u i l d i n g a g e in t h e 1 9 7 8 s a m p l e m e a s u r e d r e l a t i v e to n e w a n d o n e y e a r o l d b u i l d i n g s , a n d t h e o t h e r v a r i a b l e s a r e : BAll-20, B A 2 1 - 3 0 , BA31-40, BA41-50, and BAGE51. is BA2-10, 3-14 y e a r s b e f o r e 1 9 7 7 , t h e a d d i t i o n a l a n n u a l p a y m e n t a m o u n t s to a n d for h o u s e s b u i l t m o r e t h a n 50 y e a r s b e f o r e 1 9 7 7 , t h e t i o n a l a n n u a l p a y m e n t is $ 6 3 0 . H e n c e , the impact of $348 addi- building a g e o n i n t e r e s t ratfes in t h e L o s A n g e l e s - L o n g B e a c h a r e a h a s a substantial impact on the financial burdens borne by borrowers. A l t h o u g h t h e m a g n i t u d e s a r e s o m e w h a t s m a l l e r in t h e o t h e r p l e s , the conclusion remains the same: borrowers mortgaging o l d e r h o u s e s pay s i g n i f i c a n t l y higher interest r a t e s and substantially sam- larger annual costs than those mortgaging bear new houses. T h e i n t e r p r e t a t i o n o f t h e s e f i n d i n g s is p r o b l e m a t i c . the one h a n d , lenders may claim that a property's age risk factors considered (e.g., b u i l d i n g condition) represents that may legitimately in t h e l o a n e v a l u a t i o n p r o c e s s . A c c o r d i n g to interpretation, the findings imply that lenders consider gages on o l d e r b u i l d i n g s to be s u b s t a n t i a l l y r i s k i e r than on new b u i l d i n g s . On this mortthose O n t h e o t h e r h a n d , to t h e e x t e n t t h a t r i s k n o t r e l a t e d to b u i l d i n g a g e , t h e f i n d i n g s s u g g e s t t h a t be is lenders in C a l i f o r n i a d i s c r i m i n a t e a g a i n s t t h e p u r c h a s e r s of o l d build- ings by imposing harsher terms than otherwise w a r r a n t e d . How- e v e r , s i n c e b u i l d i n g a g e is p r o b a b l y a g o o d p r o x y for t h e rem a i n i n g economic life of the b u i l d i n g , the discrimination pretation is a t b e s t a w e a k inter- explanation. We find a similar p a t t e r n , although slightly less strong s t a t i s t i c a l l y , for the impact of b u i l d i n g age on the m a t u r i t y the loan. In F r e s n o , for e x a m p l e , in b o t h s a m p l e s , maturities d e c r e a s e s t e a d i l y w i t h b u i l d i n g a g e ; t h e m a t u r i t y for t h e very of 3-15 o l d e s t h o u s e s b e i n g 3.2 a n d 2.5 y e a r s s h o r t e r on a v e r a g e t h o s e for n e w h o u s e s . Similar but less pronounced patterns m e r g e in t h e S a n F r a n c i s c o - O a k l a n d samples. than (1977) a n d t h e S a n J o s e m a t u r i t i e s than the n e w e s t and the oldest areas. longer Lower l o a n s in r e l a t i o n t o a p p r a i s e d v a l u e , a f t e r c o n t r o l l i n g requested are houses. T h e r e s u l t s for t h e l o a n - t o - v a l u e r a t i o a r e m i x e d . Fresno (1977) In t h e L o s A n g e l e s - L o n g B e a c h a r e a , the p a t t e r n s U - s h a p e d , w i t h m o r t g a g e s on the m e d i u m aged houses having e- for the l o a n - t o - v a l u e r a t i o , a r e g i v e n on o l d e r h o u s e s in the (both y e a r s ) a n d S a n F r a n c i s c o - O a k l a n d (1977) metropolitan T h u s , for these three s a m p l e s , we conclude that i m p o s e h a r s h e r t e r m s in a l l t h r e e w a y s on b o r r o w e r s older houses. In t h e L o s - A n g e l e s - L o n g lenders purchasing B e a c h a n d San J o s e areas, h o w e v e r , t h e r e s u l t s s u g g e s t t h a t b o r r o w e r s on o l d e r h o u s e s are g i v e n l a r g e r l o a n s in r e l a t i o n t o a p p r a i s e d v a l u e t h a n a r e bor- r o w e r s on n e w h o m e s , t h e r e b y o f f s e t t i n g adverse terms imposed on these Discrimination somewhat the other borrowers. Results W e f o c u s h e r e o n t h e i n t e r e s t r a t e r e s u l t s for t h r e e , r e a sons . First we have the most confidence in the i n t e r e s t equations because they are the most clearly identified. the i n t e r p r e t a t i o n of the r e l e v a n t c o e f f i c i e n t s is rate Second, unambiguous in t h e i n t e r e s t r a t e e q u a t i o n s s i n c e , for a n y t e r m to m a t u r i t y a n d l o a n t o v a l u e r a t i o , b o r r o w e r s a l w a y s p r f e r l o w e r to h i g h e r interest rates. Hence, a statistically significant positive e f f i c i e n t o n a d i s c r i m i n a t i o n v a r i a b l e in t h e i n t e r e s t rate e q u a t i o n p r o v i d e s r e l a t i v e l y c l e a r e v i d e n c e in s u p p o r t of the co- 3-16 h y p o t h e s i s of d i s c r i m i n a t o r y lending practices. In the maturity e q u a t i o n , by c o n t r a s t , the discrimination variables may reflect b o r r o w e r p r e f e r e n c e s f o r d i f f e r e n t m a t u r i t y p e r i o d s as w e l ] discriminatory lending behavior. nation variables are statistically and loan-to-value e q u a t i o n s . F i n a l l y , m a n y of the insignificant discrimi- in t h e m a t u r i t y W h e r e p a t t e r n s e m e r g e in the m a t u - tiry and loan-to-value equations, they will be noted. To s u m m a r i z e the r e s u l t s , w e show the p r e d i c t e d difference in i n t e r e s t r a t e a s s o c i a t e d w i t h t h e d i f f e r e n c e b e t w e e n t h e dicated catetory, e.g. black applicant(s) or a p p l i c a n t s age 25, and the base category, e.g. white applicant(s) cants between 35 a n d 4 4 . or By m a k i n g applithe assump- t i o n s a b o u t t h e t e r m to m a t u r i t y , t h e s i z e of t h e l o a n , a n d i n t e r e s t r a t e on a b a s e a p p l i c a t i o n , each of the interest d i f f e r e n c e s c a n b e t r a n s l a t e d i n t o a n i m p a c t on t h e in- under A s t e r i s k s a r e u s e d to i n d i c a t e statistical significance of the d i f f e r e n c e . yearly mortgage payments. as the rate borrower's For example, starting with a mortgage r a t e of 9 p e r c e n t a n d a 30 y e a r m a t u r i t y p e r i o d , a d i f f e r e n c e of 0 . 1 2 5 p e r c e n t t r a n s l a t e s i n t o 11 c e n t s p e r 100 d o l l a r s of mortgage contract. the H e n c e , a $40,000 mortgage would cost $44 m o r e p e r y e a r a n d a $ 6 0 , 0 0 0 m o r t g a g e w o u l d c o s t $66 m o r e per year. Sex. Table 4-2. The b a s i c sex d i s c r i m i n a t i o n results are reported The m o s t striking and consistent pattern discrimination against male-only applications in involves in b o t h t h e Los Angeles-Long Beach and San Francisco-Oakland metropolitan areas. T h e four s t a t i s t i c a l l y s i g n i f i c a n t c o e f f i c i e n t s for these two Table 4-4 Impact ofAgeofApplicantonInterest Rates for Conventional Mortgages on Owner-Occupied Single Family Houses in Four California Metropolitan Areas: 1977 MFNCB 1977 and 1978 a Fresno Los A n g e l e s - L o n g Beach San F r a n c i s c o - O a k l a n d -1978 1977 1978 1977 1978 San 1977 Jose 1978 (base) 0 .,01 0 ,.02 - 0 ..05 - 0 .,03 0..00 0..03 - 0 ..04 - 0 ..08 FONLYNCB - 0 ,.02 0 ..01 0,.01 -0 ,.09* MONLY - 0 ,.07** 0 ,.01 0 ,.03** MFCB25-34 FONLYCB25- 34 b 0,.07* - 0 ..01 -0 ..03 - 0 ..04 - 0 ..01 0..04* -0 ,.00 0..04 - 0 ..02 0,.01 -0 ..04 -0 ,.04 - 0 ..07 0,.05 0..03 0,.04** 0 ,.07** a) E a c h e n t r y s h o w s t h e p r e d i c t e d d i f f e r e n c e b e t w e e n t h e i n t e r e s t r a t e c h a r g e d o n an a p p l i c a t i o n w i t h t h e indicated c h a r a c t e r i s t i c s and t h a t c h a r g e d on an a p p l i c a t i o n w i t h the base characteristics. A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e r e l e v a n t d i f f e r e n c e is s t a t i s t i c a l l y significant at the five-to-ten p e r c e n t level (2-tailed t e s t ) . Two asteri s k s (**) i n d i c a t e t h a t the d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l . b) T h e s e c o e f f i c i e n t s r e f l e c t t h e e f f e c t s of b o t h s e x a n d a g e . S e e T a b l e 4-4 for t h e d i f f e r e n c e b e t w e e n i n t e r e s t r a t e s c h a r g e d o n l o a n s t o a p p l i c a n t s b e t w e e n 25 a n d 34 and t h o s e c h a r g e d t o a p p l i c a n t s b e t w e e n 35 a n d 4 4 . 3-18 a r e a s i m p l y t h a t i n t e r e s t r a t e s c h a r g e d t h i s t y p e of exceed those charged otherwise similar male-female application applications w h e r e t h e w i f e is b e y o n d c h i l d b e a r i n g a g e b y 0.0 3 to 0.07 centage points. In S a n J o s e the r e s u l t s a r e c o n s i s t e n t this finding but are statistically c e n t l e v e l , w h i l e in F r e s n o male-only category is per- with i n s i g n i f i c a n t a t t h e 10 p e r - (1977) w e f i n d e v i d e n c e t h a t this favored. T h e o n l y o t h e r f i n d i n g c o n s i s t e n t w i t h the h y p o t h e s i s discrimination is t h e s t a t i s t i c a l l y point predicted difference s i g n i f i c a n t 0.04 in i n t e r e s t r a t e s c h a r g e d of percentage female only applications with at least one female below childbearing age (and t h e a p p l i c a n t h e r s e l f b e t w e e n 25 a n d 34) in t h e S a n Fran- cisco-Oakland 1977 s a m p l e . S i n c e n o n e of t h e o t h e r for t h i s c a t e g o r y a r e s t a t i s t i c a l l y differences significant and four have n e g a t i v e s i g n s , n o e v i d e n c e of w i d e s p r e a d d i s c r i m i n a t i o n t h i s g r o u p is against apparent. B e c a u s e o f t h e e v i d e n c e of i n t e r e s t r a t e d i s c r i m i n a t i o n g a i n s t m a l e - o n l y a p p l i c a t i o n s , it is i m p o r t a n t to s e e h o w a- this c a t e g o r y f a r e s w i t h r e s p e c t to t h e o t h e r t w o l o a n t e r m s , m a t u rity periods and loan-to-value r a t i o s . A c c o r d i n g to the m a t u - rity equations, lenders grant male-only borrowers significantly shorter maturity San Francisco-Oakland statistically l o a n s in t h e F r e s n o (1977) m e t r o p o l i t a n a r e a s . (1977 a n d 1 9 7 8 ) a n d L o s A n g e l e s - L o n g B e a c h (1978) (1977) The San insignificant. unless male applicants have preferences for s h o r t e r Jose coefficients are also negative but are statistically loans that are not fully controlled and for, the results Hence, maturity provide 3-19 some evidence t h a t lenders treat this category of b o r r o w e r v e r s e l y w i t h r e s p e c t to m a t u r i t y l e n g t h a s w e l l a s w i t h to i n t e r e s t ad- respect rates. The loan-to-value ratio findings present a slightly ent picture. The only statistically significant differ- coefficients f o r t h e m a l e - o n l y c a t e g o r y i m p l y t h a t m e m b e r s of t h i s g r o u p c e i v e h i g h e r l o a n s in r e l a t i o n to a p p r a i s e d v a l u e t h a n o f t h e s a m e g r o u p in t h e L o s A n g e l e s - L o n g B e a c h and San Francisco-Oakland (1978) m e t r o p o l i t a n re- members (1977 a n d 1978) areas. In a d d i t i o n to t e s t i n g for o u t r i g h t d i s c r i m i n a t i o n b a s e d t h e s e x o f t h e a p p l i c a n t , w e t e s t e d for d i s c r i m i n a t i o n b a s e d d i f f e r e n t i a l t r e a t m e n t of s e c o n d a r y i n c o m e . samples, only one statistically r e s p e c t to i n t e r e s t r a t e s . Across all on on eight significant finding emerges In t h e S a n F r a n c i s c o - O a k l a n d with 1978 s a m p l e , m a l e - o n l y a p p l i c a t i o n s w i t h two w o r k e r s earning equal comes are charged interest rates that average 0.13 percentage p o i n t s m o r e t h a n t h o s e c h a r g e d to s i m i l a r l y s i t u a t e d male-female applications with a non-working wife beyond childbearing age. T h i s d i f f e r e n t i a l r e f l e c t s the c o m b i n e d e f f e c t s o f b e i n g male a n d of h a v i n g secondary i n c o m e , b o t h of w h i c h a r e s i g n i f i c a n t in t h i s s a m p l e . statistically In c o n t r a s t t o t h i s f i n d i n g m a l e s , the allegation that lenders discount the secondary of f e m a l e s is r e j e c t e d Race. in a l l for income cases. The equations provide substantial evidence that mem- b e r s of m i n o r i t y g r o u p s a r e c h a r g e d h i g h e r i n t e r e s t r a t e s similarly situated whites. As summarized than in T a b l e 4 - 3 , a l l of t h e i n t e r e s t r a t e d i f f e r e n t i a l s a r e g r e a t e r t h a n o r e q u a l to in- zero Table 4-4 Impact ofAgeofApplicantonInterest Rates for Conventional Mortgages on Owner-Occupied Single Family Houses in Four California Metropolitan Areas: Race of Applicant(s) White (base) Fresno 1977 1978 — 1977 and 1978 a Los Angeles-Long B e a c h San F r a n c i s c o - O a k l a n d 1977 1978 1977 1978 — — San 1977 — Jose 1978 — 0 .01 0 .06 0.05 0.06** 0 .07** 0 .06* 0.03 0.06* 0.04** 0 .06** 0 .03 0.03 0.05 0.05* 0 .03 0 .08* 0.C3 Black 0.04 0 .13* 0.04** 0.06 Spanish 0.05** 0 . 00 0.06** 0.10** Asian 0 . 02 0.03 0.02* Other Minority 0 . 00 0.03 0.02 -0.00 a) Each entry shows the predicted difference between the interest rate charged on an application with the indicated characteristics and that charged on an application with the base characteristics. A single asterisk (*) indicates that the relevant difference is statistically significant, at the five-to-ten percent level (2-tailed test). Two asterisks (**) indicate that the difference is significant at the five or less percent level. 3-21 and many are statistically significant. The clearest r e l a t e s to t h e t r e a t m e n t of S p a n i s h a p p l i c a n t s . pattern In a l l f o u r met- ropolitan areas, statistically significant differentials w i t h m a g n i t u d e s ranging from 0.05 to 0.10 p e r c e n t a g e emerge points. T h e e v i d e n c e a l s o s u p p o r t s the v i e w t h a t A s i a n s r e c e i v e verse treatment, especially in t h e S a n F r a n c i s c o - O a k l a n d A n g e l e s - L o n g B e a c h m e t r o p o l i t a n areas w h e r e all four are statistically significant. and minorities are slightly more mixed but are still generally terest rate differentials lending. (1977) a n d F r e s n o (1977) a n d S a n J o s e in- (1978) Fran- (1977). T u r n i n g b r i e f l y to t h e m a t u r i t y e q u a t i o n s , w e find that l e n d e r s in t h e S a n F r a n c i s c o - O a k l a n d a r e a g r a n t l o a n s w i t h tistically con- signifi- w h i l e t h o s e for o t h e r m i n o r i t i e s a r e s i g n i f i c a n t in S a n cisco-Oakland other The for b l a c k s a r e s t a t i s t i c a l l y c a n t o n l y in L o s A n g e l e s - L o n g B e a c h Los coefficients T h e r e s u l t s f o r b l a c k s and s i s t e n t w i t h the h y p o t h e s i s of d i s c r i m i n a t o r y ad- s i g n i f i c a n t l y s h o r t e r m a t u r i t i e s to S p a n i s h , sta- Asian, a n d o t h e r m i n o r i t i e s t h a n to s i m i l a r l y s i t u a t e d w h i t e s . Only the Los A n g e l e s - L o n g Beach that minority groups (1977) a r e a is t h e r e e v i d e n c e ( b l a c k s a n d S p a n i s h , in p a r t i c u l a r ) longer maturity loans. are granted Finally, the evidence suggests that b o t h Los A n g e l e s - L o n g Beach and San F r a n c i s c o - O a k l a n d , l a r g e r l o a n s in r e l a t i o n to m a r k e t than similarly situated whites. Although the law prohibits discriminatory value lending b a s e d on the age of the a p p l i c a n t , a l l e g a t i o n s p e r s i s t lenders treat both very young applicants and old in minori- t i e s t e n d to b e g r a n t e d Age. in that applicants 3-22 adversely. 4-4. S o m e s u p p o r t for t h e s e a l l e g a t i o n s is f o u n d in T a b l e In f o u r o f t h e e i g h t s a m p l e s , l e n d e r s a p p e a r t o d i s c r i m i - n a t e a g a i n s t a p p l i c a n t s u n d e r 25 b y c h a r g i n g t h e m i n t e r e s t t h a t a v e r a g e 0 . 0 4 to 0 . 0 9 p e r c e n t a g e p o i n t s a b o v e t h o s e rates charged s i m i l a r l y s i t u a t e d a p p l i c a n t s b e t w e e n t h e a g e s o f 35 a n d 4 4 . In a d d i t i o n , l e n d e r s a p p a r e n t l y c h a r g e a p p l i c a n t s o v e r 44 h i g h e r in- terest rates. This conclusion is b a s e d o n f o u r significant positive coefficients statistically for t h e 4 5 - 5 4 y e a r old g r o u p a n d t w o f o r t h e g r e a t e r t h a n 54 a g e age group. Not surprisingly, the maturity equations provide evidence t h a t a p p l i c a n t s o v e r 45 e n d u p w i t h s h o r t e r m a t u r i t i e s , especi- a l l y in L o s A n g e l e s - L o n g B e a c h , S a n F r a n c i s c o - O a k l a n d , a n d Fres- no should ( 1 9 7 8 ) , t h a n a p p l i c a n t s b e t w e e n 35 a n d 4 4 . This result n o t n e c e s s a r i l y b e i n t e r p r e t e d a s e v i d e n c e of d i s c r i m i n a t o r y havior based on a g e , however, since the outcome may merely f l e c t t h e p r e f e r e n c e of o l d e r a p p l i c a n t s f o r s h o r t e r This alternative explanation ruled adequately f o r t h e b o r r o w e r ' s p r e f e r e n c e s w i t h r e s p e c t to m a t u r i t y length. In t h e l o a n - t o - v a l u e e q u a t i o n s , w e f i n d s u p p o r t for hypothesis that lenders grant loans that are smaller in to a p p r a i s e d v a l u e to a p p l i c a n t s o v e r 45 t h a n to t h o s e 35 a n d 44. re- maturities. for the findings c a n n o t be o u t since data limitations keep us from controlling be- the relation between 4 Redlining. T a b l e 4 - 5 s u m m a r i z e s the e v i d e n c e p e r t a i n i n g a l l e g a t i o n s t h a t l e n d e r s i m p o s e h a r s h e r t e r m s on to applications f r o m o l d e r n e i g h b o r h o o d s or f r o m n e i g h b o r h o o d s w i t h h i g h propor- t i o n s of m i n o r i t i e s . table E a c h e n t r y in t h e f i r s t r o w of t h e Table 4-4 Impact of Age of Applicant on Interest Rates for Conventional Mortgages on Owner-Occupied Single Family Houses in Four California Metropolitan Areas: Age of Applicant T9T7 1978 L e s s t h a n 25 0.05** 0.05 25-34 0.01 0.02 35-44 (Base) 45-54 Greater t h a n 54 Fresno — 0.01 -0.01 1977 and 1978 a Los Angeles-Long Beach San Francisco-Oakland San T9T7 1973 TT71 T9V5 1977 — 0.05** -0.02 0.04** -0.00 -0.04 0.00 — — — 0.09** Jose ' 1978 0.02 -0.01 -0.00 -0.00 -0.03 — — — 0.07** 0.02** 0.10** 0.02* -0.01 0.05 -0.01 0.06 0.01 0.08* 0.05** -0.01 0.08 -0.02 a) E a c h e n t r y s h o w s t h e p r e d i c t e d d i f f e r e n c e b e t w e e n t h e i n t e r e s t r a t e c h a r g e d on an applic a t i o n w i t h t h e i n d i c a t e d c h a r a c t e r i s t i c s a n d t h a t c h a r g e d o n an a p p l i c a t i o n w i t h t h e base characteristics. A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t the r e l e v a n t d i f f e r e n c e is s t a t i s t i c a l l y s i g n i f i c a n t a t the f i v e - t o - t e n p e r c e n t l e v e l ( 2 - t a i l e d t e s t ) . T w o a s t e r i s k s (**) i n d i c a t e t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l , Table 4-5 I m p a c t of N e i g h b o r h o o d A g e a n d R a c i a l o n I n t e r e s t R a t e s for C o n v e n t i o n a l on O w n e r - O c c u p i e d S i n g l e F a m i l y in F o u r C a l i f o r n i a M e t r o p o l i t a n A r e a s : Fresno 1977 PRE1940 (increase to a v e r a g e +0.10) -0.01* 1978 -0.14* Composition Mortgages Houses 1977 a n d 1978' Los Angeles-Long Beach San F r a n c i s c o - O a k l a n d San Jose 1977 1978 1977 1978 1977 1978 -0.01** -0.04** -0.01** FBLACK (increase to " h i g h " ) - 0 . 0 0 0.23 0.09** 0 . 24** 0 . 18* FSPANISH (increase to " h i g h " ) 0.03** 0.01 0.15** 0.42** 0.12** FASIAN (increase to " h i g h " ) 0.00 0.00 -0.06** -0.14** -0.06 ; -0.00 -0 .01 -0.02* 0.13** 0.06 -0.10* 0.21** 0.13' 0.05 - 0 .10 -0 .11 0.05 a) Each entry shows the impact on the contract interest rate of increasing each neighborhood variable from its average value to the amount indicated. "High" values of the racial composition variables vary across samples; they are calculated as the maximum value in the sample minus two standard deviations. See Table 3-32 for representative values. A single asterisk (*) indicates that the relevant difference is statistically significant 'at the five-t."-ten p e r c e n t level (2-tailed test). Two asterisks (**) indicate the difference is significant at the five or less percent level. 3-25 represents the predicted i m p a c t on t h e i n t e r e s t r a t e of a n in- c r e a s e o f 0 . 1 0 in t h e f r a c t i o n o f h o u s i n g b u i l t b e f o r e 1 9 4 0 t h e c e n s u s t r a c t in w h i c h t h e p r o p e r t y is l o c a t e d . The in entries in t h e n e x t t h r e e r o w s s h o w t h e i m p a c t a s s o c i a t e d w i t h a n in- c r e a s e in t h e f r a c t i o n o f a p a r t i c u l a r m i n o r i t y , s a y S p a n i s h , in the census tract (or z i p c o d e a r e a f o r t h e A s i a n f r a c t i o n ) w h i c h t h e p r o p e r t y is l o c a t e d 5 specific "high" from the average level to a in sample level. The results contradict allegations by community groups that l e n d e r s i m p o s e h a r s h e r t e r m s in o l d e r n e i g h b o r h o o d s , c e t e r i s ibus. In a l l e i g h t s a m p l e s , l o a n s o n h o u s e s in par neighborhoods w i t h above average p r o p o r t i o n s of old houses are found to have l o w e r i n t e r e s t r a t e s t h a n t h o s e o n h o u s e s in n e i g h b o r h o o d s a v e r a g e p r o p o r t i o n s of old h o u s i n g . In s i x o f t h e e i g h t the findings are statistically significant. with samples The appearance that lenders are d i s c r i m i n a t i n g on the b a s i s of n e i g h b o r h o o d age prob a b l y c o m e s f r o m t h e i r b e h a v i o r w i t h r e s p e c t to b u i l d i n g a g e ; as noted a b o v e , the evidence suggests the conclusion that lenders consistently charge higher interest rates on older buildings o n n e w a n d t h a t t h e d i f f e r e n t i a l i n c r e a s e s w i t h t h e a g e of building. However, since age may be proxying building f i n d i n g , the generally support the hypothesis that lenders impose results harsher from "high" m i n o r i t y n e i g h b o r h o o d s on applications from average neighborhoods. lender buildings. In c o n t r a s t to t h e a g e of n e i g h b o r h o o d terms on applications the condition a n d h e n c e t h e r i s k to t h e l e n d e r , w e c a n n o t c o n c l u d e t h a t are d i s c r i m i n a t i n g a g a i n s t old tha In b o t h t h e than Los 3-26 Angeles-Long Beach and San Francisco-Oakland metropolitan i n t e r e s t r a t e s o n l o a n s in " h i g h l y " b l a c k or " h i g h l y " neighborhoods are substantially and statistically Spanish significantly h i g h e r t h a n t h o s e o n l o a n s in n e i g h b o r h o o d s w i t h a v e r a g e populations. Of all the d i s c r i m i n a t o r y areas, minority impacts found with re- s p e c t to i n t e r e s t r a t e s , t h e s e i n t e r e s t r a t e i m p a c t s of t h e r a c i a l c o m p o s i t i o n of the n e i g h b o r h o o d are a m o n g the largest. In S a n J o s e , t h e r e s u l t s a r e m i x e d , w i t h b l a c k a r e a s being f a v o r e d in 1978 a n d S p a n i s h a r e a s d i s c r i m i n a t e d a g a i n s t in 1977. O n l y o n e f i n d i n g a t t a i n s s t a t i s t i c a l s i g n i f i c a n c e in F r e s n o ; 1 9 7 7 l e n d e r s in t h a t a r e a a p p e a r to h a v e d i s c r i m i n a t e d in against t r a c t s w i t h a b o v e a v e r a g e f r a c t i o n s of S p a n i s h p o p u l a t i o n . In the Los A n g e l e s - L o n g B e a c h m e t r o p o l i t a n a r e a , zip code areas a b o v e a v e r a g e p r o p o r t i o n s of A s i a n s a p p e a r to b e f a v o r e d lower interest rates during both with years. A d d i t i o n a l e v i d e n c e of d i s c r i m i n a t o r y lending practices b a s e d o n t h e r a c i a l c o m p o s i t i o n of t h e n e i g h b o r h o o d c a n b e in t h e m a t u r i t y a n d l o a n - t o - v a l u e e q u a t i o n s . Francisco-Oakland with found L e n d e r s in S a n ( 1 9 7 7 ) , in a d d i t i o n to c h a r g i n g h i g h e r inter- est rates, apparently discriminate against Spanish and black n e i g h b o r h o o d s by giving shorter m a t u r i t y loans and smaller in r e l a t i o n to m a r k e t v a l u e . Similar conclusions emerge the Los A n g e l e s - L o n g Beach 1978 s a m p l e . During 1 9 7 7 , l e n d e r s in t h i s a r e a g a v e m o r e f a v o r a b l e t e r m s a n d r a t i o s to s o m e m i n o r i t y n e i g h b o r h o o d s . Although Los from however, loan-to-value Angeles- Long Beach lenders favored Asian areas by giving lower r a t e s , t h e y g r a n t e d s m a l l e r l o a n s in r e l a t i o n to m a r k e t loans interest value. 3-27 I n f o r m a t i o n a v a i l a b l e to u s p e r m i t s e x a m i n a t i o n of explicit a l l e g a t i o n s o f r e d l i n i n g in c e r t a i n n e i g h b o r h o o d s o f t h e L o s A n geles-Long Beach and San Francisco-Oakland areas. By comparing i n t e r e s t r a t e s in t h e s e n e i g h b o r h o o d s w i t h t h o s e in a reference suburban a r e a , we can d e t e r m i n e whether the e v i d e n c e the redlining allegations. T h e r e s u l t s for L o s B e a c h a r e r e p o r t e d in T a b l e 4-6 a n d for S a n in T a b l e supports Angeles-Long Francisco-Oakland 4-7. Of t h e t w e l v e a r e a s d e l i n e a t e d a s n e i g h b o r h o o d s a l l e g e d to b e r e d l i n e d in t h e L o s A n g e l e s - L o n g B e a c h m e t r o p o l i t a n a r e a , t i s t i c a l l y s i g n i f i c a n t f i n d i n g s in s u p p o r t of t h e r e d l i n i n g t h e s i s e m e r g e for a t l e a s t o n e of t h e y e a r s in s i x o f t h e In t w o o f t h e s e a r e a s , P o m o n a a n d S o u t h C e n t r a l L o s In o t h e r a r e a s , s u c h a s hypo- areas. Angeles, large and highly significant interest rate differentials found for b o t h y e a r s . sta- are Covina-Azusat Long Beach-Southwest, and Venice-Santa M o n i c a , the results imply t h a t l o a n s on p r o p e r t i e s rates in t h e s e a r e a s p a y l o w e r i n t e r e s t than c o m p a r a b l e loans on suburban p r o p e r t i e s . W h i l e the results across all alleged redlined areas are m i x e d , the finding that e v i d e n c e supports the allegations of redlining is i m p o r t a n t ; in c e r t a i n d i s m i s s e d as b e i n g dif- be inconsequential. In S a n F r a n c i s c o - O a k l a n d , o n l y o n e a r e a h a s b e e n as allegedly redlined: Central Oakland. identified The results are t e n t w i t h t h e r e d l i n i n g h y p o t h e s i s in t h a t i n t e r e s t r a t e s this area for b o t h years are substantially and areas the s u b s t a n t i a l m a g n i t u d e s of the i n t e r e s t rate f e r e n t i a l s s u g g e s t t h a t d i s c r i m i n a t i o n of t h i s f o r m c a n n o t the consisin statistically 3-186 Table 3-11 I m p a c t of L o c a t i o n o n I n t e r e s t R a t e s for C o n v e n t i o n a l M o r t g a g e s on Owner-Occupied Single H o u s e s in L o s A n g e l e s - L o n g B e a c h : Neighborhood 1978 a 1977 1978 0.02 0.95** Covina-Azusa -0.02 -0.43** East Los AngelesBoyle Heights-Echo Park -0.11** Allegedly Redlined Neighborhoods Compton Other 1977 and Family 0.01 Highland Park 0.12** -0.39** Long Beach-Southwest 0.10 -0.43* Pacoima-San Fernando -0.04 •0.16 -0.04 Pasadena-North Central 0.31** Pomona 0.20** 0.42** San Pedro 0.01 0.62** South Central Los Angeles 0.20** 0.30** Venice-Santa Monica 0.03 -0.26* West Covina 0.04 -0.27 0.01 -0.04 Neighborhoods R e s t of the C i t y of Long B e a c h Rest of the City of Los A n g e l e s R e s t of L o s A n g e l e s C o u n t y (base) -0.04** -0.06** — a) E a c h e n t r y s h o w s t h e p r e d i c t e d d i f f e r e n c e b e t w e e n t h e i n t e r e s t r a t e c h a r g e d o n a m o r t g a g e l o a n in t h e s p e c i f i e d l o c a t i o n a n d t h a t c h a r g e d o n a l o a n in t h e r e f e r e n c e a r e a . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e r e l e v a n t d i f f e r e n c e is s t a t i s t i c a l l y sign i f i c a n t at the five to ten p e r c e n t level (2-tailed t e s t ) . Two a s t e r i s k s (**) i n d i c a t e t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t the five or less p e r c e n t l e v e l . 3-29 Table 3-11 Impact of Location on Interest Rates C o n v e n t i o n a l M o r t g a g e s on O w n e r - O c c u p i e d Houses in S a n F r a n c i s c o - O a k l a n d : Neighborhood Allegedly Redlined Central Other for Single 1977 and Family 1978 a 1977 1978 0.24** 0.19** 0.03 0.16* Neighborhood Oakland Neighborhoods Alameda City Berkeley •0.02 -0.15** East Oakland 0.14** 0.10** West Oakland 0.30** 0 .40** Rest of Alameda Contra Costa Marin County County County San F r a n c i s c o County San M a t e o C o u n t y 0.00 -0.04* 0.09** 0.12** 0.02 0.02 -0.06** •0.13** (base) a) E a c h e n t r y s h o w s t h e p r e d i c t e d d i f f e r e n c e b e t w e e n t h e i n t e r e s t r a t e c h a r g e d o n a m o r t g a g e l o a n in t h e s p e c i f i e d l o c a t i o n a n d t h a t c h a r g e d o n a l o a n in t h e r e f e r e n c e a r e a . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e r e l e v a n t d i f f e r e n c e i s s t a t i s t i c a l l y s i g n i f i c a n t a t the five to ten p e r c e n t level (2-tailed t e s t ) . T w o a s t e r i s k s (**) i n d i c a t e t h a t t h e d i f f e r e n c e is s i g n i f i c a n t at the five or less p e r c e n t l e v e l . 3-30 s i g n i f i c a n t l y h i g h e r t h a n t h o s e in s u b u r b a n S a n M a t e o County. It should be noted however that the d i f f e r e n t i a l s , w h i l e a r e n o t so l a r g e a s t h o s e in W e s t O a k l a n d , t o w a r d w h i c h t i o n s of r e d l i n i n g h a v e n o t b e e n DOWNWARD large, allega- aimed. MODIFICATIONS This section analyzes the differences between requested g r a n t e d l o a n a m o u n t s for t h o s e a p p l i c a t i o n s modifications. and s u b j e c t to d o w n w a r d T h e s p e c i f i c q u e s t i o n a d d r e s s e d h e r e is w h e t h e r some borrowers experience larger downward modifications than o t h e r s s o l e l y b e c a u s e o f m e m b e r s h i p in g r o u p s n o t l e g a l l y allowed t o b e c o n s i d e r e d b y b a n k s in t h e i r d e c i s i o n m a k i n g p r o c e s s . d o w n w a r d m o d i f i c a t i o n s of loan a m o u n t s m a y yield e f f e c t s Large similar t o t h o s e o f l o a n d e n i a l ; t h e a p p l i c a n t m a y n o t b e a b l e to p r o c e e d w i t h the house p u r c h a s e b e c a u s e h e / s h e c a n n o t raise the additional d o w n p a y m e n t n e c e s s i t a t e d b y t h e b a n k ' s d e c i s i o n n o t t o lend requested Control amount. Variables T h e g e n e r a l f o r m o f t h e m o d e l u s e d to t e s t for behavior discriminatory in c o n n e c t i o n w i t h t h e d e t e r m i n a t i o n of l o a n a m o u n t s d i s c u s s e d in C h a p t e r 2 . The equations estimated for m o d e l the downward modification (MODOWN, defined as the (REQLOAN); the r e q u e s t e d loan to appraised v a l u e (RLTOAV); the requested l o a n to i n c o m e r a t i o requested loan ratio (RLTOINC); a vector of variables representing the age of the property; a vector is California l o a n m i n u s t h e g r a n t e d l o a n ) a s a f u n c t i o n o f the r e q u e s t e d amount the of 4-31 n e i g h b o r h o o d c h a r a c t e r i s t i c s , including level and change varia- bles; and a vector of discrimination v a r i a b l e s , including sex, r a c e , a n d a g e of a p p l i c a n t s , d i v i s i o n o f i n c o m e b e t w e e n the app l i c a n t a n d c o - a p p l i c a n t , a n d t h e a g e and r a c i a l c o m p o s i t i o n the neighborhood. T h i s m o d e l is e s t i m a t e d o n l y for t h o s e tions w h i c h received loan amounts below that of applica- requested. Additional financial characteristics of the borrower such as the income, net wealth, and employment stability variables included in the New York MODOWN equations are excluded from the California equations for the following reasons: net wealth and employment stability data are not available in the California data set and preliminary analysis for California indicated that income is relevant only in relation to the size of the requested loan. The California MODOWN equations differ from the New York equations as well by the inclusion of the building age dummy variables, data not available for New York. To the extent that build- ing age correctly indicates a building's condition, these variables measure objective factors influencing the risk of the loan to the bank; to the extent that building age is imperfectly correlated with the building's remaining useful life, however, these variables might be capturing discrimination against older buildings. T h e e s t i m a t e d e q u a t i o n s for t h e e i g h t s e p a r a t e s a m p l e s (two y e a r s for e a c h S M S A ) a r e r e p o r t e d in A p p e n d i x B , T a b l e s B - 3 5 to B-38. All equations are linear and were estimated using least squares. ordinary S a m p l e s i z e r a n g e s f r o m a low of 110 in F r e s n o to a h i g h of 1,519 i n - L o s A n g e l e s - L o n g B e a c h . A s m a l l n u m b e r of ob- s e r v a t i o n s in t h e 1977 F r e s n o s a m p l e , c o m b i n e d w i t h a l a r g e p l a i n e d v a r i a t i o n lead to t h e c o n c l u s i o n t h a t t h e 1977 unex- Fresno 3-32 e q u a t i o n e x p l a i n s a s t a t i s t i c a l l y i n s i g n i f i c a n t p r o p o r t i o n of variation in t h e d e p e n d e n t v a r i a b l e . The other seven e x p l a i n s t a t i s t i c a l l y s i g n i f i c a n t p r o p o r t i o n s of the w i t h t h e p r o p o r t i o n s a v e r a g i n g a b o u t 25-30 S i z e of t h e r e q u e s t e d loan income the equations variation, percent. (REQLOAN) and r e q u e s t e d loan to (RLTOINC) a r e t h e h e y c o n t r o l v a r i a b l e s . The requested l o a n a m o u n t a c t s as a s c a l e v a r i a b l e ; for a n y g i v e n d e g r e e of l o a n r i s k a s m e a s u r e d by the o t h e r c o n t r o l v a r i a b l e s , the d o l l a r a m o u n t of t h e m o d i f i c a t i o n d e p e n d s on the s i z e of t h e l o a n . r e q u e s t e d l o a n to i n c o m e r a t i o is t h e b a n k ' s p r i m a r y predictor o f t h e b o r r o w e r ' s a b i l i t y to m a k e t i m e l y p a y m e n t s in the Beyond a certain point The (in the e m p i r i c a l s p e c i f i c a t i o n , future. this p o i n t is 2.5 t i m e s i n c o m e ) , the l a r g e r the r e q u e s t e d loan is in r e l a t i o n to i n c o m e , the g r e a t e r is the d o w n w a r d modification n e e d e d to b r i n g the a c t u a l l o a n a m o u n t in l i n e w i t h b o r r o w e r come. in- B o t h v a r i a b l e s h a v e p o s i t i v e i m p a c t s on t h e m a g n i t u d e of the downward m o d i f i c a t i o n , as p r e d i c t e d , and are s i g n i f i c a n t in a l l e i g h t statistically equations. T h e c o e f f i c i e n t s of r e q u e s t e d loan to a p p r a i s e d v a l u e a r e less c o n s i s t e n t a c r o s s e q u a t i o n s : statistically (RLTOAV) in t h r e e e q u a t i o n s t h e y s i g n i f i c a n t and p o s i t i v e as e x p e c t e d ; in t h r e e a r e p o s i t i v e b u t n o t s i g n i f i c a n t ; a n d in two t h e y a r e are they negative. T h e b o o m i n g C a l i f o r n i a h o u s i n g m a r k e t d u r i n g the s t u d y p e r i o d p a r t i a l l y e x p l a i n t h e s e r e s u l t s ; d u r i n g a p e r i o d of r i s i n g values, firmly held expectations that housing prices will t i n u e to r i s e m a y m a k e l o a n - t o - v a l u e r a t i o s a s e c o n d a r y may house con- concern f o r b a n k e r s in r e l a t i o n to t h e i r p r i m a r y c o n c e r n t h a t the b o r r o w e r 4-33 h a v e s u f f i c i e n t income to m a k e the m o n t h l y payments. M o s t of the o t h e r c o n t r o l v a r i a b l e s h a v e little power. explanatory In a f e w e q u a t i o n s , o n e o r m o r e of t h e n e i g h b o r h o o d ables are significant, b u t no clear pattern emerges. building age variables are statistically vari- Some of s i g n i f i c a n t in t h e A n g e l e s - L o n g Beach and San Jose equations; the Los in b o t h c a s e s t h e evi- dence suggests that applications on old buildings are subject smaller downward m o d i f i c a t i o n s than those on new Discrimination buildings. Results The finding of a positive c o e f f i c i e n t on a discrimination v a r i a b l e indicates that a p p l i c a n t s w h o are members of the in q u e s t i o n (e.g. w o m e n , old p e o p l e , b l a c k s , S p a n i s h , or b u y e r s in a l l e g e d l y r e d l i n e d n e i g h b o r h o o d s ) experience loan reductions than c o m p a r a b l e applicants from the groups. to group home- larger baseline Larger loan reductions translate directly into larger t h a n a n t i c i p a t e d d o w n p a y m e n t s u n l e s s t h e b o r r o w e r t u r n s to a more expensive second mortgage. In s o m e c a s e s , l a r g e r l o a n re- d u c t i o n s may keep the a p p l i c a n t from purchasing the home at all a n d , t h u s , m a y b e a n i n d i r e c t w a y for t h e b a n k to d e n y t h e Provided the control variables in t h e M O D O W N e q u a t i o n s r e p r e s e n t t h e l e g i t i m a t e f a c t o r s a f f e c t i n g t h e s i z e of modifications, we can interpret statistically loan. adequately downward significant posi- tive c o e f f i c i e n t s on any of the d i s c r i m i n a t i o n v a r i a b l e s as p o r t for t h e h y p o t h e s i s of d i s c r i m i n a t o r y behavior. F o r e a c h of t h e e i g h t s a m p l e s , w e h a v e c a l c u l a t e d pected downward modification sup- the ex- for a b a s e l i n e a p p l i c a t i o n . This 4-34 baseline application represents the type that bankers would least likely to discriminate against: be the applicants are a w h i t e , m a l e - f e m a l e c o u p l e ; t h e f e m a l e is b e y o n d c h i l d b e a r i n g a g e ; all t h e i n c o m e is e a r n e d b y t h e p r i m a r y w o r k e r ; t h e a p p l i c a n t is b e 7 t w e e n 35 a n d 4 4 ; a n d t h e p r o p e r t y is in t h e s u b u r b s . spect to all other c h a r a c t e r i s t i c s , the b a s e l i n e With application takes on a v e r a g e v a l u e s for the p a r t i c u l a r MODOWN sample volved. In c o n n e c t i o n w i t h e a c h t y p e o f p o t e n t i a l tion, the predicted downward modification differs from the baseline application re- in- discrimina- for an a p p l i c a t i o n tli.-it in t h e d i s c r i m i n a t i o n di- m e n s i o n o n l y is r e p o r t e d and c o m p a r e d to the b a s e l i n e downward modification situated for that s a m p l e . In t h i s w a y , s i m i l a r l y a p p l i c a n t s c a n b e c o m p a r e d a n d t h e m a g n i t u d e of t h e tory d i f f e r e n t i a l s can be put into Sex. discrimina- perspective. The results by sex are reported in T a b l e 4 - 8 . Each e n t r y r e p r e s e n t s the p r e d i c t e d a m o u n t b y w h i c h s a v i n g s and loan a s s o c i a t i o n s in e a c h o f t h e e i g h t s a m p l e s r e d u c e l o a n s for down- ward modified applications differing o n l y in t e r m s o f s e x . ratio of from baseline applications T h e n u m b e r s in p a r e n t h e s e s r e p r e s e n t the p r e d i c t e d M O D O W N for the g i v e n sex type to the i n c l u d e d in t h e b a s e . F o r e x a m p l e , t h e s e c o n d e n t r y in t h e c o l u m n of T a b l e 4 - 8 i n d i c a t e s t h a t s a v i n g s a n d l o a n p l i c a t i o n t h a t d i f f e r s f r o m t h e b a s e o n l y in t h a t t h e this predicted the l o a n r e d u c t i o n is 8 3 p e r c e n t o f t h e ap- female T h e 0 . 8 3 in p a r e n t h e s e s i n d i c a t e s loan r e d u c t i o n for the b ase second loan on average by $7,819 for a d o w n w a r d m o d i f i e d i s of c h i l d b e a r i n g a g e . type associations in L o s A n g e l e s - L o n g B e a c h r e d u c e t h e a c t u a l l o a n b e l o w requested the that predicted 4-35 Table 4-10 Downward Modifications (Dollar A m o u n t s a n d b y S e x for B a s e l i n e Applications in F o u r C a l i f o r n i a M e t r o p o l i t a n S e x of Applicant(s) Fresno Ratios) Los Angeles -Long Beach Areas £ San Francisco -Oakland S a n Jose 1977 MFNCB MFCB (base) 25-34 FONLYCB b 4,603 (1.00) 9,438 (1.00) 7,486 (1.00) 10,434 4,101 (0.89) 7,819 (0.83) 7,212 (0.96) 5,423** (0.52) 8,222 (0.87) 4,468 (0.60) ~ I 9,095 (0.96) 7,011 (0.94) 5,427 (1.18) 8,842 (0.93) 6,803 (0.91) 6,358** (0.61) 25-34* ~ r 4,682 (1.02) FONLYNCB MONLY (1.00) r 4,864** (0.47) I 1978 MFNCB MFCB (base) 25-34 b 3,173 (1.00) 11,017 (1.00) 9,679 (1.00) 4,727 (1.00) 6,257* (1.97) 8,836 (0.80) 8,148 (0.84) 8,9 94 (1.90) FONLYCB'2 5-3 4 FONLYNCB MONLY T 3,121 (0.98) 1 i 9,106 (0.82) 7,558 (0.78) 11,533 (1.05) 7,552 (0.78) 3,178 (1.00) 7,999 (0.73) 7,497** (0.77) 1 6 , 272 (1.33) 1 i 7,000 (1.48) a) T h e e n t r i e s in t h e t a b l e r e p r e s e n t the p r e d i c t e d d o w n w a r d m o d i f i c a t i o n (in d o l l a r s ) for an a p p l i c a t i o n s i m i l a r to the b a s e a p p l i c a t i o n in a l l w a y s o t h e r t h a n t h e c h a r a c t e r i s t i c l i s t e d . N u m b e r s in p a r e n t h e s e s r e p r e s e n t t h e r a t i o of t h e d o w n w a r d m o d i f i c a t i o n for a n a p p l i c a t i o n w i t h the i n d i c a t e d c h a r a c t e r i s t i c s to t h e d o w n w a r d m o d i f i c a t i o n for t h e b a s e l i n e a p p l i c a t i o n . 4-36 Table 4-8 (continued) (cont'd) See t e x t for d e f i n i t i o n of the b a s e l i n e a p p l i c a t i o n . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r of t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t f r o m t h e d e n o m i n a t o r a t t h e f i v e - t o - t e n p e r c e n t l e v e l (using a t w o - t a i l e d t e s t ) . T w o a s t e r i s k s (**) i n d i c a t e t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e or l e s s p e r c e n t l e v e l . b ) T h e s e e s t i m a t e s r e f l e c t t h e e f f e c t s o f b o t h s e x a n d a g e in t h a t t h e a g e o f t h e a p p l i c a n t is r e d u c e d t o t h e 2 5 - 3 4 a g e c a t e g o r y . S e e T a b l e 4 - 1 0 for t h e s e p a r a t e e f f e c t s o f a g e . 4-37 application. The a b s e n c e of asterisks w i t h this entry indicates that the d i f f e r e n c e b e t w e e n this and the baseline MODOWN is s t a - tistically means insignificant. In g e n e r a l , a s i n g l e a s t e r i s k t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e to t e n percent level, w h i l e two asterisks indicate the five percent level a two-tailed using test. T a b l e 4-8 p r o v i d e s a l m o s t no e v i d e n c e of a d v e r s e t i a l t r e a t m e n t b a s e d o n t h e s e x of t h e a p p l i c a n t s . five statistically differen- Four of significant effects imply favorable than adverse treatment. rather M o r e o v e r , t h e s i g n s of the o t h e r ficients are i n c o n s i s t e n t across equations indicating no p a t t e r n of lender the coefclear behavior. The one significant finding consistent with discriminatory b e h a v i o r r e l a t e s to s a v i n g s and loan a s s o c i a t i o n s in Fresno (1978) ; l e n d e r s in t h i s a r e a a p p e a r t o r e d u c e l o a n s for m a l e f e m a l e c o u p l e s in, w h i c h t h e f e m a l e is of c h i l d b e a r i n g a g e t h e a p p l i c a n t is b e t w e e n 25 a n d 34) b y a l m o s t t w i c e t h e amount they r e d u c e loans for b a s e l i n e a p p l i c a t i o n s , c o n t r o l l i n g 8 other factors. Since this requires an additional o f $ 3 , 1 3 6 , t h e f i n a n c i a l i m p a c t on t h e b o r r o w e r is Lenders might also discriminate by counting come less than primary for substantial. secondary We can examine modi- t h e p r o p o r t i o n of i n c o m e e a r n e d b y secondary earner w i t h the presence of a female secondary this income earned by the s e c o n d a r y earner on the size of the d o w n w a r d By interacting in- applica- a l l e g a t i o n b y l o o k i n g a t t h e i m p a c t o f t h e p r o p o r t i o n of fication. all downpayment income when evaluating mortgage t i o n s a n d d e c i d i n g w h a t s i z e l o a n to g r a n t . (and the earner 4-38 of c h i l d b e a r i n g age and w i t h the presence of a female secondary earner beyond childbearing a g e , we can test the further allega- tion that bankers treat secondary income earned by females dif- ferently from that earned by m a l e s . The r e s u l t s for the four SMSAs examined here do not the hypothesis that bankers count secondary income less primary income. M o s t of t h e r e l e v a n t c o e f f i c i e n t s a r e support than statis- t i c a l l y i n s i g n i f i c a n t , a n d a few i m p l y f a v o r a b l e t r e a t m e n t secondary income. The F r e s n o 1978 sample p r o v i d e s the to this g e n e r a l p a t t e r n . exception The h i g h e r the p r o p o r t i o n of income f r o m a f e m a l e s e c o n d a r y e a r n e r b e y o n d c h i l d b e a r i n g a g e in s a m p l e , t h e l a r g e r is t h e p r e d i c t e d d o w n w a r d Race. of that modification. The findings w i t h r e s p e c t to d i f f e r e n t i a l treatment b a s e d o n r a c e , s u m m a r i z e d in T a b l e 4 - 9 , f a i l to s u p p o r t t h e h y pothesis of discriminatory behavior. M o s t of t h e r a t i o s are l e s s t h a n o n e , i m p l y i n g t h a t , if a n y t h i n g , l e n d e r s m o d i f y loans d o w n w a r d b y l e s s for m e m b e r s of r a c i a l m i n o r i t i e s t h a n for larly situated whites; f u r t h e r m o r e , n o n e of t h e f o u r g r e a t e r t h a n o n e is d e r i v e d from a statistically simi- ratios significant coefficient. Age. T u r n i n g n o w to t h e r e s u l t s b y a g e , w e f i n d evidence t h a t savings and loan associations reduce loan amounts by m o r e f o r a p p l i c a n t s o v e r 45 t h a n for o t h e r w i s e c o m p a r a b l e applicants. (See T a b l e 4 - 1 0 . ) Los Angeles-Long Beach younger The findings are strongest (1977 a n d 1 9 7 8 ) a n d S a n (1977 a n d 1 9 7 8 ) , w h e r e a p p l i c a n t s Francisco-Oakland in b o t h t h e 4 5 - 5 4 a n d t h e 54 a g e g r o u p s e x p e r i e n c e d l a r g e r d o w n w a r d m o d i f i c a t i o n s for than over 4-39 Table 4-10 Downward Modifications (Dollar A m o u n t s and by Race for B a s e l i n e Applications in F o u r C a l i f o r n i a M e t r o p o l i t a n Los Angeles -Long Beach Fresno Ratios) Areas 3 San Francisco -Oakland San Jose 1977 White (base) 4 , 603 (1.00) Black 3,224 (0.70) Spanish 5,306 (1.15) b Asian Other Minority — 9,438 (1.00) 7,486 (1.00) 10,434 (1.00) 12,222 (1.29) 4,771 (0.63) 8 , 098 (0.78) 8,722 (0.92) 5,660 (0.76) 10,081 (0.96) 8,400 (0.89) 6,176 (0.83) 9,593 (1.02) 5,426 (0.72) — 1978 White (base) 3,173 (1.00) Black 959 (0.30) Spanish 3,012 (0.94) Asian Other Minority b 11,017 (1.00) 9,679 <1.00) 4,727 (1.00) 8,090* (0.73) 7,103** (0.73) 7,187 (1.52) 9,686* (0.87) 8,450 (0.87) 7,778 (1.65) 10,153 (0.92) 7,779** (0.80) 7,647* (0.69) 9,634 (0.99) a) T h e e n t r i e s in t h e t a b l e r e p r e s e n t t h e p r e d i c t e d d o w n w a r d m o d i f i c a t i o n (in d o l l a r s ) f o r a n a p p l i c a t i o n s i m i l a r t o t h e b a s e a p p l i c a t i o n in a l l w a y s o t h e r t h a n t h e c h a r a c t e r i s t i c l i s t e d . Numbers in p a r e n t h e s e s r e p r e s e n t t h e r a t i o o f t h e d o w n w a r d m o d i f i c a t i o n for a n a p p l i c a t i o n w i t h t h e i n d i c a t e d c h a r a c t e r i s t i c s to t h e d o w n ward m o d i f i c a t i o n for the b a s e l i n e a p p l i c a t i o n . S e e t e x t for d e f i n i t i o n o f t h e b a s e l i n e a p p l i c a t i o n . A s i n g l e a s t e r i s k (*) 4-40 Table 4-9 (continued) ( c o n t ' d ) i n d i c a t e s t h a t t h e n u m e r a t o r o f t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t from the d e n o m i n a t o r at the fivet o - t e n p e r c e n t l e v e l (using a t w o - t a i l e d t e s t ) . T w o a s t e r i s k s (**) i n d i c a t e t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r less percent level. b) I n c l u d e s o t h e r m i n o r i t i e s ; A s i a n s a r e g r o u p e d w i t h w h i t e s in t h e base. 4-41 Table 4-10 Downward Modifications (Dollar A m o u n t s and Ratios) by A g e for B a s e l i n e A p p l i c a t i o n s in F o u r , C a l i f o r n i a M e t r o p o l i t a n A g e of Applicant Fresno Los A n g e l e s - L o n g Beach Areas 3 San F r a n c i s c o -Oakland San J o s e 1977 Y o u n g e r than 25 3,224 (0.70) 7,925 (0.84) 6, 59 4 (0.88) 7,989 (0.76) A25-34 3,961 (0.86) 8,761 (0.93) 7,444 (0.99) 9,618 (0.92) 4,603 (1.00) 9,438 (1.00) 7., 486 (1.00) 10 ,434 (1.00) A45-54 4,456 (0.97) 10,923* (1.16) 10,276** (1.37) 10,753 (1.03) O l d e r than 54 4,710 (1.02) 12,496** (1.32) 9,678* (1.29) 9 , 989 (0.95) A35-44 (base) 1978 Y o u n g e r than 2 5 6,233 (1.96) 9,795 (0.89) 8, 927 (0.92) 6,014 (1.27) 5,566* (1.75) 10,432 (0.94) 9 , 689 (1.00) 6,224 (1.32) 3,173 (1.00) 11,017 (1.00) 9 , 679 (1.00) 4, 727 (1.00) 45-54 8,361** (2.63) 12,363* (1.12) 11,533** (1.19) 6,41 5 (1.36) O l d e r than 54 4 , 388 (1.38) 11,781 (1.07) 9,762 (1.01) 8,752 (1.85) 25-34 35-44 (base) a) The e n t r i e s in the table r e p r e s e n t the predicted d o w n w a r d modific a t i o n (in d o l l a r s ) for an a p p l i c a t i o n similar to the b a s e application in all w a y s o t h e r than the c h a r a c t e r i s t i c l i s t e d . Numbers in p a r e n t h e s e s r e p r e s e n t the ratio of the d o w n w a r d m o d i f i c a t i o n for an a p p l i c a t i o n w i t h the indicated c h a r a c t e r i s t i c s to the downw a r d m o d i f i c a t i o n for the b a s e l i n e a p p l i c a t i o n . See text for d e f i n i t i o n of the b a s e l i n e a p p l i c a t i o n . A single asterisk (*) i n d i c a t e s that the n u m e r a t o r of the ratio is s t a t i s t i c a l l y significantly d i f f e r e n t from the d e n o m i n a t o r at the f i v e - t o - t e n percent, level (using a t w o - t a i l e d t e s t ) . Two a s t e r i s k s (**) indicate that the d i f f e r e n c e is s i g n i f i c a n t at the five or less p e r c e n t l e v e l . 4-42 s i m i l a r l y s i t u a t e d a p p l i c a n t s b e t w e e n t h e a g e s of 35 a n d This conclusion is b a s e d o n s t a t i s t i c a l l y significant c i e n t s in s i x of t h e e i g h t c a s e s i n v o l v e d . ward modifications 44. coeffi- The predicted down- for a p p l i c a n t s in t h e s e a g e g r o u p s a r e s t a n t i a l in a b s o l u t e a m o u n t , r a n g i n g f r o m $9,67 8 for o v e r 54 in t h e S a n F r a n c i s c o - O a k l a n d sub- applicants a r e a d u r i n g 1977 to $12,496 for a p p l i c a n t s o v e r 54 in t h e L o s A n g e l e s - L o n g B e a c h area the same y e a r . T h e p r e d i c t e d a m o u n t s for t h e s e t w o a g e during groups e x c e e d t h e m o d i f i c a t i o n a m o u n t s e x p e r i e n c e d b y 35 to 44 y e a r a p p l i c a n t s b y u p to 37 percent. In t h e t w o s m a l l e r m e t r o p o l i t a n a r e a s , the r e s u l t s mixed, especially for t h e 1 9 7 7 d a t a . are T h e 1978 r e s u l t s f o r b o t h Fresno and San J o s e , however, indicate a clear, although generally statistically not s i g n i f i c a n t , p a t t e r n of l a r g e r t h a n ranted downward modifications for a p p l i c a n t s o v e r 4 5 . for m o r t g a g e s in F r e s n o d u r i n g 1978 a l s o a p p e a r to e x p e r i e n c e d o w n w a r d m o d i f i c a t i o n s t h a n 35 to 44 y e a r old war- In a d d i - t i o n , a p p l i c a n t s b e t w e e n t h e a g e s of 25 a n d 34 a p p l y i n g Redlining. old larger applicants. Table 4-11 summarizes the e v i d e n c e relating allegations that bankers treat applications from older neighbor- h o o d s o r w i t h h i g h p r o p o r t i o n s of m i n o r i t i e s d i f f e r e n t l y those from other neighborhoods. from E a c h e n t r y in t h e f i r s t r o w of t h e t a b l e r e p r e s e n t s t h e p r e d i c t e d c h a n g e in the d o w n w a r d modi- f i c a t i o n a s s o c i a t e d w i t h a n i n c r e a s e of 0.10 in t h e f r a c t i o n h o u s i n g b u i l t b e f o r e 1 9 4 0 in t h e c e n s u s t r a c t in w h i c h t h e e r t y is l o c a t e d . T h e e n t r i e s in t h e n e x t t h r e e r o w s s h o w c h a n g e in t h e d o w n w a r d m o d i f i c a t i o n a s s o c i a t e d w i t h an to of propthe increase Table 4-11 C h a n g e s in D o w n w a r d M o d i f i c a t i o n (Dollar A m o u n t s ) w i t h C h a n g e s in t h e A g e a n d R a c i a l C o m p o s i t i o n o f t h e Fresno Neighborhood a L o s A n g e l e s -•Long B e a c h S a n F r a n c i s c o - O a k l a n d San Jose 1977 1$78 1977 1978 1977 1978 1977 1978 195 -355 386* 212 FBLACK (increase to "high") 17,376 -3,596 -3,895* 6,512 PRE1940 (increase to a v e r a g e +0.10) Associated 249 554** -709 1 , 352 4,567 4,687 -7,460 b 3,343* b FSPANISH (increase to "high") -563 843 -163 -442 3,693** 1,865 -4,785 -4,495 416 3,560 -1,525 -11,510 621 1,796 8,640 b FASIAN (increase to "high") 539 a) T h e e n t r i e s in t h e t a b l e r e p r e s e n t t h e c h a n g e in t h e d o w n w a r d m o d i f i c a t i o n s a s s o c i a t e d w i t h a n i n c r e a s e in t h e n e i g h b o r h o o d 1 1 a g e o r r a c i a l c o m p o s i t i o n v a r i a b l e f r o m i t s a v e r a g e l e v e l to t h e i n d i c a t e d l e v e l . "High levels for the r a c i a l c o m p o s i t i o n v a r i a b l e s are sample specific. S e e T a b l e 3 - 3 2 f o r r e p r e s e n t a t i v e v a l u e s . A s i n g l e a s t e r i s k (*) ind i c a t e s t h a t t h e n u m e r a t o r of t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t f r o m t h e d e n o m i n a t o r a t t h e f i v e - t o - t e n p e r c e n t l e v e l (using a t w o - t a i l e d t e s t ) . Two asteri s k s (**) i n d i c a t e t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e or l e s s p e r c e n t l e v e l . b) F o r r e p r e s e n t a t i v e values, of " h i g h " p r o p o r t i o n m i n o r i t y b y a r e a , s e e T a b l e 3-32. 4-44 i n t h e f r a c t i o n o f a p a r t i c u l a r m i n o r i t y , say S p a n i s h , in the census tract (or z i p c o d e a r e a for A s i a n s ) in w h i c h t h e is l o c a t e d f r o m t h e a v e r a g e l e v e l t o a s a m p l e s p e c i f i c Q level. property "high" T h e r e s u l t s f o r t h e L o s A n g e l e s - L o n g B e a c h a n d San cisco-Oakland metropolitan areas provide limited support these allegations; Downward modifications i n c r e a s e w i t h t h e p r o p o r t i o n of and Los coeffi- s i g n i f i c a n t in o n l y t w o o f t h e In a d d i t i o n , s a v i n g s a n d l o a n a s s o c i a t i o n s a r e a a p p e a r to t r e a t a p p l i c a t i o n s four in t h e from while in t h e L o s A n g e l e s - L o n g B e a c h d o t h e s a m e w i t h ,respect t o a p p l i c a t i o n s f r o m t r a c t s w i t h than average proportions of S p a n i s h . A g a i n , o n l y t w o of the modifications downward in n e i g h b o r h o o d s a l l e g e d to b e r e d l i n e d in t h e Angeles-Long Beach metropolitan area. Only for this area the sample sizes s u f f i c i e n t l y large to e x a m i n e this Even here, however, data limitations g a t e a l l t h e a r e a s a l l e g e d to b e r e d l i n e d Results from the interest rate equation m o d e l s in C h a p t e r sta- significant. F i n a l l y , w e e x a m i n e t h e h y p o t h e s i s of d i f f e r e n t i a l issue. area higher f o u r c o e f f i c i e n t s on w h i c h t h e s e c o n c l u s i o n s a r e b a s e d a r e tistically San tracts w i t h h i g h e r t h a n a v e r a g e p r o p o r t i o n s of b l a c k s a d v e r s e l y savings and loan associations old Angeles-Long Beach areas during both years, although the positive cients are statistically met- support. h o u s i n g in b o t h t h e S a n F r a n c i s c o - O a k l a n d Francisco-Oakland for the r e s u l t s for the F r e s n o and San Jose ropolitan areas provide no samples. Fran- aggre- category. (and t h e l e n d e r 3) s u g g e s t t h a t s u c h a g g r e g a t i o n are redlining f o r c e u s to into one Los is action undesirable. 4-45 I n t e r e s t r a t e s r e l a t i v e to the r e f e r e n c e s u b u r b a n a r e a varied s u b s t a n t i a l l y a c r o s s t h e t w e l v e n e i g h b o r h o o d s a l l e g e d to b e redlined. In a n y c a s e , t h e r e s u l t s w h i c h a r e r e p o r t e d in T a b l e 4-12 p r o v i d e n o s u p p o r t for t h e h y p o t h e s i s t h a t s a v i n g s a n d loan assoc i a t i o n s in L o s A n g e l e s - L o n g B e a c h r e d u c e l o a n a m o u n t s by m o r e in a r e a s a l l e g e d to b e r e d l i n e d t h a n in o t h e r LOAN areas. FEES T h e f i n a l c o m p o n e n t of m o r t g a g e t e r m s t h a t c a n b e analyzed w i t h t h e C a l i f o r n i a d a t a a r e the f e e s t h a t s a v i n g s and loan associations charge for making m o r t g a g e loans. A s d e v e l o p e d more f u l l y in C h a p t e r 2 , w e e x p e c t l o a n f e e s to b e a f u n c t i o n of the loan a m o u n t , property characteristics, and neighborhood tics. characteris- In a d d i t i o n , w e i n c l u d e v a r i a b l e s to t e s t for the exist- e n c e of d i s c r i m i n a t i o n . I m p l i c i t in t h i s g e n e r a l m o d e l is the v i e w t h a t l e n d e r s s h o u l d s e t loan f e e s to c o v e r the administrat i v e c o s t s of m a k i n g t h e l o a n r a t h e r than to a d j u s t for the riski n e s s of t h e l o a n . of the l o a n S i n c e b o r r o w e r i n c o m e a f f e c t s the riskiness ( c o n t r o l l i n g for loan a m o u n t ) b u t not the administra- t i v e c o s t s , it is n o t i n c l u d e d as an e x p l a n a t o r y c o n t r o l variable. T h e e i g h t e s t i m a t e d e q u a t i o n s a r e r e p o r t e d in A p p e n d i x B, T a b l e s B - 4 7 to B - 5 0 . All equations are linear, are u s i n g o r d i n a r y l e a s t s q u a r e s , and c o v e r a l l a p p r o v e d which complete data exist. loans for The e q u a t i o n s e x p l a i n f r o m 50 to 75 p e r c e n t of the v a r i a t i o n in the d e p e n d e n t estimated variable. 4-46 Table 4-10 Downward Modifications by Location (Dollar A m o u n t s and for B a s e l i n e in L o s A n g e l e s - L o n g B e a c h : Property Suburbs Location (base) Areas A l l e g e d to be Redlined R e s t o f C i t y of R e s t of L o n g Los Angeles Beach Ratios) Applications 1977 a n d 1978 1977 1978 9,438 (1.00) 11,017 (1.00) 8,298 (0.88) 11,160 (1.01) 8,674 (0.92) 11,836 (1.07) 8, 625 (0.91) 8,943 (0.81) a) T h e e n t r i e s in t h e t a b l e r e p r e s e n t t h e p r e d i c t e d d o w n w a r d m o d i f i c a t i o n (in d o l l a r s ) f o r an a p p l i c a t i o n s i m i l a r to t h e b a s e a p p l i c a t i o n in a l l w a y s o t h e r t h a n t h e c h a r a c t e r i s t i c l i s t e d . N u m b e r s in p a r e n t h e s e s r e p r e s e n t t h e r a t i o of t h e d o w n w a r d m o d i f i c a t i o n for a n a p p l i c a t i o n w i t h t h e i n d i c a t e d c h a r a c t e r i s t i c s t o t h e d o w n w a r d m o d i f i c a t i o n for t h e b a s e line a p p l i c a t i o n . S e e t e x t for d e f i n i t i o n of t h e b a s e l i n e application. 4-47 Control Variables R e f l e c t i n g t h e f a c t t h a t t h e b a s i c l o a n f e e is a s s e s s e d as a p e r c e n t a g e of the loan a m o u n t , the loan amount exerts a strong and statistically s i g n i f i c a n t positive impact on the size of loan fee across all eight e q u a t i o n s . The coefficients the imply t h a t loan fees a v e r a g e slightly over one p e r c e n t of the loan amount. The property specific characteristics included in t h e loan f e e e q u a t i o n s a r e t h e p r o p e r t y ' s a p p r a i s e d v a l u e , its s i z e (mea- s u r e d in t h o u s a n d s o f i n t e r i o r s q u a r e f e e t ) , a n d i t s a g e (repre- sented b y a v e c t o r of d u m m y v a r i a b l e s ) . control These variables for t h e f a c t o r s t h a t m i g h t a f f e c t t h e a p p r a i s a l , i n s p e c t i o n , crow, and title insurance costs that associations may m a t e l y i n c l u d e in l o a n f e e s to o f f s e t t h e c o s t s of es- legiti- processing loans. Appraised value (AV) e n t e r s s i g n i f i c a n t l y a n d n e g a t i v e l y in a l l e q u a t i o n s other than those for Los A n g e l e s - L o n g B e a c h , pres u m a b l y r e f l e c t i n g e c o n o m i e s o f s c a l e in t h e a p p r a i s a l process. For unknown r e a s o n s , higher appraised values are associated with higher loan fees, controlling two Los Angeles samples. f o r a l l o t h e r f a c t o r s , in t h e E c o n o m i e s o f s c a l e in t h e a p p r a i s a l o r s p e c t i o n p r o c e s s a l s o e x p l a i n t h e n e g a t i v e s i g n s of t h e statistically able in- four s i g n i f i c a n t c o e f f i c i e n t s of the b u i l d i n g age vari- (SPACE). Building age variables enter most consistently and c a n t l y in t h e L o s A n g e l e s - L o n g B e a c h a n d S a n e q u a t i o n s , a s s h o w n in T a b l e 4 - 1 3 . signifi- Francisco-Oakland The table entries show the Table 4-13 I m p a c t of B u i l d i n g A g e on L o a n F e e s Four California Metropolitan Areas; for 1977 and 1978 Building Age (Number of years before 1977 that Fresno Los Angeles-Long Beach San Francisco-Oakland house was built) 1977 1978 1977 1978 1977 1978 New San 1977 Jose 1978 (base) BAl-9 7 -9 19** 20** 30** 8 67** 15** BA10-19 0 -7 8* 14** 33** 21** 73** 8 BA20-29 -4 -1 9** 22** 38** 35** 77** 4 BA30-39 -62** -8 14** 29** 38** 38** 58** 8 BA40-49 -93** -4 21** 40** 46** 44** 47** 2 BAGE50 -90** 1 18** 44** 45** 60** 67** -40* a) E a c h e n t r y s h o w s t h e p r e d i c t e d d i f f e r e n c e b e t w e e n t h e l o a n f e e c h a r g e d o n a n a p p l i c a t i o n w i t h the i n d i c a t e d c h a r a c t e r i s t i c s and that c h a r g e d on an a p p l i c a t i o n w i t h the b a s e c h a r a c teristics. A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e r e l e v a n t d i f f e r e n c e is s t a t i s t i c a l l y s i g n i f i c a n t at the f i v e - t o - t e n percent level (using a t w o - t a i l e d t e s t ) . T w o a s t e r i s k s (**) i n d i c a t e t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l . b ) D u e t o a p r o g r a m m i n g e r r o r in t h e 1 9 7 8 e s t i m a t e s , b u i l d i n g a g e in t h e 1 9 7 8 s a m p l e s i s m e a sured r e l a t i v e to new and one year old b u i l d i n g s , and the other v a r i a b l e s are: BA2-10, B A 1 1 - 2 0 , B A 2 1 - 3 0 , B A 3 1 - 4 0 , B A 4 1 - 5 0 , and B A G E 5 1 . 4- 49 d i f f e r e n c e b e t w e e n t h e p r e d i c t e d l o a n f e e for a h o u s e of the g i v e n a g e c o m p a r e d to a n e w h o u s e , c o n t r o l l i n g fac- tors. for o t h e r A single asterisk indicates statistical significance t h e f i v e to t e n p e r c e n t l e v e l ; a d o u b l e a s t e r i s k i n d i c a t e s tistical significance at the five percent In t h e S a n F r a n c i s c o - O a k l a n d at sta- level. area, loan fees generally in- c r e a s e s y s t e m a t i c a l l y w i t h b u i l d i n g a g e w h i l e in L o s A n g e l e s l o a n f e e s a r e h i g h e r o n a v e r a g e for a l l o l d e r h o u s e s to n e w , b u t t h e d i f f e r e n t i a l houses. relative is l o w e s t for 1 0 - 1 9 y e a r o l d In t h e S a n J o s e a r e a , t h e r e s u l t s a r e m i x e d . 1 9 7 7 , a p p l i c a t i o n s o n h o u s e s b u i l t b e f o r e 197 7 a r e During charged h i g h e r loan fees than a p p l i c a t i o n s on new h o u s e s , b u t the fees e x h i b i t n o o t h e r p a t t e r n w i t h r e s p e c t to a g e o f h o u s e . During 1978, applications on recently built houses have larger fees w h i l e t h o s e o n t h e o l d e s t h o u s e s h a v e l o w e r f e e s t h a n , t h o s e on h o u s e s b u i l t in 1 9 7 7 o r 1 9 7 8 . In t h e F r e s n o m e t r o p o l i t a n savings and loan associations charged significantly and s t a n t i a l l y lower loan fees d u r i n g 1977 on m o r t g a g e area, sub- applications f o r h o u s e s m o r e t h a n t h i r t y y e a r s o l d t h a n for n e w h o u s e s . tunately, the determination of w h e t h e r d i f f e r e n t i a l costs justify the differences loan process in l o a n f e e s a s s o c i a t e d w i t h i n g a g e is b e y o n d t h e s c o p e of t h i s Unfor- build- study. The loan fee m o d e l s include as c o n t r o l v a r i a b l e s the neighborhood variables that were included in t h e l e n d e r a c t i o n m o d e l s , b u t for d i f f e r e n t r e a s o n s . same California H e r e the a b l e s a r e i n t e n d e d to c o n t r o l for a n y l e g i t i m a t e c o s t s of varipro- c e s s i n g l o a n s w h i l e in t h e l e n d e r a c t i o n m o d e l s , t h e y c o n t r o l for 4- 50 the riskiness of the l o a n . come variables i n c l u d e c h a n g e in in- ( D I N C 7 6 7 5 a n d D I N C 7 5 7 0 ) a n d c h a n g e in n u m b e r of households variables (INC1976); The variables ( D H H 7 6 7 5 and D H H 7 5 7 0 ) ; 1976 a v e r a g e the fraction of households with high income a n d in S a n J o s e , t h e v a c a n c y r a t e (FHI); (FVACANTSJ). Many of the income change and household change are statistically income variables s i g n i f i c a n t , b u t the signs vary across t i o n s , m a k i n g t h e m h a r d to i n t e r p r e t a n d e x p l a i n . variables yield more consistent results. The equa- level Whenever either 1976 a v e r a g e i n c o m e or t h e f r a c t i o n of h i g h i n c o m e h o u s e h o l d s is t i s t i c a l l y s i g n i f i c a n t , i t s c o e f f i c i e n t in n e g a t i v e . c l u d e t h a t in t h e L o s A n g e l e s - L o n g B e a c h , S a n and San Jose We sta- con- Francisco-Oakland, (1978 o n l y ) m e t r o p o l i t a n a r e a s , b o r r o w e r s i n g m o r t g a g e s for h o u s e s in h i g h e r i n c o m e a r e a s a r e receiv- charged lower loan fees, ceteris paribus, than comparable borrowers lower income in areas. Discrimination Results T h e f i n d i n g of a s t a t i s t i c a l l y significant positive coeffi- c i e n t on a d i s c r i m i n a t i o n v a r i a b l e indicates that a p p l i c a n t s a r e m e m b e r s o f t h e g r o u p in q u e s t i o n (e.g. w o m e n , o l d people, b l a c k s , o r h o m e b u y e r s in a l l e g e d l y r e d l i n e d n e i g h b o r h o o d s ) charged higher loan fees than otherwise comparable W e i n t e r p r e t r e s u l t s o f t h i s s o r t as e v i d e n c e of behavior. This interpretation is s t r a i g h t f o r w a r d are applicants. discriminatory provided c o n t r o l v a r i a b l e s in t h e l o a n fee e q u a t i o n s a d e q u a t e l y t h e f a c t o r s a f f e c t i n g t h e c o s t s of p r o c e s s i n g who loans. the represent Even when 4- 51 a r e l e v a n t f a c t o r is l e f t o u t of t h e e q u a t i o n , h o w e v e r , h i g h e r loan fees associated with a discrimination variable may indicate discriminatory behavior. still T h i s is t r u e p r o v i d e d the l e f t o u t v a r i a b l e and t h e d i s c r i m i n a t i o n v a r i a b l e a r e n o t tively posi- correlated. For e a c h of the e i g h t s a m p l e s , w e h a v e c a l c u l a t e d the ex- p e c t e d l o a n fee for a b a s e l i n e a p p l i c a t i o n . This baseline ap- p l i c a t i o n r e p r e s e n t s t h e t y p e t h a t b a n k e r s w o u l d be l e a s t likely to d i s c r i m i n a t e a g a i n s t a n d is d e f i n e d a n a l o g o u s l y to b a s e l i n e a p p l i c a t i o n s in t h e M O D O W N s e c t i o n : the a p p l i c a n t s a r e a w h i t e , m a l e - f e m a l e c o u p l e ; t h e f e m a l e is b e y o n d c h i l d b e a r i n g a g e ; applicant the is b e t w e e n 35 a n d 4 4 , a n d the p r o p e r t y is l o c a t e d 10 the suburbs. W i t h r e s p e c t to a l l o t h e r c h a r a c t e r i s t i c s , b a s e l i n e a p p l i c a t i o n t a k e s o n a v e r a g e v a l u e s for t h e LOANFEE sample involved. in the particular In c o n n e c t i o n w i t h e a c h t y p e of poten- t i a l d i s c r i m i n a t i o n , t h e p r e d i c t e d loan fee for an a p p r o v e d app l i c a t i o n t h a t d i f f e r s f r o m the b a s e l i n e a p p l i c a t i o n in the dis- c r i m i n a t i o n d i m e n s i o n o n l y is r e p o r t e d a n d c o m p a r e d to the loan fee for the b a s e l i n e a p p l i c a t i o n for t h a t s a m p l e . In this way, s i m i l a r l y s i t u a t e d a p p l i c a n t s c a n b e c o m p a r e d and the magnitude of the d i s c r i m i n a t o r y d i f f e r e n t i a l p u t into Sex. perspective. T h e r e s u l t s b y sex of the a p p l i c a t i o n a r e in T a b l e 4 - 1 4 . reported E a c h e n t r y r e p r e s e n t s the p r e d i c t e d loan fee for a p p l i c a t i o n s d i f f e r i n g f r o m b a s e l i n e a p p l i c a t i o n s o n l y in t e r m s of t h e s e x of t h e a p p l i c a n t s . T h e n u m b e r s in p a r e n t h e s e s repre- s e n t t h e r a t i o of the p r e d i c t e d loan fee for the s e x t y p e to the t y p e i n c l u d e d in t h e b a s e . T h e a s t e r i s k s , a s in p r e v i o u s tables, 4-52 Table 4-10 Loan Fees (Dollar A m o u n t s and Ratios) by Sex Baseline Applications S e x of Applicant(s) for in F o u r C a l i f o r n i a M e t r o p o l i t a n Fresno Los AngelesLong Beach San Francisco -Oakland Areas San 5 Jose 1977 MFNCB (base) 620 (1.00) 695 (1.00) 678 (1.00) 690 (1.00) 608* (0.98) 703** (1.01) 686* (1.01) 687 (1.00) 590* (0.95) 707* (1.02) 689* (1.02) 687 (1.00) FONLYNCB 630 (1.02) 695 (1.00) 684 (1.01) 679 (0.98) MONLY 658** (1.06) 704** (1.01) 680 (1.00) 686 (0.99) MFCB25-34 b F O N L Y C B 2 5-34 u 1978 720 (1.00) 843 (1.00) 823 (1.00) 873 (1.00) 723 (1.00) 847 (1.00) 827 (1.00) 865* (0.99) F 0 N L Y C B 2 5-34 741 (1.03) 851 (1.01) 826 (1.00) 864* (0.99) FONLYNCB 718 (0.99) 840 (0.99) 820 (0.99) 859 (0.98) MONLY 733 (1.02) 848 (1.01) 837** (1.02) 894* (1.02) MFNCB (base) MFCB25-34 b a) T h e e n t r i e s in t h e t a b l e r e p r e s e n t t h e p r e d i c t e d l o a n fee (in d o l l a r s ) for a n a p p l i c a t i o n s i m i l a r t o t h e b a s e l i n e a p p l i c a t i o n in a l l w a y s o t h e r t h a n t h e c h a r a c t e r i s t i c l i s t e d . N u m b e r s in p a r e n t h e s e s r e p r e s e n t t h e r a t i o o f t h e l o a n f e e for an a p p l i c a t i o n w i t h t h e i n d i c a t e d c h a r a c t e r i s t i c s t o t h e l o a n f e e for t h e baseline application. S e e t e x t for d e f i n i t i o n of t h e b a s e l i n e a p p l i c a t i o n . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r o f t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t f r o m t h e d e n o m i n a t o r a t t h e f i v e to t e n - p e r c e n t l e v e l (using a t w o - t a i l e d 4-53 Table 4-14 (continued) ( c o n t ' d ) t e s t ) . T w o a s t e r i s k s (**) i n d i c a t e t h a t t h e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l . difference b ) T h e s e e s t i m a t e s r e f l e c t t h e e f f e c t s o f b o t h s e x a n d a g e in t h a t t h e a g e o f t h e a p p l i c a n t is r e d u c e d to t h e 2 5 - 3 4 c a t e g o r y . See T a b l e 4 - 1 6 for t h e s e p a r a t e e f f e c t s o f a g e . 4-54 t a b l e s , i n d i c a t e t h e s t a t i s t i c a l s i g n i f i c a n c e of the relevant coefficients. S t a r t i n g w i t h t h e c l e a r e s t p a t t e r n of s t a t i s t i c a l l y insig- nificant results, we conclude that female only applications w h i c h n o a p p l i c a n t is b e l o w 34 (FONLYNCB) are charged no higher on average than those charged baseline loan banks d i s c r i m i n a t e a g a i n s t w o m e n in t h i s a g e g r o u p b y i m p o s i n g exces- fees. T h e r e s u l t s for f e m a l e o n l y a p p l i c a t i o n s w h e r e the c a n t is b e t w e e n 25 a n d 34 y e a r s o l d fees applications. In o t h e r w o r d s , t h e r e s u l t s c o n t r a d i c t a l l e g a t i o n s t h a t s i v e f i n a n c i a l b u r d e n s in t h e f o r m of h i g h l o a n in appli- (FONLYCB) are m i x e d . Of four statistically significant coefficients, two indicate the higher l o a n f e e s a n d t w o i n d i c a t e l o w e r l o a n f e e s t h a n t h o s e for b a s e line applications. M o r e o v e r , the ratios above one are s m a l l ; in t h e L o s A n g e l e s - L o n g B e a c h Oakland (1977) a n d S a n relatively Francisco- (1977) m e t r o p o l i t a n a r e a s , l o a n f e e s for a p p r o v e d appli- c a t i o n s of t h i s t y p e e x c e e d t h o s e for b a s e l i n e a p p l i c a t i o n s two p e r c e n t . A s i m i l a r p a t t e r n e m e r g e s for m a l e - f e m a l e by applica- t i o n s t h a t d i f f e r f r o m t h e b a s e o n l y in t h a t t h e f e m a l e is of c h i l d b e a r i n g a g e a n d t h e a p p l i c a n t is b e t w e e n 25-34). 25 a n d 34 A g a i n t h e m a g n i t u d e s a r e s m a l l and t h e s i g n s a r e T h e o n l y c o n s i s t e n t p a t t e r n o f h i g h e r l o a n f e e s is for m a l e o n l y a p p l i c a t i o n s (MONLY). In e a c h of t h e f o u r o n e o f t h e t w o s a m p l e s y i e l d s a p o s i t i v e l o a n fee tically s i g n i f i c a n t at the five p e r c e n t l e v e l . mixed. found SMSAs, differential, for m a l e o n l y a p p l i c a t i o n s r e l a t i v e t o t h e b a s e t h a t is The t i a l r a n g e s f r o m o n e p r e c e n t o f t h e l o a n f e e in L o s (MFCB statis- differenAngeles- 4- 55 Long Beach (1977) to s i x p e r c e n t of t h e f e e in F r e s n o Race. T h e f i n d i n g s w i t h r e s p e c t to d i f f e r e n t i a l based on r a c e , summarized in T a b l e 4 - 1 5 , p r o v i d e (1977). treatment substantial support for the h y p o t h e s i s of d i s c r i m i n a t o r y b e h a v i o r . Black applicants are charged higher loan fees than similarly w h i t e s in t h e F r e s n o (1978), Los Angeles-Long 1978), San Francisco-Oakland 11 politan areas. Beach (1978) and S a n J o s e situated (1977 (1977) and metro- A l l of t h e c o e f f i c i e n t s o n w h i c h t h e s e results are based are statistically significant at the five percent vel. T h e m a g n i t u d e s of t h e d i f f e r e n t i a l s a r e r e l a t i v e l y le- large, r a n g i n g f r o m t h r e e p e r c e n t of t h e b a s e l i n e l o a n f e e in L o s A n g e les-Long Beach (1977) to s i x t e e n p e r c e n t in F r e s n o Spanish applicants face statistically l o a n f e e s in t h e L o s A n g e l e s - L o n g B e a c h Francisco-Oakland (1977) a n d S a n J o s e (1978) . significantly higher (1977 a n d 1 9 7 8 ) , S a n (1977) m e t r o p o l i t a n areas. M o r e o v e r , a l l e i g h t l o a n f e e r a t i o s e x c e e d o n e for S p a n i s h plicants. ap- F i n a l l y , A s i a n s experience higher loan fees than si- m i l a r l y s i t u a t e d w h i t e s in L o s A n g e l e s - L o n g B e a c h (1977 and 1978) and San Jose statistically (1977). significant differentials p e r c e n t to three Age. T h e m a g n i t u d e s of t h e for S p a n i s h a n d A s i a n s r a n g e f r o m o n e percent. T h e r e s u l t s b y a g e of t h e a p p l i c a n t , s u m m a r i z e d Table 4 - 1 6 , suggest that savings and loan associations Los Angeles-Long B e a c h , San Francisco-Oakland in and San Jose ropolitan areas charge higher loan fees on average on in the met- approved l o a n s to a p p l i c a n t s u n d e r 25 t h a n to s i m i l a r l y s i t u a t e d older applicants. conclusion F i v e o f t h e s i x c o e f f i c i e n t s on w h i c h t h i s 4-56 Table 4-10 Loan Fees (Dollar A m o u n t s and Ratios) by Race Baseline Applications R a c e of Applicant(s) for in F o u r C a l i f o r n i a M e t r o p o l i t a n Fresno Los AngelesLong Beach San Francisco Oakland Areas' San 1 Jose 1977 620 (1.00) 695 (1.00) 678 (1.00) 690 (1.00) Black 591 (0.95) 719 ** (1.03) 685 (1.01) 739** (1-07) Spanish 630 (1.02) 709** (1.02) 691** (1.02) 711** (1.03) Asian 612 (0.99) 704** (1.01) • 680 (1.00) 704* (1.02) 608 (0.98) 698 (1.00) 680 ' (1.00) 654** (0.94) White Other (base) Minority 1978 720 (1.00) 843 (1.00) 823 (1.00) 873 (1.00) 832** (1.16) 888** (1.05) 857** (1.04) 9.10 (1.04) Spanish 728 (1.01) 869** (1.03) 832 (1.01) 891 (1.02) Asian 740 (1.03) 870** (1.03) 825 (1.00) 866 (0 . 99 ) 742 (1.03) 855 (1.01) 825 (1.00) 871 (1.00) White (base) . Black Other Minority a) T h e e n t r i e s in t h i s t a b l e r e p r e s e n t the p r e d i c t e d l o a n fee (in d o l l a r s ) f o r an a p p l i c a t i o n s i m i l a r to t h e b a s e l i n e a p p l i c a t i o n in a l l w a y s o t h e r t h a n t h e c h a r a c t e r i s t i c l i s t e d . N u m b e r s in p a r e n t h e s e s r e p r e s e n t t h e r a t i o of t h e l o a n f e e for an a p p l i c a t i o n w i t h t h e i n d i c a t e d c h a r a c t e r i s t i c s to t h e l o a n fee for t h e baseline application. S e e t e x t for d e f i n i t i o n of t h e b a s e l i n e a p p l i c a t i o n . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r o f t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t f r o m t h e d e n o m i n a t o r a t t h e f i v e to t e n - p e r c e n t l e v e l (using a t w o - t a i l e d t e s t ) . T w o a s t e r i s k s (**) i n d i c a t e t h a t t h e d i f f e r e n c e is s i g n i f i c a n t at the five or less p e r c e n t l e v e l . 4-57 Table 4-16 Loan Fees (Dollar A m o u n t s and Ratios) by A g e of A p p l i c a n t Baseline Applications A g e of Applicant in F o u r C a l i f o r n i a M e t r o p o l i t a n Fresno Los AngelesLong Beach for Areas 5 San Francisco -Oakland San Jose 1977 ALT 2 5 582** (0.94) 707** (1.02) 695** (1.02) 711* (1.03) A25-34 585** (0.94) 695 (1.00) 686** (1.01) 693 (1.00) 620 (1.00) 695 (1.00) 678 (1.00) 690 (1.00) A45-54 610 (0.98) 691 (0.99) 678 (1.00) 689 (1.00) AGE 55 598 (0.97) 695 (1.00) 688* (1.01) 680 (0.99) A35-44 (base) 1978 ALT2 5 727 (1.01) 863** (1.02) 839** (1.02) 878 (1.01) A25-34 720 (1.00) 841 (1.00) 829 (1.01) 856* (0.98) 720 (1.00) 843 (1.00) 823 (1.00) 873 (1.00) A45-54 730 (1.01) 846 (1.00) 824 (1.00) 863 (0.98) AGE 5 5 725 (1.01) 838 (0.99) 815 (0.99) 868 (0.99) A35-44 (base) a) T h e e n t r i e s in t h i s t a b l e r e p r e s e n t t h e p r e d i c t e d l o a n fee (in d o l l a r s ) f o r a n a p p l i c a t i o n s i m i l a r to t h e b a s e l i n e a p p l i c a t i o n in a l l w a y s o t h e r t h a n t h e c h a r a c t e r i s t i c l i s t e d . N u m b e r s in p a r e n t h e s e s r e p r e s e n t t h e r a t i o o f t h e l o a n fee for an a p p l i c a t i o n w i t h t h e i n d i c a t e d c h a r a c t e r i s t i c s to t h e l o a n fee for t h e baseline application. See text for d e f i n i t i o n of the b a s e l i n e a p p l i c a t i o n . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r o f t h e r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t f r o m t h e d e n o m i n a t o r a t t h e f i v e to t e n - p e r c e n t l e v e l (using a t w o - t a i l e d t e s t ) . T w o a s t e r i s k s (**) i n d i c a t e t h a t t h e d i f f e r e n c e is s i g n i f i c a n t at the five or less p e r c e n t l e v e l . 4-58 is b a s e d are s t a t i s t i c a l l y vel- significant at the five percent The average differential le- is t w o to t h r e e p e r c e n t of the l o a n f e e for t h e b a s e l i n e a p p l i c a n t , w h i c h a m o u n t s t o l e s s $20 in m o s t than cases. Redlining. Finally, we examine allegations that treat applications from older neighborhoods or from lenders neighbor- h o o d s w i t h a h i g h p r o p o r t i o n of m i n o r i t i e s d i f f e r e n t l y than plications from neighborhoods characterized by average t i o n s of o l d h o u s i n g o r r a c i a l m i n o r i t i e s . late the differences propor- To do s o , we calcu- in l o a n f e e s a s s o c i a t e d w i t h s p e c i f i c dif- f e r e n c e s in t h e v a l u e s o f t h e n e i g h b o r h o o d v a r i a b l e s u n d e r vestigation. 4-17. These loan fee d i f f e r e n t i a l s are reported ( P R E 1 9 4 0 ) , w e r e p o r t for a l l s a m p l e s t h e c h a n g e in l o a n houses fees a s s o c i a t e d w i t h a 0 . 1 0 i n c r e a s e in t h e f r a c t i o n o f h o u s e s S i n c e t h e m e a n i n g of a " h i g h l y " b l a c k , or Asian neighborhood varies across metropolitan in- in T a b l e F o r t h e v a r i a b l e r e p r e s e n t i n g t h e f r a c t i o n of old before 1940. ap- built Spanish, areas, how- e v e r , t h e u n d e r l y i n g c h a n g e in t h e v a l u e of e a c h r a c i a l compo- 12 sition variable differs across samples. The table entries for e a c h r a c i a l c o m p o s i t i o n v a r i a b l e s h o u l d b e i n t e r p r e t e d as t h e d i f f e r e n c e b e t w e e n t h e l o a n fee l e n d e r s w o u l d c h a r g e for a p r o p e r t y in a n e i g h b o r h o o d w i t h an a v e r a g e p r o p o r t i o n of p a r t i c u l a r m i n o r i t y g r o u p a n d t h a t c h a r g e d for a p r o p e r t y n e i g h b o r h o o d w i t h a "high" p r o p o r t i o n of t h a t the in a minority. In t h r e e of t h e f o u r a r e a s , t h e r e s u l t s c o n t r a d i c t t h e hypothesis that lenders discriminate against older by c h a r g i n g higher loan fees. O n l y in S a n J o s e neighborhoods (1977) is a Table 4-11 C h a n g e s in L o a n ^ e e s Changes (Dollar Amounts) A s s o c i a t e d in t h e A g e a n d R a c i a l C o m p o s i t i o n o f t h e in Four California M e t r o p o l i t a n A r e a s : Fresno T977 PRE1940 (increase to average +0.10) 1 I9TS" with Neighborhood 1977 and 1978 a L o s A n g e l e s - L o n g B e a c h S a n F r a n c i s c o - O a k l a:n d San rrn rTTS 1977 1973 — 1977 -3 -6** _7 * * -2 -6 -81* 32** 27** 38** 13 -3 13 -1* -9 4* Jose TTT5 '4 b FBLACK (increase to "high) -66 -19 50** 3 FSPANISH* (increase to "high") 15 6 FASIAN (increase to "high") -37 -8 -10 88** 93** 45** 40* 10 -24 -7 a) T h e e n t r i e s in t h e t a b l e r e p r e s e n t t h e c h a n g e in l o a n f e e s a s s o c i a t e d w i t h an i n c r e a s e in t h e n e i g h b o r h o o d a g e o r r a c i a l c o m p o s i t i i o n v a r i a b l e f r o m its a v e r a g e l e v e l to t h e i n d i c a ted level. " H i g h " l e v e l s for t h e r a c i a l c o m p o s i t i o n v a r i a b l e s a r e s a m p l e s p e c i f i c . See T a b l e 3 - 3 2 f o r r e p r e s e n t a t i v e v a l u e s . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e n u m e r a t o r of the r a t i o is s t a t i s t i c a l l y s i g n i f i c a n t l y d i f f e r e n t from the d e n o m i n a t o r at the five-toten p e r c e n t l e v e l (using a t w o - t a i l e d t e s t ) . T w o a s t e r i s k s (**) i n d i c a t e t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l . b) F o r r e p r e s e n t a t i v e v a l u e s of "high 11 p r o p o r t i o n m i n o r i t y b y a r e a , see T a b l e 3-32. 4- 60 h i g h e r p r o p o r t i o n of old h o u s i n g associated w i t h a significant positive impact on loan statistically fees. W i t h r e s p e c t to the r a c i a l c o m p o s i t i o n of the the results are somewhat mixed. ficients are negative; neighborhood, Eleven of the t w e n t y - f o u r t h e s e i n d i c a t e t h a t , if a n y t h i n g , coef- lenders favor n e i g h b o r h o o d s w i t h h i g h p r o p o r t i o n s of m i n o r i t i e s . On other h a n d , the evidence that lenders charge higher strongly supports the hypothesis loan fees on properties in the neighborhoods w i t h h i g h p r o p o r t i o n s o f b l a c k s in t h e L o s A n g e l e s - L o n g Beach (1977 a n d 1 9 7 8 ) a n d S a n J o s e propor- (1978) a r e a s a n d w i t h h i g h t i o n s o f a l l t h r e e m i n o r i t y g r o u p s in t h e S a n area. The m a g n i t u d e s of the differentials Francisco-Oakland are large, especially i n S a n F r a n c i s c o - O a k l a n d w h e r e l o a n f e e s in h i g h l y S p a n i s h borhoods might average $ 9 3 m o r e a n d in h i g h l y A s i a n neigh- neighborhoods $ 8 8 m o r e t h a n t h o s e in n e i g h b o r h o o d s w i t h a v e r a g e p r o p o r t i o n s of minorities. Using available are alleged information defining which geographic to be redlined Francisco-Oakland B e a c h and areas. 1 3 The results are reported The table entries in T a b l e suburban show the predicted difference 4- between fee location. In L o s A n g e l e s - L o n g B e a c h , w e f i n d t h a t l o a n f e e s a r e t h a n t h o s e in t h e s u b u r b a n a r e a in Francisco- t h e l o a n f e e o n a h o u s e in t h e s p e c i f i e d a r e a a n d t h e l o a n in t h e r e f e r e n c e that in a l l e g e d l y r e d l i n e d a r e a s t h a n e l s e w h e r e 18 f o r L o s A n g e l e s - L o n g B e a c h a n d T a b l e 4 - 1 9 for S a n Oakland. San a r e a s , w e can examine directly the hypothesis loan fees are higher these metropolitan in t h e L o s A n g e l e s - L o n g areas in s o m e a l l e g e d l y r e d l i n e d higher areas 4-61 Table 4-10 Impact of Geographic Location on Loan Fees in the L o s A n g e l e s - L o n g B e a c h M e t r o p o l i t a n 1977 and 1978 Neighborhoods Allegedly Redlined 1977 1978 72 -0 Neighborhoods Compton Covina-Azusa-West East Los Covina 156** 4 Park Long Beach-Southwest Pacoima-San Fernando Pasadena-North Central 43** 22 20 -9 163** San Pedro 26 South Central Los Angeles -26** Venice-Santa -36* Monica 17 16 -18* Pomona Other 223** Angeles- Boyle Heights-Echo Park Highland Area: a -44** -7 116** -36 29** -81** Neighborhoods R e s t of t h e C i t y of L o n g B e a c h R e s t of the City of Los A n g e l e s Rest of Los A n g e l e s County (base) -1 -22** — -0 -31 — a) T h e e n t r i e s in t h e t a b l e r e p r e s e n t t h e p r e d i c t e d d i f f e r e n c e b e t w e e n t h e l o a n f e e f o r a h o u s e in t h e s p e c i f i e d a r e a a n d t h e l o a n f e e f o r a h o u s e in t h e r e f e r e n c e s u b u r b a n l o c a t i o n . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e d i f f e r e n c e is s t a tistically significant at the five-to-ten percent level (using a t w o - t a i l e d t e s t ) . T w o a s t e r i s k s (**) i n d i c a t e t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r cent level. 4-62 Table 4-10 Impact of G e o g r a p h i c Location on Loan in t h e S a n F r a n c i s c o - O a k l a n d 1977 and Neighborhoods 1978 Area: a 1978 Neighborhood Central Oakland Other Metropolitan 1977 Allegedly Redlined Fees 5 12 -7 12 -32** -30** Neighborhoods Alameda City Berkeley East Oakland -3 17** West Oakland -5 56** 23** 12** 29** 29** 24** 20** -5 -8 R e s t of A l a m e d a Contra Costa Marin County County County San F r a n c i s c o County San Mateo County (base) a) T h e e n t r i e s in t h e t a b l e r e p r e s e n t t h e p r e d i c t e d d i f f e r e n c e b e t w e e n t h e l o a n fee for a h o u s e in t h e s p e c i f i e d a r e a a n d t h e l o a n fee for a h o u s e in t h e r e f e r e n c e s u b u r b a n l o c a t i o n . A s i n g l e a s t e r i s k (*) i n d i c a t e s t h a t t h e d i f f e r e n c e is statistically significant at the five-to-ten percent level (using a t w o - t a i l e d t e s t ) . T w o a s t e r i s k s (**) i n d i c a t e t h a t t h e d i f f e r e n c e is s i g n i f i c a n t a t t h e f i v e o r l e s s p e r cent level. 4- 63 a n d l o w e r in o t h e r s . T h e m o s t s t r i k i n g e v i d e n c e of adverse t r e a t m e n t is f o u n d for C o v i n a - A z u s a - W e s t C o v i n a w h e r e loan fees a r e p r e d i c t e d to b e $156 h i g h e r in 1977 a n d $223 h i g h e r in 1978 a n d in P o m o n a , w h e r e l o a n f e e s a r e $163 h i g h e r in 1977 a n d h i g h e r in 1 9 7 8 . A l l f o u r of the c o e f f i c i e n t s on w h i c h predictions are based are highly statistically $11C these significant. E v i d e n c e of s t a t i s t i c a l l y s i g n i f i c a n t h i g h e r loan f e e s is a l s o f o u n d for H i g h l a n d P a r k (1978) and S o u t h C e n t r a l L o s A n g e l e s (1978) b u t t h e m a g n i t u d e s a r e m u c h s m a l l e r a n d the e f f e c t s less consistent across the two y e a r s . It s h o u l d b e n o t e d are that t h e n e g a t i v e l o a n fee d i f f e r e n c e s f o u n d in m a n y of t h e a l l e g e d redlined areas are consistent w i t h the conclusion that loan f e e s in t h e c i t y t e n d on a v e r a g e to b e l o w e r t h a n t h o s e in the suburbs. S u p p o r t for t h i s v i e w c o m e s from t h e f i n d i n g that l o a n fees on m o r t g a g e l o a n s to p u r c h a s e r s of h o u s e s in the a r e a s of L o s A n g e l e s C i t y n o t a l l e g e d to be r e d l i n e d are t h a n t h o s e in t h e s u b u r b a n r e f e r e n c e lower area. In S a n F r a n c i s c o - O a k l a n d , w e h a v e m o r e l i m i t e d information a b o u t r e d l i n i n g a l l e g a t i o n s ; C e n t r a l O a k l a n d is t h e o n l y area t h a t o u r s o u r c e i d e n t i f i e s as an a l l e g e d l y r e d l i n e d area. W h i l e t h e d i r e c t i o n of i m p a c t is c o n s i s t e n t w i t h t h e hypothesis of a d v e r s e t r e a t m e n t for b o r r o w e r s in t h i s a r e a , t h e m a g n i t u d e s are small and the relevant coefficients statistically ficant. H e n c e , for S a n F r a n c i s c o - O a k l a n d , w e r e j e c t the of a d v e r s e d i f f e r e n t i a l t r e a t m e n t for t h i s a l l e g e d l y area. insignihypothesis redlined 4- 64 SUMMARY T o s u p p l e m e n t t h e d e c i s i o n to l e n d m o d e l p r e s e n t e d in C h a p ter 3, this c h a p t e r a n a l y z e s the terms of the m o r t g a g e Using data on loans a p p r o v e d by state chartered associations contract. savings and for f o u r m e t r o p o l i t a n a r e a s in C a l i f o r n i a loan (Fresno, Los Angeles-Long B e a c h , San F r a n c i s c o - O a k l a n d , and San J o s e ) , we e s t i m a t e d t h r e e s e t s of m o r t g a g e t e r m s m o d e l s . First, we esti- mated a simultaneous three equation model of the interest rate, t e r m to m a t u r i t y , a n d l o a n - t o - v a l u e r a t i o u s i n g t h e t e c h n i q u e of two-stage least squares. as Each of the three terms was modeled a f u n c t i o n of t h e o t h e r t w o t e r m s , b o r r o w e r p r e f e r e n c e s , t i v e m e a s u r e s of r i s k t o t h e l e n d e r , a n d d i s c r i m i n a t i o n bles. objecvaria- S e c o n d , w e estimated a m o d e l of the amount by which ers m o d i f i e d loan amounts below requested lend- l o a n a m o u n t s for applications approved after being modified downward. t h e s e d o w n w a r d m o d i f i c a t i o n s a r e i m p l i c i t in t h e those Although loan-to-value e q u a t i o n s from the s i m u l t a n e o u s m o d e l , w e chose to e s t i m a t e s e p a r a t e l y a s w e l l so t h a t t h e r e s u l t s c a n b e c o m p a r e d to for New York State can be estimated. w h e r e only the downward modification F i n a l l y , loan fees were m o d e l e d as a of the loan a m o u n t , those property and neighborhood might legitimately influence loan fees, and them those model function factors that discrimination variables. After controlling for the n o n - d i s c r i m i n a t o r y factors in- f l u e n c i n g m o r t g a g e t e r m s , f a c t o r s t h a t in m o s t c a s e s p l a y major r o l e s , w e f i n d s u b s t a n t i a l e v i d e n c e t h a t c e r t a i n t y p e s of appli- cants against whom discrimination is l e g a l l y p r o h i b i t e d face 4- 65 substantially harsher mortgage terms than those faced by applicants. H e n c e , w e c o n c l u d e t h a t in t h e s e t t i n g o f terms, California savings and loan associations pursue t h a t in m a n y c a s e s h a v e u n d e s i r a b l e d i s c r i m i n a t o r y following paragraphs sis of d i s c r i m i n a t i o n other mortgage policies impacts. The summarize our findings on each possible examined in t h i s c h a p t e r . in interpreting the m a g n i t u d e s of the a d v e r s e d i f f e r e n t i a l impacts reported the various groups, the reader in m i n d t h a t t h e y present predicted averages should bear ba- for re- only. Sex T h e s t r o n g e s t r e s u l t t h a t e m e r g e s w i t h r e s p e c t to n a t i o n b a s e d on the sex of the a p p l i c a n t ( s ) is that applicants often face harsher terms than similarly female baseline applicants, while not. discrimi- male-only situated female only applicant(s) T h i s is a s u r p r i s i n g and i m p o r t a n t r e s u l t The evidence higher supports the conclusion that lenders i n t e r e s t r a t e s to m a l e o n l y a p p l i c a n t s in S a n Oakland and Los Angeles-Long Beach and give such shorter maturity (1977). l o a n s in S a n F r a n c i s c o - O a k l a n d M a n y of the other although not statistically applications charge Francisco- (1977) and In a d d i t i o n , this Fresno conclusion, male-only In e a c h o f t h e f o u r a r e a s , o n e o f t h e samples yields a positive loan fee differential for m a l e a p p l i c a t i o n s r e l a t i v e t o t h e r e f e r e n c e g r o u p t h a t is against tend to be charged higher loan fees than their female counterparts. al- applicants signs are consistent with significant. 1 do in l i g h t o f l e g a t i o n s of a d v e r s e t r e a t m e n t a g a i n s t w o m e n rather than men. male maletwo only statistically 4- 66 significant at the five percent level. The differential ranges f r o m o n e p e r c e n t o f t h e l o a n fee in L o s A n g e l e s - L o n g B e a c h to s i x p e r c e n t o f t h e l o a n f e e in F r e s n o (1977) (1977). A d v e r s e differential treatment of male-only applicants ap- p e a r to b e r e s t r i c t e d t o i n t e r e s t r a t e s , t e r m s to m a t u r i t y , and loan f e e s . In g e n e r a l , t h e l o a n - t o - v a l u e e q u a t i o n s d o n o t port the conclusion that male-only applicants receive sup- lower l o a n s in r e l a t i o n to a p p r a i s e d v a l u e t h a n o t h e r b o r r o w e r s and t h e d o w n w a r d m o d i f i c a t i o n e q u a t i o n s p r o v i d e n o e v i d e n c e of c e s s i v e d o w n w a r d a d j u s t m e n t s of t h e r e q u e s t e d A l t h o u g h a few other scattered loan statistically amount. significant findings of d i s c r i m i n a t o r y behavior based on sex are no other clear patterns emerge. ex- evident, In a d d i t i o n , w e f i n d v e r y lit- t l e e v i d e n c e of d i s c r i m i n a t o r y t r e a t m e n t b a s e d o n t h e i n c o m e of t h e s e c o n d a r y e a r n e r ; o n l y t w o i n s t a n c e s of d i s c r i m i n a t i o n merge. In S a n F r a n c i s c o - O a k l a n d (1978), male-only in w h i c h f i f t y p e r c e n t o f t h e t o t a l h o u s e h o l d a secondary (male) w o r k e r a r e c h a r g e d applications income comes interest rates that age 0.13 percentage points more than those charged In F r e s n o aver- beyond (1978), downward modifications crease with the proportion of income from a female earner beyond childbearing from similarly situated male-female applications with a non-working wife childbearing age. e- in- secondary age. Race The interest rate equations provide substantial that m e m b e r s of m i n o r i t y groups are charged higher evidence interest 4- 67 rates than similarly situated whites. The clearest pattern l a t e s to t h e t r e a t m e n t o f S p a n i s h a p p l i c a n t s . ropolitan areas, statistically In a l l f o u r m e t - significant interest rate e n t i a l s e m e r g e w i t h m a g n i t u d e s r a n g i n g f r o m 0 . 0 5 to 0 . 1 0 centage points. Asians and blacks also pay higher r a t e s in m a n y i n s t a n c e s . San Francisco-Oakland differper- interest The maturity results are mixed; in ( 1 9 7 7 ) , m i n o r i t i e s t e n d to b e g i v e n loans w i t h s h o r t e r m a t u r i t i e s , w h i l e in L o s A n g e l e s - L o n g B e a c h some are given longer re- (1977), maturities. A d v e r s e t r e a t m e n t of r a c i a l m i n o r i t i e s also clearly from the loan fee e q u a t i o n s . The evidence suggests that in a l l f o u r a r e a s c h a r g e b l a c k s h i g h e r l o a n f e e s ; t h a t emerges lenders lenders in L o s A n g e l e s - L o n g B e a c h , S a n F r a n c i s c o - O a k l a n d , a n d S a n Jose c h a r g e S p a n i s h a p p l i c a n t s h i g h e r f e e s ; a n d t h a t l e n d e r s in L o s A n g e l e s - L o n g B e a c h and San Jose charge A s i a n s h i g h e r loan Both the loan-to-value equations and the downward fees. modifi- c a t i o n e q u a t i o n s i m p l y t h a t , if a n y t h i n g , m i n o r i t i e s a r e given l a r g e r r a t h e r t h a n s m a l l e r l o a n s in r e l a t i o n to a p p r a i s e d o r to t h e r e q u e s t e d A g e of loan value amount. Applicant We find evidence of adverse treatment against members two separate age g r o u p s . First, young applicants (those under 25) a p p a r e n t l y a r e c h a r g e d h i g h e r l o a n f e e s t h a n s i m i l a r l y uated older applicants. In a d d i t i o n , y o u n g a p p l i c a n t s in o f t h e e i g h t s a m p l e s p a y i n t e r e s t r a t e s t h a t a v e r a g e 0.04 0.09 p e r c e n t a g e p o i n t s h i g h e r than those paid by of similarly sitfour to 4-68 s i t u a t e d a p p l i c a n t s b e t w e e n t h e a g e s o f 35 a n d Second, older applicants 44. ( t h o s e o v e r 44) in m a n y instances a l s o p a y h i g h e r i n t e r e s t r a t e s t h a n t h o s e in t h e 3 5 - 4 4 a g e In a d d i t i o n , b o t h t h e l o a n - t o - v a l u e e q u a t i o n s a n d t h e modification equations group. downward s u p p o r t t h e v i e w t h a t in t h e l a r g e r met- r o p o l i t a n a r e a s , l e n d e r s g r a n t s m a l l e r l o a n s in r e l a t i o n to a p p r a i s e d v a l u e or to t h e r e q u e s t e d t h a n to t h o s e in t h e 3 5 - 4 4 a g e loan a m o u n t to older applicants group. Redlining We examined allegations that California associations s a v i n g s and loan i m p o s e h a r s h e r t e r m s in m o r t g a g e c o n t r a c t s on e r t i e s l o c a t e d in n e i g h b o r h o o d s w i t h l a r g e r t h a n a v e r a g e prop- propor- tions of old h o u s i n g or h i g h e r than a v e r a g e p r o p o r t i o n s of min o r i t i e s , a n d in n e i g h b o r h o o d s a l l e g e d to b e redlined. W i t h r e s p e c t to t h e a g e o f t h e n e i g h b o r h o o d , a s measured b y t h e p r o p o r t i o n o f h o u s e s b u i l t b e f o r e 1 9 4 0 , w e find o n l y m i t e d e v i d e n c e of a d v e r s e t r e a t m e n t . fees are higher In S a n J o s e (1977), in o l d e r n e i g h b o r h o o d s a n d in t w o of the San Francisco-Oakland significant lend- amounts m o r e in o l d e r n e i g h b o r h o o d s t h a n in n e w n e i g h b o r h o o d s . w i t h r e s p e c t to i n t e r e s t r a t e s and loan f e e s , h o w e v e r , loan four and Los A n g e l e s - L o n g Beach s a m p l e s , ers modify loans downward by statistically li- Both substan- tial evidence supports the h y p o t h e s i s that lenders terms are harsher in m o r t g a g e s on o l d b u i l d i n g s r e l a t i v e to n e w . The n i t u d e s of t h e d i f f e r e n t i a l s r e l a t e d to b u i l d i n g a g e a r e a n d , in m a n y c a s e s , h i g h l y s t a t i s t i c a l l y significant. mag- large They 4- 69 c a n n o t b e i n t e r p r e t e d as e v i d e n c e of discriminatory behavior, h o w e v e r , s i n c e b u i l d i n g a g e m a y b e s e r v i n g as a p r o x y for b u i l d ing c o n d i t i o n , a n d h e n c e r i s k to the lender. In c o n t r a s t to t h e a g e of n e i g h b o r h o o d f i n d i n g , the r e s u l t s g e n e r a l l y s u p p o r t t h e h y p o t h e s i s t h a t lenders charge hinher int e r e s t r a t e s o n a p p l i c a t i o n s f r o m "high" minority neighborhoods t h a n o n a p p l i c a t i o n s f r o m a v e r a g e neighborhoods. In the L o s A n g e l e s - L o n g B e a c h a n d San Francisco-Oakland m e t r o p o l i t a n areas, i n t e r e s t r a t e s on l o a n s to " h i g h l y " black or "highly" S p a n i s h n e i g h b o r h o o d s a r e s u b s t a n t i a l l y and statistically significantly h i g h e r t h a n t h o s e o n l o a n s in n e i g h b o r h o o d s w i t h a v e r a g e ity p o p u l a t i o n s . In a d d i t i o n , l e n d e r s appear to c h a r g e minorhigher l o a n f e e s o n p r o p e r t i e s in n e i g h b o r h o o d s with high p r o p o r t i o n s of b l a c k s in L o s A n g e l e s - L o n g B e a c h Jose (1977 and 1978) and San (1978) a n d w i t h h i g h p r o p o r t i o n s of all t h r e e g r o u p s in S a n F r a n c i s c o - O a k l a n d . minority F i n a l l y , there is limited s u p p o r t for t h e v i e w t h a t d o w n w a r d modifications a r e l a r g e r minority m neighborhoods. T h e r e s u l t s w i t h r e s p e c t to p u r e r e d l i n i n g a r e m i x e d . l e g a t i o n s t h a t l e n d e r s i m p o s e h a r s h e r terms in l o a n s on Al- proper- t i e s in a l l e g e d l y r e d l i n e d n e i g h b o r h o o d s are supported. ± n o111 y a few of t h e s e n e i g h b o r h o o d s in L o s Angeles-Long Beach. particular, the Los Angeles-Long.Beach neighborhoods'of In Pomona; S o u t h C e n t r a l L o s A n g e l e s , C o v i n a - A z u s a , a n d Venice-Santa p a y h i g h e r i n t e r e s t r a t e s a n d C o v i n a - A z u s a - W e s t Gov j mona pay higher loan fees. Monica ' i S o m e e v i d e n c e of adverse t e r m s is 4- 70 a l s o f o u n d for t h e a l l e g e d l y r e d l i n e d C e n t r a l O a k l a n d a r e a of San Francisco-Oakland. 4-'71 Footnotes - Chapter 4 1. The order condition is a n e c e s s a r y b u t i n s u f f i c i e n t d i t i o n for i d e n t i f i c a t i o n . S e e , for e x a m p l e , R o b e r t Pyndyck and Daniel L. Rubenfeld, Econometric Models Economic Forecasts 2. 3. 5. unidentified equation. is n e w a n d o n e y e a r o l d the Houses. T h i s c o n c l u s i o n , it s h o u l d b e n o t e d , is g e n e r a l l y consis- equations. A " h i g h " p r o p o r t i o n o f a m i n o r i t y g r o u p is c a l c u l a t e d as the maximum value of the racial composition v a r i a b l e minus two standard deviations. R e p r e s e n t a t i v e v a l u e s of m i n o r i t y p o p u l a t i o n s a r e p r e s e n t e d in T a b l e 6. and McGraw-Hill, 1976), Ch. tent with that from the downward modification 5. s. A s i n d i c a t e d in f o o t n o t e b o f T a b l e 4 - 1 , t h e b a s e f o r 1978 estimates 4. (New Y o r k : The e i g h t h and m i s s i n g r e s u l t is that for the San F r a n c i s c o 1978 con- "high" 3-32. The r e d l i n i n g a l l e g a t i o n s for Los A n g e l e s C o u n t y are from W h e r e t h e M o n e y Is: County 197 5) . (Los A n g e l e s : Mortgage Lending, Los derived Angeles The C e n t e r for N e w C o r p o r a t e T h i s r e p o r t is r e p r i n t e d in H e a r i n g s o n t h e Priorities, Home Mortgage Disclosure Act of 1975, U . S . Senate, Committee Banking, Housing and Urban A f f a i r s , 94th C o n g r e s s , Session (May 5 - 8 , 1 9 7 5 ) . For the San 1st Francisco-Oakland on 4- 72 a r e a , t h e r e d l i n i n g a l l e g a t i o n is b a s e d on a s t u d y ining mortgage l e n d i n g in O a k l a n d o n l y . exam- See William M . Fre j , " D i s c r i m i n a t o r y L e n d i n g P r a c t i c e s in O a k l a n d , " in Hearings on t h e H o m e M o r t g a g e D i s c l o s u r e A c t o f 1 9 7 5 , U . S . S e n a t e , C o m m i t t e e on B a n k i n g , H o u s i n g and Urban A f f a i r s , C o n g r e s s , 1st Session 7. (May 94th 5-8,1975). The baseline reference locations are: the suburbs F r e s n o , the n o n - a l l e g e d redline portions and c i t y p o r t i o n s o f L o s A n g e l e s C o u n t y in L o s in non-central Angeles-Long B e a c h , San M a t e o C o u n t y in S a n F r a n c i s c o - O a k l a n d , and 8. s u b u r b s in S a n Jose. The calculated impact reflects the effects of both the of t h e a p p l i c a n t s a n d a g e . 9. 10. See footnote 5, See footnote b , Table The reference suburban 4-8. l o c a t i o n s a r e t h e s a m e as t h o s e cance . 12. See footnote 5, supra. 13. See footnote 6, supra. for See footnote 7, supra. The San Jose 1978 r e s u l t just m i s s e s s t a t i s t i c a l sex supra. the downward modification r e s u l t s . 11. the signifi- CHAPTER 5 A P P R A I S A L P R A C T I C E S IN CALIFORNIA V a r i o u s o r g a n i z a t i o n s h a v e a l l e g e d t h a t l e n d e r s , or their d e s i g n a t e d a p p r a i s e r s , d i s c r i m i n a t e a g a i n s t c e r t a i n t y p e s of properties or applicants in t h e a p p r a i s a l p r o c e s s . Since e r s u s e t h e a p p r a i s e d v a l u e o f t h e p r o p e r t y in e v a l u a t i n g lendloan a p p l i c a t i o n s a n d , s p e c i f i c a l l y , in d e t e r m i n i n g t h e a m o u n t of loan they w i l l offer a creditworthy a p p l i c a n t , an of a p p r a i s a l p r a c t i c e s examination is an i m p o r t a n t p a r t o f a s t u d y of d i s - c r i m i n a t i o n in m o r t g a g e l e n d i n g . In C h a p t e r 2 , w e o u t l i n e a p p r a i s a l p r a c t i c e s m o d e l t h a t c a n b e u s e d t o t e s t for t i c u n d e r a p p r a i s a l o f p r o p e r t i e s l o c a t e d in c e r t a i n h o o d s or o f f e r e d as s e c u r i t y by c e r t a i n types of (e.g. w o m e n or racial m i n o r i t i e s ) . applicants This chapter presents (Fresno, Los Angeles-Long Beach, San O a k l a n d , and San Jose) MODEL in 1 9 7 7 a n d systema- neighbor- r e s u l t s o f e s t i m a t i n g t h e s e m o d e l s in f o u r C a l i f o r n i a itan areas an the metropol- Francisco- 1978. DESCRIPTION T h e d e p e n d e n t v a r i a b l e is t h e a p p r a i s e d v a l u e to p r i c e r a t i o for c o n v e n t i o n a l m o r t g a g e a p p l i c a t i o n s o n purchase single family r e s i d e n c e s , including those denied by lenders. Non-dis- criminatory variables include property characteristics (struc- ture type and building age), neighborhood characteristics p e r c e n t h i g h i n c o m e , i n c o m e l e v e l , a n d c h a n g e in i n c o m e h o u s e h o l d s in t h e r e c e n t p a s t ) a n d a s e t of b i n a r y and variables r e p r e s e n t i n g t h e p u r c h a s e p r i c e r a n g e of t h e p r o p e r t y . These v a r i a b l e s c o n t r o l for f a c t o r s t h a t l e g i t i m a t e l y m i g h t lead appraised values that differ systematically (e.g. from purchase to prices 4-2 b e c a u s e l e n d e r s r e c o g n i z e d i f f e r e n t r i s k s or a r e m o r e r i s k averse than the m a r k e t . for L e n d e r s , or their designated a p p r a i s e r s , example, may undervalue condominiums because insufficient experi- e n c e w i t h s u c h u n i t s l e a v e s t h e m u n c e r t a i n a b o u t t h e s t r e n g t h of the future resale m a r k e t . In a d d i t i o n , c o n c e r n a b o u t t h e effects on h o u s i n g v a l u e s of n e i g h b o r h o o d e x t e r n a l i t i e s m a y cause lenders to v a l u e p r o p e r t i e s in n e i g h b o r h o o d s w i t h p o t e n t i a l l y a d v e r s e ex- t e r n a l i t i e s lower than the m a r k e t . are The purchase price ranges i n c l u d e d b e c a u s e a p p r a i s e r s m a y b e u n a b l e to t r a c k p r i c e for a l l p r i c e r a n g e s w i t h e q u a l a c c u r a c y in the r a p i d l y California real estate trends changing market. T h e r e m a i n i n g i n d e p e n d e n t v a r i a b l e s a r e i n c l u d e d to test for d i s c r i m i n a t i o n on t h e b a s i s of t h e s e x , r a c e o r a g e of a p p l i c a n t , p r o p e r t y l o c a t i o n , and the age or racial of t h e the composition neighborhood. RESULTS The models"have been estimated with ordinary and are presented in A p p e n d i x B . least squares A l t h o u g h the equations esti- m a t e a p p r a i s e d v a l u e to p u r c h a s e p r i c e r a t i o s , w e p r e s e n t r e s u l t s h e r e in t e r m s o f t h e i r i m p a c t on t h e d o w n p a y m e n t quirement. re- The impact on downpayment requirement varies with t h e l o a n to a p p r a i s e d v a l u e r a t i o . variations the Table 5-1 illustrates for s e v e r a l c h a n g e s in t h e a p p r a i s e d v a l u e to price ratio. these purchase F o r e x a m p l e , for a h o u s e c o s t i n g $ 4 0 , 0 0 0 , t h e d o w n - p a y m e n t w i t h a l o a n to a p p r a i s e d v a l u e r a t i o of 80 p e r c e n t $8,000. If t h e a p p r a i s e d v a l u e to p u r c h a s e p r i c e r a t i o w e r e percent lower (0.99 i n s t e a d o f 1 . 0 0 ) , t h e d o w n p a y m e n t would rise four p e r c e n t to $ 8 , 3 2 0 . one required If t h e a p p r a i s e d v a l u e to p u r - c h a s e p r i c e r a t i o w e r e 10 p e r c e n t l o w e r is (0.90 v e r s u s 1.00), Table 5-1 Relationship Between the Appraised Price Ratio and Down Payment C h a n g e in R a t i o of A p p r a i s e d V a l u e to Purchase Price Percentage Change in L o a n A m o u n t Granted Value-to-Purchase Requirements P e r c e n t a g e C h a n g e in D o w n P a y m e n t R e q u i r e m e n t s A s s u m i n g a 70% A s s u m i n g a n 80% A s s u m i n g a 90% Loan-to-Value Loan-to-Value Loan-to-Value Ratio Ratio Ratio •0.001 -0.1 0.2 0.4 0.9 •0.010 -1.0 2.3 4.0 9.0 -0.100 -10.0 23.3 40.0 90.0 •0.200 -20.0 46.6 80.0 180.0 3-4 t h e d o w n p a y m e n t w o u l d r i s e b y 40 p e r c e n t . The p e r c e n t c h a n g e s in t h e d o w n p a y m e n t r e q u i r e m e n t are n o t affected by the c o s t of the h o u s e , b u t increase as the l o a n to a p p r a i s e d v a l u e r a t i o i n c r e a s e s . In t h e p r e v i o u s if t h e l o a n to a p p r a i s e d v a l u e r a t i o w e r e 90 p e r c e n t , the p a y m e n t w o u l d h a v e i n c r e a s e d b y 9 a n d 90 p e r c e n t , requirements to a p p r a i s e d v a l u e r a t i o of 80 p e r c e n t . in t h e e s t i m a t e d e q u a t i o n in A p p e n d i x B . the for a l o a n The asterisks t h e s t a t i s t i c a l s i g n i f i c a n c e of t h e c o r r e s p o n d i n g down- respectively. T a b l e s 5 - 2 a n d 5 - 3 s u m m a r i z e t h e r e s u l t s in t e r m s of p e r c e n t a g e c h a n g e in t h e d o w n p a y m e n t example, indicate coefficient One asterisk indi- c a t e s s i g n i f i c a n c e a t b e t w e e n t h e f i v e a n d ten p e r c e n t l e v e l t w o i n d i c a t e s i g n i f i c a n c e a t the f i v e o r l e s s p e r c e n t level. In g e n e r a l , t h e a p p r a i s e d v a l u e to p u r c h a s e p r i c e ratio varies substantially only with purchase price and building Higher priced houses are systematically underappraised to h o u s e s p r i c e d b e l o w $ 3 0 , 0 0 1 . age. relative In f a c t , i n s p e c t i o n of t h e r o w in e a c h t a b l e , w h i c h s h o w s t h e a p p r a i s e d v a l u e t o and last purchase p r i c e r a t i o for t h e e q u a t i o n ' s r e f e r e n c e p o i n t , i n d i c a t e s t h a t is t h e u n d e r $ 3 0 , 0 0 1 h o u s e s w h i c h a r e o v e r a p p r a i s e d . The o f t h i s o v e r a p p r a i s a l d e t e r m i n e s t h e g e n e r a l m a g n i t u d e of p e r c e n t a g e c h a n g e s in d o w n p a y m e n t ; c o m p a r e t h e the variables T h e p e r c e n t c h a n g e s in d o w n - p a y m e n t s h o w a d i s t i n c t a n d r e g u l a r p a t t e r n of i n c r e a s i n g p a y m e n t s as p u r c h a s e price amount parenthetical f i g u r e s in t h e l a s t r o w to t h o s e for the p u r c h a s e p r i c e in t h e c o r r e s p o n d i n g c o l u m n . down rises. The b u i l d i n g age variables show that older b u i l d i n g s (at l e a s t o n e y e a r o l d in 1 9 7 7 a n d a t l e a s t t w o y e a r s o l d in 1 9 7 8 ) systematically underappraised it and show relatively small are variations 5-5 Table 5-3 Relationship Between Appraisal and Downpayment Practices Requirements in F o u r C a l i f o r n i a M e t r o p o l i t a n A r e a s : 1977 a P e r c e n t I n c r e a s e in D o w n p a y m e n t o n an 80% L o a n Fresno Structure Los AngelesLong Beach San Francisco -Oakland San Jose 0.4 1.6' 0.4 type CONDO -3.6* Purchase price ( r e l a t i v e to u n d e r $30,001) P30-50 6.8** 9.2** 5.2** 6.4** P50-75 10.0** 12.8** 8.8** 12.4** P75-100 12.8** 14.4** 11.2** 14.8** 9.2** 15.6** 14.0** 18.0** 18.8** 18.4** 17.2** 22.0*'* -0.3 -1.1** -1.0** -0.9** -2.4 -0.1 -1.2** 1.2** 0.1 -0.8** P100-125 PGT125 Neighborhood ^ characteristics FHI (+0.20) INC1976 (+3.0) DINC767 5 (+0.2) 2.0** -0.0 DINC7570 (+0.9) 1.1 -0.4** -0.0 -0.0 -0.8** 0.0 0.2** DHH7675 (+1.0) -0.2 DHH7570 (+5.0) -2.0** FVACANTSJ A g e of (+0.03) 0.4 -0.8** 0.4 0.1 neighborhood PRE1940 (+0.20) -1.4** -0.6** -0.6** -1.0 * * 5-6 Table 5-3 (continued) P e r c e n t I n c r e a s e in D o w n p a y m e n t o n a n 8 0 % Fresno Building age (relative to buildings) Los AngelesLong Beach San Francisco -Oakland San Loan Jose new BAl-9 5.2** 2.4** 3.2** 10.0** BA10-19 6.8** 2.4** 3.2** 9.2** BA20-29 7.6** 2.4** 4.0** 9.2** BA30-39 12.0** 3.2** 4.4** 10.0** BA40-49 12.4** 3.2** 4.0** 11.6** 8.4** 6.0** 4.8** 16.0** BAGE50 A g e of applicant (relative to 35-44 years) •0.8 0.4 •0.4 1.2 A25T034 0.4 0.1 •0.1 0.8 A45T054 0.4 0.1 1.2** 0.8 AGE 55 1.2 0.4 0.8** 2.0** ALT 2 5 ** S e x of a p p l i c a n t ( s ) (relative to M F N C B ) 1.1 1-2 1.2** 2.4** -0.0 0.3 0.4 -0.4** 0.1 -0.1 FONLYCB25-34 2.0 1.3 FONLYNCB 6.4** 0.8* MFCB25-34 MONLY R a c e of -0.4 1.2 * * applicant (relative to w h i t e ) BLACK SPANISH ASIAN •1.6 •0.1 1.6 0.8** 3.2 0.4* •0.1 1. 2 •0.8* 0.8 0.1 0.4 5-7 Table 5-2 (continued) P e r c e n t I n c r e a s e in D o w n p a y m e n t on an 80% Loan Fresno OMIN Los AngelesLong Beach San F r a n c i s c o -Oakland San Jose -0.1 1.2 0.4 0.1 -4.2** -0.1 -0.04 Racial composition^ of n e i g h b o r h o o d FBLACK (+0.1) (+0.1) 0.6 (+0.03)° 0.7* FSPANISH FASIAN Property location ( r e l a t i v e to C i t y of Fresno Compton (AR) SUBURBS 0.4** -0.04 SUBURBS 0.8 -4.4 Covina-Azusa-West C o v i n a (AR) 0.1 East L.A.-Boyle Heights-Echo P a r k (AR) 4.0** Highland (AR) 0.8 Park Long BeachS o u t h w e s t (AR) 1.6 Pacoima-San F e r n a n d o (AR) -0.0 Pasadena-North C e n t r a l (AR) -0.8 Pomona (AR) San Pedro (AR) 3.2** 0.8 South Central L . A . (AR) -0.1 Venice-Santa M o n i c a (AR) 1.2 0.2 -0.3** SAN MATEO 0.3 1.2** 1.3 SUBURBS) S-8 Table 5-2 (continued) Percent Increase Fresno R e s t of t h e C i t y of L o n g B e a c h Rest of the City of L o s A n g e l e s Alameda — - - in D o w n p a y m e n t o n an 80% Los Angeles Long Beach San Francisco -Oakland Loan San Jose -1.2** — -0.8** — — County Alameda City Berkeley Central (AR) — — 3.6** - - — — 2.4** - - — — 4.4** — 2.4** — Oakland East Oakland — - West Oakland — — 2.0** - - — — 2.4** - - Contra Costa County — — 0.8** - - Marin County' — — 0.4 - - Francisco — — -0.4 - - R e s t of A l a m e d a County San C i t y of S a n Jose A p p r a i s e d V a l u e to Purchase Price for Reference Point — Constant e from Equation - - 1.050 (-20.0) - — 1.034 (-13.6) — 1.013 (-5.2) -0.8* 1.065 (-26.0) a) O n e a s t e r i s k (*) i n d i c a t e s t h a t a p p r o p r i a t e c o e f f i c i e n t in A p p e n d i x B is s t a t i s t i c a l l y s i g n i f i c a n t a t b e t w e e n t h e f i v e a n d t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e t h a t t h e a p p r o p r i a t e c o e f f i c i e n t is s t a t i s t i c a l l y s i g n i f i c a n t a t t h e f i v e o r l e s s p e r c e n t l e v e l . These are two-tail tests. b ) T h e s e a r e c o n t i n u o u s v a r i a b l e s a n d t h e n u m b e r s in p a r e n t h e s e s a f t e r t h e v a r i a b l e n a m e is t h e c h a n g e in v a l u e u s e d t o c a l c u l a t e t h e imp a c t on d o w n p a y m e n t . T h e s e c h a n g e s are a p p r o x i m a t e l y e q u a l to the standard d e v i a t i o n s of each v a r i a b l e . b-9 Table B-2 (continued) c) T h e s t a n d a r d d e v i a t i o n f o r t h e F r e s n o S M S A is o n e t e n t h t h a t in t h e o t h e r S M S A s r a n d t h i s s m a l l e r v a l u e h a s b e e n u s e d for F r e s n o . d) A n "AR" a f t e r a p r o p e r t y l o c a t i o n i n d i c a t e s t h e n e i g h b o r h o o d b e e n a l l e g e d to b e r e d l i n e d . has e) T h e s e r a t i o s a p p l y t o an a p p l i c a t i o n o n a b u i l d i n g t h a t is n e w and neither a condominium or cooperative w i t h a purchase price under $ 3 0 , 0 0 1 l o c a t e d in a s u b u r b a n n e i g h b o r h o o d t h a t h a s z e r o v a l u e s of all the c o n t i n u o u s variables and the a p p l i c a n t s are a m a l e - f e m a l e c o u p l e w i t h a w o m a n b e y o n d c h i l d b e a r i n g a g e w h o is 3 5 - 4 4 y e a r s o l d a n d w h i t e . T h e n u m b e r s in p a r e n t h e s e s a r e t h e p e r c e n t a g e c h a n g e in d o w n p a y m e n t d u e to t h e o v e r o r u n d e r a p p r a i s a l of t h i s b u i l d i n g . 5-10 Table 5-3 Relationship Between Appraisal and Downpayment Practices Requirements in F o u r C a l i f o r n i a M e t r o p o l i t a n A r e a s : 1978 P e r c e n t I n c r e a s e in D o w n p a y m e n t o n an 80% Fresno Structure San F r a n c i s c o -Oakland San Jose type CONDO Purchase Los AngelesLong Beach Loan 4.4* 1.2** 2.0** 3.2** 79 . 6** price (relative to $30,001) under P30-50 17.6** 14.8** 9.6** P50-75 23.6** 19.2** 15.2** 86.8** P75-100 32.4** 21.6** 18.4** 88.0** P100-125 34.4** 22.8** 20.4** 90.8** PGT125 39.2** 25.2** 24.0** 94.0** -0.7 -1.3** -1.4** -1.0** 2.4 -0.2 -0.2 -1.8 -0.1 -0.2* 1.8 -0.2* 0.0 0.0 -0.1** 0.0 0.4 -0.1 0.0 Neighborhood ^ characteristics FHI (+0.2) INC1976 (+3.0) DINC7675 (+0.2) DINC7 570 ( + 0.9) D H H 7 6 75 (+1.0) 2.8** DHH7570 (+5.0) -6.0** FVACANTSJ A g e of (+0.03) neighborhood* PRE1940 -0.0 1.2** -0 .2 -0 . 2 3 (+0.20) -1.4** -0.6** -0.2 -0.1 5-11 Table 5-3 (continued) P e r c e n t I n c r e a s e in D o w n p a y m e n t o n an 80"-, L o a n Fresno Los AngelesLong Beach San Francisco -Oakland San Jose Building age ( r e l a t i v e to n e w and one year old buildings) BA2-10 13.2** 1.2** 2.4** 2.4** BA11-20 13.6** 1.2** 2.0** 2.8** BA21-30 14.4** 2.0** 3.6** 4.0** BA31-40 14.8** 2.0** 3.2** 6.0** BA41-50 15.2** 3.6** 4.4** 7.6** BAGE51 24.8** 5.6** 3.6** 6.8** -0.4 0.8* 0.8* -1.2 A g e of a p p l i c a n t ( r e l a t i v e to 35-44 years) ALT25 A25T034 2.0 0.4 0.4** -0.4 A45T054 1.2 0.8** 0.8** -0.4 -0.8 0.4 0.8* FONLYCB25-34 5.2 0.8 2.0** FONLYNCB 0.4 0.8** 0.8* MFCB25-34 2.8 0.4 -0.0 -0.8 MONLY 2.0 -0.0 -0.4 -0.4 -2.8 -0.1 0.8 1.6 0.8** 0.2 AGE55 S e x of 0.4 applicant(s) ( r e l a t i v e to M F N C B ) R a c e of -2.4** 2.0** applicant (relative to white) BLACK SPANISH 3.6** 1.6** 5-12 Table 5-3 (continued) P e r c e n t I n c r e a s e in D o w n p a y m e n t on an 80", L o a n Fresno Los AngelesLong Beach San F r a n c i s c o -Oakland San J o s e ASIAN 1.6 0 .8** OMIN 1.2 0.4 -5.8** 0.0 0.2* 0.2 0.6** 0.4** 0.9** 0.8** -0.4 -0.4 -1.2 Racial composition^ of n e i g h b o r h o o d FBLACK (+0.1) FSPANISH FASIAN 0.4 (0.1) (0.03) C 2.1** Property location ( r e l a t i v e to SUBURBS C i t y of Fresno Compton (AR) -0.1 SUBURBS 2.8** 5.6* Covina-AzusaWest Covina (AR) -0.8 East L.A.-Boyle HeightsE c h o P a r k (AR) 6.4** Highland Park 5.2** Long BeachSouthwest (AR) (AR) Pacoima-San F e r n a n d o (AR) Pasadena-North C e n t r a l (AR) Pomona Venice-Santa M o n i c a (AR) 6.8** 2.8* (AR) South Central (AR) 1.6* -1.6 (AR) San Pedro 0.4 L.A. 3.2** -4.0** -0 .2** SAN M A T E O 0.3 SUBURBS 4-13 Table 4-8 (continued) P e r c e n t I n c r e a s e in D o w n p a y m e n t on an 80% R e s t of the City of L o n g B e a c h Fresno Los AngelesLong Beach -- -0.8 — -0.8** San Francisco -Oakland San Loan Jose Rest of the C i t y of L o s A n g e l e s Alameda County Alameda City -- — 1.6 Berkeley — — 0.8 — — 4.8** East Oakland — — 2.4** West Oakland — — 6.0** — — 1.2** — — 2.0** Marin County -- — 1.2** San Francisco — -- City of San Jose -- — Central Oakland (AR) R e sC to u nof ty Alameda Contra Costa County A p p r a i s e d V a l u e to P u r c h a s e P r i c e for Reference Point — Constant e from Equation 1.136 (-54.4) 1.052 (-20.8) -1.2** -- -0.4 1.043 (-17.2) 1.236 (-94.4) a) O n e a s t e r i s k (*) i n d i c a t e s , t h a t t h e a p p r o p r i a t e c o e f f i c i e n t in A p p e n d i x B is s t a t i s t i c a l l y s i g n i f i c a n t a t b e t w e e n t h e f i v e and t e n p e r c e n t l e v e l . T w o a s t e r i s k s (**) i n d i c a t e t h a t t h e a p p r o p r i a t e c o e f f i c i e n t is s t a t i s t i c a l l y s i g n i f i c a n t a t the f i v e or less percent level. These are two-tail tests. b ) T h e s e a r e c o n t i n u o u s v a r i a b l e s a n d t h e n u m b e r s in p a r e n t h e s e s a f t e r t h e v a r i a b l e n a m e is t h e c h a n g e in v a l u e u s e d t o c a l c u l a t e t h e 5-14 Table 5-3 (continued) (cont'd) i m p a c t on d o w n p a y m e n t . T h e s e c h a n g e s a r e a p p r o x i m a t e l y e q u a l to t h e s t a n d a r d d e v i a t i o n s of e a c h v a r i a b l e . c) T h e s t a n d a r d d e v i a t i o n for t h e F r e s n o S M S A is o n e t e n t h t h a t in t h e o t h e r S M S A s , a n d t h i s s m a l l e r v a l u e h a s b e e n u s e d for F r e s n o . 11 11 d) A n AR after a property location indicates the neighborhood b e e n a l l e g e d to b e r e d l i n e d . has e) T h e s e r a t i o s a p p l y to a n a p p l i c a t i o n o n a b u i l d i n g t h a t is n e w and neither a condominium or cooperative with a purchase price u n d e r $ 3 0 , 0 0 1 l o c a t e d in a s u b u r b a n n e i g h b o r h o o d t h a t h a s z e r o values of all the continuous v a r i a b l e s and the applicants are a m a l e - f e m a l e c o u p l e w i t h a w o m a n b e y o n d c h i l d b e a r i n g a g e w h o is 35-44 y e a r s o l d a n d w h i t e . T h e n u m b e r s in p a r e n t h e s e s a r e t h e p e r c e n t a g e c h a n g e in d o w n p a y m e n t d u e to t h e o v e r or u n d e r app r a i s a l of t h i s b u i l d i n g . 4-15 w i t h building age beyond one year. A l t h o u g h t h e r e is a s l i g h t u p w a r d t r e n d in d o w n p a y m e n t as b u i l d i n g a g e r i s e s a b o v e o n e y e a r , it is n o t a s p r o n o u n c e d as the p u r c h a s e p r i c e relation- ship. With one exception (1977 F r e s n o ) , c o n d o m i n i u m s and tive dwelling units are systematically underappraised. A s a re- s u l t , d o w n p a y m e n t s o n t h e s e u n i t s a r e 0.4 to 4.4 p e r c e n t than d o w n p a y m e n t s on otherwise similar single-family higher dwellings. A p p r a i s a l practices do not vary greatly with the hood characteristics. coopera- neighbor- M o s t of t h e s e v a r i a b l e s h a v e the expected n e g a t i v e r e l a t i o n s h i p w i t h the a p p r a i s e d v a l u e to p u r c h a s e ratio. price D I N C 7 5 7 0 is the o n l y s u b s t a n t i a l d e v i a n t , b u t its p o s i - t i v e v a l u e s a r e c l o s e to z e r o a n d s t a t i s t i c a l l y i n s i g n i f i c a n t the ten percent level. Although a little less than half at the neighborhood coefficients are statistically significant, all but one imply downpayment changes with magnitudes below 2.5. c e p t i o n is D H H 7 5 7 0 for 1978 F r e s n o (-6.0 p e r c e n t ) . A T h e ex- two-percent c h a n g e in d o w n p a y m e n t on a $ 1 0 0 , 0 0 0 h o u s e w i t h a n 80 p e r c e n t loan to a p p r a i s e d v a l u e r a t i o is $ 4 0 0 . N e a r l y t w o - t h i r d s of the changes in d o w n p a y m e n t , w h i c h a r e b a s e d o n s t a n d a r d d e v i a t i o n s in the samp l e s , a r e u n d e r 1.0 p e r c e n t (less t h a n $200 for the $100,000 house). T h e r e m a i n d e r of o u r d i s c u s s i o n is d e v o t e d to the discrimination measures. Sex M a l e - f e m a l e a p p l i c a n t s w i t h a w o m a n of c h i l d b e a r i n g (MFCB) a n d m a l e o n l y a p p l i c a n t s (MONLY) r e c e i v e age approximately the s a m e t r e a t m e n t in the a p p r a i s a l p r o c e s s as m a l e - f e m a l e 4-16 a p p l i c a n t s w h e r e t h e w o m a n is n o t of c h i l d b e a r i n g a g e O n l y o n e of t h e s e 16 c o e f f i c i e n t s is s t a t i s t i c a l l y (1977 L o s A n g e l e s - L o n g B e a c h ) , a n d it (MFNCB). significant (MONLY) is so s m a l l in m a g n i t u d e t h a t d o w n p a y m e n t i n c r e a s e s by o n l y 0.4 p e r c e n t , or $40 o n a $ 1 0 0 , 0 0 0 house. T h e e v i d e n c e , h o w e v e r , d o e s i n d i c a t e t h a t t h e p r o p e r t i e s of f e m a l e o n l y a p p l i c a n t s w i t h n o o n e of c h i l d b e a r i n g a g e are systematically underappraised. (FONLYNCB) A l l of its c o e f f i c i e n t s are p o s i t i v e a n d a l l b u t o n e a r e s t a t i s t i c a l l y s i g n i f i c a n t at the five o r t e n p e r c e n t l e v e l . A l t h o u g h m o s t of t h e m a r e s m a l l in m a g n i t u d e , o n e is q u i t e l a r g e relatively (1977 F r e s n o ) a n d results in a 6.4 p e r c e n t i n c r e a s e in t h e d o w n p a y m e n t w i t h an 80 p e r c e n t l o a n to a p p r a i s e d v a l u e r a t i o . On a $ 1 0 0 , 0 0 0 h o u s e , t h i s w o u l d be $1,280. T h e o t h e r c o e f f i c i e n t s lead to a 0.8 to 2.4 i n c r e a s e in downpayment. percent F e m a l e o n l y a p p l i c a n t s w i t h s o m e o n e of c h i l d b e a r i n g age CB25-34) cases: (FONLY- face s t a t i s t i c a l l y s i g n i f i c a n t u n d e r a p p r a i s a l in three 1977 L o s A n g e l e s - L o n g B e a c h , a n d 1977 a n d 1978 San Fran- cisco-Oakland. H o w e v e r , t h e y face s i g n i f i c a n t o v e r a p p r a i s a l s S a n J o s e p r o p e r t i e s in 1 9 7 8 . on T h e c h a n g e s in d o w n p a y m e n t are be- t w e e n a 2.0 p e r c e n t d e c r e a s e a n d a 1.6 p e r c e n t increase. It is a l s o i m p o r t a n t to a s s e s s t h e i m p a c t of s u c h d i f f e r e n t i a l s on the p r o b a b i l i t y of d e n i a l . O n e a p p r o a c h is to a s s u m e a c o n s t a n t d o w n p a y m e n t a n d to a d j u s t the r e q u e s t e d l o a n to appraised value ratio. In t h i s w a y , a 2.5 p e r c e n t underappraisal, w h i c h w o u l d h a v e i n c r e a s e d d o w n p a y m e n t by 10 p e r c e n t , trans- l a t e s i n t o a r e q u e s t e d l o a n to a p p r a i s e d v a l u e r a t i o of i n s t e a d o f 80 p e r c e n t . 82.05 A s a r e s u l t , t h e c h a n c e s of d e n i a l 4-247 would rise (Chapter 3). In t h e L o s A n g e l e s — L o n g B e a c h . a r e a , a 2 . 0 5 p e r c e n t a g e p o i n t i n c r e a s e in t h e r e q u e s t e d l o a n t o appraised v a l u e r a t i o w o u l d l e a d t o a d e n i a l r a t i o o f 1 . 1 3 for t h e typical applicant (Chapter 3). N o n e of t h e s e x o r o t h e r discrimination v a r i a b l e s p r o d u c e c h a n g e s in d o w n p a y m e n t a s l a r g e a s 10 t h e l a r g e s t is 6.4 p e r c e n t w h i c h w o u l d i n c r e a s e t h e percent; requested l o a n to v a l u e r a t i o b y 1.3 p e r c e n t a g e p o i n t s a n d l e a d to a d e n i a l r a t i o o f 1 . 0 8 in t h e L o s A n g e l e s - L o n g B e a c h area. metropolitan T h e 2 p e r c e n t i n c r e a s e s in d o w n p a y m e n t t h a t a r e m o r e com- m o n for t h e d i s c r i m i n a t i o n v a r i a b l e s in T a b l e s 5 - 2 a n d 5 - 3 w o u l d i n c r e a s e t h e r e q u e s t e d r a t i o b y o n l y 0.4 p e r c e n t a g e p o i n t s l e a d t o a d e n i a l r a t i o o f 1 . 0 2 in t h e s a m e m e t r o p o l i t a n indeed a small e f f e c t on the chance of and area, denial. Race A p p r a i s e d v a l u e t o p u r c h a s e p r i c e r a t i o s for b l a c k cants are not significantly different than those for situated white appli- similarly applicants. T h e p r o p e r t i e s of S p a n i s h a p p l i c a n t s , h o w e v e r , t e n d to b e systematically underappraised applicants. T h e l a r g e s t d i f f e r e n t i a l o c c u r s in t h e m e t r o p o l i t a n a r e a in 1 9 7 8 — payment. relative to those of similar Fresno a 3.6 p e r c e n t i n c r e a s e in t h e d o w n - The other differentials are smaller. In t h e S a n c i s c o - O a k l a n d m e t r o p o l i t a n a r e a t h e e v i d e n c e is c o n s i s t e n t s y s t e m a t i c u n d e r a p p r a i s a l in 1978 b u t i n c o n s i s t e n t in 1 9 7 7 ; c o e f f i c i e n t s are statistically significant at the ten l e v e l a n d a p p r o x i m a t e l y e q u a l in m a g n i t u d e . white Franwith both percent 4-18 T h e r e s u l t s for A s i a n a p p l i c a n t s p a r a l l e l t h o s e for S p a n i s h a p p l i c a n t s b u t t h e c o e f f i c i e n t s are s m a l l e r and f e w e r of t h e m are statistically significant. T h e r e is n o s u p p o r t for the p r o p o s i t i o n t h a t t h e properties of o t h e r m i n o r i t i e s a r e e i t h e r s y s t e m a t i c a l l y o v e r - or u n d e r a p p r a i s e d r e l a t i v e to t h o s e of s i m i l a r w h i t e applicants. A g e of t h e A p p l i c a n t A l t h o u g h a few of t h e a g e c o e f f i c i e n t s a r e s t a t i s t i c a l l y sig- n i f i c a n t , t h e i r m a g n i t u d e s a r e s m a l l a n d no p a t t e r n of age related u n d e r - o r o v e r - a p p r a i s a l is e v i d e n t . Redlining A l l e g a t i o n s t h a t s p e c i f i c n e i g h b o r h o o d s a r e r e d l i n e d were a v a i l a b l e to us for the L o s A n g e l e s - L o n g B e a c h a n d S a n Francisco- O a k l a n d , b u t n o t t h e F r e s n o a n d San J o s e , m e t r o p o l i t a n a r e a s . The L o s A n g e l e s - L o n g B e a c h a l l e g a t i o n s a r e b a s e d o n a r e p o r t reviewing the e n t i r e m e t r o p o l i t a n a r e a , w h i l e t h o s e for the S a n Francisco- O a k l a n d a r e a are b a s e d on a s t u d y r e s t r i c t e d to the C i t y of Oakland. 1 T h e r e s u l t s for b o t h y e a r s a r e c o n s i s t e n t w i t h t h e s e alleg a t i o n s in four c a s e s : East Los Angeles-Boyle Heights-Echo H i g h l a n d P a r k , P o m o n a , and C e n t r a l O a k l a n d . Systematic p r a i s a l of p r o p e r t i e s in t h e s e n e i g h b o r h o o d s i n c r e a s e s m e n t s b y 3.2 to 6.8 underapdownpay- percent. P r o p e r t i e s in o l d e r n e i g h b o r h o o d s a r e s y s t e m a t i c a l l y a p p r a i s e d w h i c h r e s u l t in s l i g h t l y l o w e r d o w n p a y m e n t s . n e a r l y a l l of t h e c o e f f i c i e n t s a r e s t a t i s t i c a l l y Park, over- Although significant, 4- 19 their magnitudes are small. The racial composition of the neighborhood affects appraisal practices in both directions. While a ten percentage point in- crease in the fraction of the population that is Spanish leads to underappraisal and slight (0.4 to 1.2 percent) increases in downpayments, the same increase in the fraction that is black leads to overappraisal and as much as a 5.8 percent reduction in downpayment. The effect of changes in the fraction Asian are small ex- cept in Fresno where there is very little variation in this variable . SUMMARY The major differentials in appraisal practices vary with the purchase price and building age. New buildings or buildings sel- ling for less than $30,001 are overappraised. Higher - priced buildings are increasingly underappraised relative to those priced under $30,001. Although there are many household types who receive statistically significant underappraisals of their properties, the magnitudes are generally small and result in less than two percentage point increases in downpayment. Female only applicants with no one of childbearing age are an exception; underappraisal of their properties raises their downpayments by 6.4 percent in the Fresno metropolitan area in 1977. Some of the neighborhoods alleged to be redlined are another exception. Properties in the East Los Angeles-Boyle Heights-Echo Park, Highland Park, and Pomona areas of Los Angeles and in Central Oakland are sufficiently underappraised to raise down payments by 3.2 to 6.8 percent. 4- 20 Footnotes - Chapter 5 1. The redlining allegations are derived from Where the Money Is: Mortgage Lending, Los Angeles County (Los Angeles: The Center for New Corporate Priorities, 1975) as reprinted in Hearings on the Home Mortgage Disclosure Act of 1975, U.S. Senate, Committee on Banking, Housing and Urban Affairs, 94th Cong., 1st sess. (May 5-8, 1975); and William M. Frej, "Discriminatory Lending Practices in Oakland" in Hearings, ibid. Chapter 6 DECISION TO LEND IN NEW YORK The evaluation of applications for loans on specific properties to distinguish the different risks of loss among them represents a major part of the residential lending process. In general, lenders approve those applications having the lower risks of loss provided there are enough funds in the portfolio for this type of investment; the other applications are rejected. (Although this description of the lending process indicates sequential steps, the actual process is interactive. For example, if most of its residential mortgage applications have high risks of loss, a bank may decide to reduce that portion of its portfolio available for residential mortgages). When receiving an application for a mortgage, a lender must decide whether to approve the application as received, approve it with sane modification in terms, or turn it down. Lenders may discourage the submission of formal applications from applicants who, they believe, will likely be denied. Apnlioants may also withdraw their applications prior or subsequent to a lender's decision. In Chapter 2, a lender's decision on a mortgage application was viewed as a function of the creditworthiness of the borrower, the quality of the collateral, and the requested terms of the mortgage. In this chapter, we report estimates of this decision to lend model. DATA BASE AND MODEL DESCRIPTION All state-regulated lenders in New York State are required to maintain detailed data on applicants for mortgages on one-to-four family houses. 6-2 The state's banking department prescribes the form of the information through its Equal Housing Opportunity Lender (EHOL) form. form contains the following information: The gross annual income of the applicant, years at present occupation (separate answers for applicant and joint applicant), amount of outstanding debts, monthly debt payments, purchase price of subject property, whether or not the subject property will be owner occupied, race or national origin of applicant and joint applicant, age of the applicant and joint applicant, type of loan, exact dollar amount of the requested loan, requested loan-to-appraised value ratio, action taken by lender, modified loan amount and modified loan-to-value ratio in case of approval with modified terms, reasons for the decision, and the census tract in which property is located. Since April 1977, the EHOL form has also recorded the sex and marital status of the applicant and joint applicant. Many of these items have categorical responses; for example, income is reported as being within one of five possible ranges. Four types of lender action on mortgage applications are identified on the EHOL forms: approved as applied for, approved after modifications, denied, and withdrawn by the applicant. In many cases, lenders indicated that a modified approval was rejected by the applicant by checking both the modified and withdrawal responses on the form. We were only able to separately analyze rejected modifications in one case: mutual savings banks in the New York and Nassau-Suffolk metropolitan areas The lack of information on applicants who were discouraged from making a written application could create a methodological problem for this study. Under the New York State Banking Department's 4- 3 Supervisory Procedure G-107, every banking organization is required to maintain an EHOL form on all written applications, Unfortunately, this regulation does not clearly delineate the circumstances under which a written application is required. However, the regulation may act to minimize the practice of informal screening, although the opposite effect, obviously, is also possible. As long as there are an adequate number of modified approvals, denials, and withdrawals within the formal applications, the explanations for these three actions should reflect the bases for discouraging formal applications. For example, if the analysis of denials indicates the exis- tence of racial discrimination, discrimination is also a likely factor in deciding which applicants should be discouraged from applying. A lender would not likely discriminate against formal applicants and not against informal ones. However, if the statistical analysis does not indicate the existence of discrimination, it is still possible that lenders use a different set of criteria, including sex or race, in their informal screening of applicants. For this study, EHOL forms were gathered for mortgage applications made between May 1977 and October 1978 at state regulated commercial banks and savings and loan associations with branches located in the five largest metropolitan areas, Albany-Schenectady-Troy, Buffalo, New York-Nassau-Suffolk, Rochester, and Syracuse. Sex and marital status information was a required part of the form throughout this period. In addition, as part of our earlier study, EHOL forms were collected from all mutual savings banks with branches in these same five areas for all applications filed between May 1976 and October 1977. Since EHOL forms from 4- 4 mutual savings banks in the New York-Nassau-Suffolk area with no branches in Bronx, Kings (Brooklyn), or New York (Manhattan) counties were not analyzed in the earlier study; their analysis is included in this study. Results from the earlier study are shown alongside the present study's results to facilitate an overall picture of lending practices by New York state regulated banks. Since sex and marital scatus were not required by the EHOL form that was in force during most of the period covered by the mutual savings bank data, we were only able to analyze these factors in one metropolitan area. In the New York-Nassau-Suffolk area a sufficient number of applications using the newer EHOL form are available that discrimination on the basis of sex and marital status can be analyzed. The EHOL forms are supplemented by 1970 census data matched to each FID J, response using the census tract number provided on the forms, and the National Planning Data Corporation's census tract estimates of 1977 population and 1976 income. Model Description In general, four outcomes of the lending behavior of New York banks can be studied: approved as applied for, approved with modifications, denied and withdrawn. The primary form of modification in our samples is an alteration of the loan amount, generally, but not always below the requested amount. Other modifications include adjustment of the maturity period. The lender's decision depends on the creditworthiness of the borrower, the quality of the collateral and the requested terms of the mortgage. Various measures of financial and neighborhood characteristics are used to capture the influence of these factors. The financial characteristics are income, net wealth, years at present occupation, requested loan amount in relation to annual income, and the ratio of the requested loan amount to the appraised value of the property. The risk of loss should decline as the income and net wealth of a 6-5 household increase. Years at present occupation is included in the bclioT that it will serve as an indicator of the stability of an applicant's croc'it w o r t h i n e s s ; the a p p l i c a n t ' s income and other m e a s u r e s of creditw o r t h i n e s s should b e m o r e stable (have smaller v a r i a n c e ) as the 2 y e a r s of e x p e r i e n c e i n c r e a s e . Risk should rise as the a m o u n t oC r e q u e s t e d loan r i s e s r e l a t i v e to income or a p p r a i s e d v a l u e . Al- though e x p e r i m e n t a t i o n w i t h d i f f e r e n t m e a s u r e s of the e f f e c t of income in C a l i f o r n i a showed t h a t the r a t i o of requested loan aiiou-.i: to income p e r f o r m e d the b e s t , the c a t e g o r i c a l r e s p o n s e s of the now Y o r k data p r e v e n t r e p l i c a t i o n of the v a r i a b l e used in C a l i f o r n i a . I n s t e a d , the N e w Y o r k models include s e v e r a l d u m m y v a r i a b l e s that represent various income categories and one dummy variable that crudely indicates w h e t h e r or n o t the loan a m o u n t is m o r e than two times annual income.^ N e i g h b o r h o o d c h a r a c t e r i s t i c s are included to c o n t r o l for risl. of loss in the v a l u e of p r o p e r t y r e s u l t i n g from h o u s i n g m a r k e t externalities. A l t h o u g h it w o u l d b e ideal to ipclude d i r e c t mea- sures of t h e s e e x t e r n a l i t i e s such as w h e t h e r or not the subject p r o p e r t y is a d j a c e n t to a v a c a n t b u i l d i n g , this is g e n e r a l l y imp o s s i b l e b e c a u s e the r e q u i s i t e information is u n a v a i l a b l e . There- f o r e , n e i g h b o r h o o d c o n d i t i o n s are proxied b y m e a s u r e s of the income of r e s i d e n t s , c h a n g e in income and p o p u l a t i o n , and m o r t g a g e forec l o s u r e and d e l i n q u i n c y r a t e s . T h e s e v a r i a b l e s are calculated for b-6 the census tract containing the subject property. Risk of loss should be lower in neighborhoods with more higher income residents and higher in those with higher average foreclosure and delinquency rates. In general, neighborhoods with larger increases in average income and population should have rising property values and less risk of loss in value. The New York model only includes one requested term (loan to appraised value ratio) because the forms do not provide information on interest rate and maturity period. The interest rate, how- ever, is unlikely to vary much across neighborhoods because the low maximum rate permitted by the New York State usury law applied to nearly all the mortgages covered by the EHOL forms and the credit market was very tight during the period being analyzed. Two of the four lender actions have clear meaning: as applied for and denial. approved The other two (modification and with- drawal) are somewhat ambiguous. One of the four must be selected as the reference to which the other three will be compared. Since it is important that this reference action have a clear meaning in relation to all other actions, the job falls to applications that are approved as applied for (i.e., approved with the terms requested by the borrower). The likelihood of a lender deciding to deny an application for a conventional mortgage loan should decrease as an applicant's income and wealth increase. The probability of denial should in- crease as the quality of the collateral decreases (e.g., as the loan-to-appraised value ratio increases). Differences in the risk of loss associated with the borrower and the subject property 6-7 may be offset, to some extent, by modifications in the terms of the mortgage (i.e., interest rate, maturity, and down payment). It is more difficult, however, to relate each of the independent variables to a lender's decision to modify the terms. For example, although it would be natural to expect the probability of modification to increase as income decreases, applications from higher income households trying to maxiinize their leverage might produce the opposite effect. They may apply for mortgage amounts in excess of what their income justifies in order to secure the largest possible mortgage. Modifications can be subdivided, as in California, into downward and upward movements in the requested loan amount. In New York, however, nearly all the modifications are downward and separate analysis of upward modifications is not possible. It should be remembered, however, that if such a division were analyzable, the downward category would not be a clear case of adverse action. A downward modification could be the result of an appli- cant's request (e.g., desire to maximize equity in house and revised plans as to the amount of household funds that can be allocated to this function). Unlike California, New York modifications can be subdivided into ones that were accepted and ones that were subsequently withdrawn. This division is analyzable in one case (mutual savings banks in the New York-NassauSuffolk area). As a result, it is possible to examine Regulation B's definition of adverse action (denials or modifications unacceptable to the applicant). However, it is important to recognize} that modifications which have not been accepted by the applicant 6-8 are not necessarily adverse actions. The bank may have treated the applicant similar to other similarly situated applicants at that bank but the applicant may have received a better offer elsewhere or the sale may have fallen through. When modification is used in the following pages, it includes those withdrawals by the applicant as well as those accepted by the applicant. The relationship between the independent variables and the applicant's decision to withdraw prior to bank action is even more ambiguous. of reasons. The application could be withdrawn for a variety For example, the lender may have suggested that the appli- cation will not be successful or the applicant may have succeeded in obtaining financing from another institution. To ascertain whether discrimination on the basis of sex, race, marital status or age of the applicant, or property location exists in mortgage lending, variables along the lines discussed in Chapter 2 are also included in the models. Sample Characteristics Versions of the preceeding model have been estimated for different types of banks in several metropolitan areas. Small samele sizes limited the ability to look at each type of bank in all i.ivc metropolitan areas. All three bank types can be separately ana- lyzed only in the New York-Nassau-Suffolk metropolitan areas. Commercial banks and mutual savings banks can be analyzed in the Buffalo area; mutual savings banks and savings and loan associations in the Rochester area; and mutual savings banks in the Alb.mySchenectady-Troy and in the Syracuse metropolitan areas. Commer- cial banks in three upstate areas (Albany-Schenectady-Troy, Rochester and Syracuse) can be analyzed only if the areas are combined. 6-9 Although there is some savings and loan association activity in Buffalo and Syracuse, the sample is too small to analyze. The samples have been limited to applications for conventional mortgages on properties intended to be owner-occupied. Applica- tions for federally assisted mortgages have been excluded because the involvement of a third party, the government, substantially affects the decision-making process, and the EHOL forms do not identify which actor was making the decision. In any case, there are not enough observations to separately analyze such applications at commercial banks or savings and loan associations/ Applications on properties not to be owner-occupied are excluded because most rental properties are not covered by the EHOL forms; as a result, 0.8 to 5.6 percent of the observations are excluded depending on the type of bank and the metropolitan area. Applications that indicated they were for refinancing (i.e., written comment to this effect or nonresponse to the purchase price question) have also been excluded because they do not involve a property transaction and the form lacks the information necessary to analyze these decisions. Again, only a small percentage of the forms were affected. The final sample sizes (after eliminating forms with critical nonresponses) are summarized in Table 6-1. RESULTS Our multinomial logit estimates of lender behavior for six bank and metropolitan area combinations are reported in Appendix C. (Complete variable definitions are presented in Appendix A.) Logit estimates for mutual savings banks in four upstate metropolitan areas 6-10 Table 6-1 Number of Observations by Bank Type and Metropolitan Area: New York State Number Albany-Schenectady-Troy SMSA Mutual Savings Banks 6,173 Albany-Schenectady-Troy, Rochester and Syracuse SMSAs Commercial Banks 2,586 Buffalo SMSA Commercial Banks 1,434 Mutual Savings Banks 7,408 New York and Nassau-Suffolk SMSAs Commercial Banks Mutual Savings Banks Large sample without sex and marital status Small sample with sex and marital status Savings and Loan Associations 4,919 18,696 4,131 2,170 Rochester SMSA Mutual Savings Banks 3,047 Savings and Loan Associations 1,304 Syracuse SMSA Mutual Savings Banks 2,695 6-11 are reported in an earlier study. The following discussion presents the implications of our current results and those from the earlier study for a typical application and key variations in its characteristics. We have defined the typical application as one from a household with an annual income in the $15,001 to $25,000 range, very good net wealth (i.e., reported assets were two or more cetagories above reported debts), and a wage earner with more than five years in his/her present occupation. These characteristics are typical in the sense that a plurality of applicants possessed these characteristics in all but two cases.6 The per- centage of applicants with income between $15,000 and $25,000 (INC15-25) ranges from 23 to 57, with very good net wealth (VGNW) ranges from 68 to 92, and with more than 5 years experience (0CCGT5) ranges from 59 to 70. Furthermore, the typical application is from an all-white household (84 to 96 percent of all applications), an applicant between the ages of 3r) and 44 (23 to 28 percent of all applications), a male-female couple with the female applicant beyond childbearing age (over 34 years old) and not working (5 to 9 percent of all applications) , and married persons (79 to 86 percent of all applications). These characteristics were selected because they describe a household which is least likely to be the target of discrimination, if any exists. Therefore, they do not always represent a plurality of all applications. The major exceptions to the plurality rule are age of applicant and the age and work status of the woman. The selection of these characteristics result from a desire to compare working to nonworking women and childbearing io nonchildbearing women. Our typical applicant is also defined by the average values of all the continuous variables for applications to that type of bank in the metropolitan area being studied: requested loan to appraised value ratio, fraction high income households, inccme and population change, foreclosure and delinquency 6-12 rates, age of neighborhood, and racial composition of neighborhood. These values are summarized in Table 6-2. In addition, requested loan amount is assumed to be less than two times annual income (96 to 98 percent of all applications) , and the property is located in a suburb. The treatment accorded applications with different characteristics than the typical application are compared to the treatment received by the typical application. The treatment is measured by the probability of a given decision such as denial or modification. These probabilities can be calculated from the logit estimates.^ In general, we report comparisons in terms of the ratio of the probability of a given decision for an application with certain characteristics to the probability of that decision for the typical application. The probabilities of each decision for the typical application are presented in Table 6-3. They vary considerably by type of bank and across metropolitan areas. It is for this reason that ratios must be used to compare the differential impact of discrimination measures on outgomes across banks and areas. Since the denial of an application is clearly an adverse decision, the following discussion focuses on these results. Al- though modification has a somewhat ambiguous meaning, it is clearer than the meaning of a withdrawn application. Therefore, the modi- fication results are summarized and discussed below, but the withdrawal results are only discussed when the equations indicate withdrawal to be more likely for one of the potentially discriminated against groups. Financial Characteristics The financial characteristics serve the purpose of controlling for the risk of loss associated with the creditworthiness of the applicant, the value of the property, and the requested loan terms. 6-13 Table 6-3 Probability of Various Outcomes for the Typical Application: New York State Denial Modification Withdrawn 1 5.03 3.88 3.06 3.08 5.78 1.29 Commercial Banks 4.74 2.66 2.49 Mutual Savings Banks 6.49 4.56 3.80 Commercial Banks 9.12 14.42 8.04 Mutual Savings Banks 6.83 17.39 4.81 Savings and Loan Associations 4.38 0.53 0.66 Mutual Savings Banks 2.81 4.14 3.2 I Savings and Loan Associations 3.55 0.68 0.9 7 4.71 3 . 23 Albany-Schenectady-Troy SMSA Mutual Savings Banks Albany-Schenectady-Troy, Rochester and Syracuse SMSAs Commercial Banks Buffalo SMSA New York and Nassau-Suffolk SMSAs Rochester SMSA Syracuse SMSA Mutual Savings Banks 2.9 f, Table 6-2 Mean Values of Continous Variables by Type of Bank and Metropolitan Area RLTOAV FHI DINC DPOP FORRATE DELRATE PRE1940 FBLACK Albany-Schenectady-Troy SMSA Mutual Savings Banks 0 . 80 0.25 4 . 58 1.97 0 .17 2.16 0.47 0.008 Albany-Schenectady-Troy, Rochester and Syracuse SMSAs Commercial Banks 0.69 0 . 30 4 .96 2.14 0 .52 2.60 0.43 0.007 Buffalo SMSA Commercial Banks 0.68 0.26 5.08 1.82 0 .04 0.51 0 .39 0.009 0 .73 0.23 4 . 81 1.80 0. 39 0 .97 0.39 0.011 0 . 69 0.71 0.69 0.43 0.37 0 . 34 5.76 5.89 5.70 1.73 1.71 2. 51 0. 49 0 .97 1. 69 2.73 2.67 3 . 09 0.39 0.43 0.42 0 .028 0.038 0.037 Mutual Savings Banks 0.70 0 .38 5.66 2 . 53 2.99 0.36 0.008 Savings and Loan Assoc. 0.73 0 .34 5 .45 2 .48 0 .12 0 .08 2. 25 0 .42 0 .008 0 . 77 0 . 22 4.96 2 .43 4 .43 7 . 88 0.40 0.004 Mutual Savings Banks New York and Nassau-Suffolk SMSAs Commercial Banks Mutual Savings Banks Savings and Loan Assoc. Rochester SMSA Syracuse SMSA Mutual Savings Banks 6-±5 In general these variables have the expected relationship to lender behavior and are highly significant. Table 6-4 presents denial ratios for the typical application and variations in its characteristics that should make it more likely to be denied. As a result, the ratios in all but the first column should be greater than one; there are only 9 exceptions. The requested loan to appraised value ratio is the most consistent variable; it has a positive coefficient in all the denial equations. All but one of these coefficients are large and very significant; the exception g occurs for mutual savings banks in Rochester. The coefficients in the modification and withdrawal equations closely follow the same pattern. This positive coefficient indicates that an application is more likely to be denied, modified, or withdrawn the higher the requested loan amount relative to the appraised value of the property. The income coefficients indicate that the likelihood of denial increases by a statistically significant amount as income decreases except for savings and loan associations in the New York and NassauSuffolk metropolitan areas. The income coefficients have mixed signs in the modification and withdrawal equations which is probably due to the ambiguity of these decisions. As a result, the denial equations contain the best information on the performance of the risk measures. When requested loan amount exceeds two times income, the likelihood of denial should increase. This is the situation in seven Table 6-1 Denial Ratios for Several Different Applications Relative to the Typical Applicant 5 Typical Applicant b (TA) TA with TA with less less net income wealth (INC10-15) (GNW) TA with less experience (0CCLT3) TA with re- TA with quested higher loan 2 RLTOAV times income (+0.10) Albany-Schenectady-Troy SMSA Mutual Savings Banks 1.00 1.50** 1.42** 1.05 1.63** 1.27** 1.0 0 2.41** 1.79** 1.19 0.23** 1.43** Commercial Banks 1.00 19.08** 1.13 1.11 0.92 5.29** Mutual Savings Banks 1.00 1.46** 1.28** 1.13 1.52** 1.12** Commercial Banks 1.00 1.54** 0. 96 1.52** 1.66* 1.06** Mutual Savings Banks 1.00 1.25** 1.43** 1.37** 1.57* 1.37** Savings and Loan Assoc. 1.00 1.13 1.34** 1.18 3.07* 1.14** Mutual Savings Banks 1.00 1.72* 1.92 1.29 0 . 00 1. 10 Savings and Loan Assoc. 1.00 1.17** 1.51** 1.34 3.28** 1. 3 0 * * 1.00 1. 00 c 1.08 1.03 1.34 1.16** Albany-Schnectady-Troy, Rochester and Syracuse SMSAs Commercial Banks Buffalo SMSA New York and Nassau-Suffolk SMSAs Rochester SMSA Syracuse SMSA Mutual Savings Banks Table 6-4 (continued) a) The mutual savings banks estimates are derived from 1976-1977 applications data while the other estimates are based on 1977-1978 mortgage applications. The ratio is equal to the probability that an application with indicated characteristics will be denied divided by the probability that the typical application will be denied. A single asterisk (*) indicates that the coefficients used to estimate the numerator and denominator are statistically significant at the five-to-ten percent level. Two asterisks (**) indicates they are significant at the five or less percent level. b) This is the typical application described in the text. It is the base for calculating the denial ratios. The other applications involve variations frcm the typical one in one or more characteristics. See Table 6-3 for the probability of denial for the typical application in each bank type-area. c) Although there is no statistically significant difference between applicants with $15,001 to $25,000 in annual income and applicants with $10,001 to $15,000 incomes, applicants with lower incomes (under $10,001) are statistically significantly (five percent level) more likely to be denied than higher income applicants. 6-18 cases (six of them statistically significant at the ten perccnt level); the three exceptions are commercial banks in the com- bined upstate area (the only statistically significant exception) and the Buffalo metropolitan area, and mutual savings banks in the Rochester metropolitan area. Applications are more likely to be denied the smaller the applicant's net wealth with one exception: commercial banks in the New York-Nassau-Suffolk metropolitan area. In six of the nine cases with the expected negative relationship between the likelihood of denial and net wealth, the coefficients are statistically significant at the five percent level. Although the coefficients for the years at present occupation variables (reported in Table 6-4) indicate that less experience increases the likelihood of denial in all ten bank type-areas, they are only significant in two (commercial and mutual savings banks in the New York-Nassau-Suffolk metropolitan area). Neighborhood Characteristics The neighborhood characteristics have been included to control for the effect of housing market externalities on the future value of the property securing the loan. The coefficients of these variables are not consistent across metropolitan areas. The fraction of households with high income (FHI) and the change in income (DINC) in the census tract containing the property are the most consistent. For example, FHI and DINC have the expected 6-19 negative relationship with the likelihood of denial in all but three and tw# cases, respectively. However, these negative rela- tionships are statistically significant (five percent level) in only three bank type-areas for FHI and two for DINC, and the positive relationship is,statistically significant for each variable in one bank type-area (savings and loan associations in the New York-Nassau-Suffolk area for FHI and commercial banks in the combined upstate areas for DINC). Contrary to expectations, the change in population is positively related to the likelihood of denial in most of the bank type-areas and significant in two of them. This may reflect the effect of past instability in future uncertainty. One of the three negative relationships is statistically significant. The coefficients of the two direct measures of the risk of loss on mortgages in the census tract (the foreclosure and delinquency rates) aiNe the most disappointing. The results indicate that the likelihood of denial decreases more often than it increases when the foreclosure rate rises - a result which is statistically significant (five percent level) in two bank typeareas and contrary to our expectations. It is probably a reflec- tion of foreclosure policies rather than differentials in the risk of loss. Foreclosure policies vary across lenders, even within the same bank type, and frequently exhibit a lender fs reluctance to show large losses through the foreclosure route. Consequently, the foreclosure rate may not accurately reflect the risk of loss in lending. The delinquency rate is not subject to the vagaries of bank policy and its coefficients show that the likelihood of denial increases more often that it decreases when the delinquency 6 - 20 rate rises. And three of these coefficients are statistically significant at the five percent level. However, the ^delinquency rate coefficient for savings and loan associations in the New York-Nassau-Suffolk area is significantly negative (smaller chance of denial as delinquency rate rises) at the five percent level. Fortunately, at least one of the neighborhood characteristics has a statistically significant (five percent level) coefficient with the expected relationship to the likelihood of denial in all but two bank type-areas. In one of the bank type-areas none of the neighborhood characteristics variables have significant coefficients. Also, the savings and loan associations in the New YorkNassau-Suffolk area have three statistically significant neighborhood coefficients in the denial equation that are inconsistent with the risk hypothesis. Commercial banks in the combined up- state area and mutual savings banks in the Albany-SchenectadyTroy metropolitan area have statistically significant coefficients in the denial equation that are consistent and inconsistent with the risk hypothesis. Sex and Marital Status Each equation contains nine variables that measure sex and marital status differences across applications. these coefficients define 13 In combination, different types of applications which are used to illustrate the results. Their denial and modi- fication ratios are presented in Tables 6-5 and 6-6. 6-21 Table 6-5 Denial Ratios by Sex and Marital Status for a Typical Application: New York State 3 AST-ROCH-SYR COM BUF COM COM NYNS MSB SLA RQC!1 SLA 1.00 1.00 1.00 1.00 1.00 1.00 1.65 2.26* 1.06 1.24 0. 54** 0. 93 Married MFNCBNW b MFNCBW MFCBNW (25-•34) 0.58° 1.48 0.84 0.70 0.49 1.11 MFCBW (25-•34) 0.45C 1.01c 0.83 0.78° 0.50 1.20 FONLY (25-•34) 0.35° 5.04 ** 0.47 2.06 ** 0.90° 0.00** 1.44 3.04* 1.16 2.54** 1.04 2. 0 3 * MFNCBNW 1..52 0..84 1 .65* 1 .29 0..98 3 . 58** MFNCBW 2..45 1..91* 1 .73* 1 . 58 0.. 52** 3 . 32** MFCBNW (25-•34) 0..86° 1..24 1.40 * 0.,92° 0,.48 3.88** MFCBW 0..68° 0..85° 1.36 * 1.,01° 0..49 4..18** FONLYNCB 0..74 1.. 62 1 . 00 1,.47 0 ,41 . 0 . 54 FONLYCB (25--34) 0..55° 0..33 1.04 1.05° 0..18 0.46 MONLY 2..22 1.. 68** 1.41** 1,.99** 1. 18 1..88** MONLY Unmarried or Separated (25--34) a) The mutual savings banks estimates are derived from 1976-1977 applications data while the other estimates are based on 1977-1978 mortgage applications. The ratio is equal to the probability that an application with the indicated characteristics will be denied divided by the probability that the typical application will be denied. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different than the denominator at the five-to-ten percent level. Two asterisks (**) indicates that the difference is significant at the five or less percent level. The acronyms in the column headings have the following meanings: Bank type COM - commercial banks MSB - mutual savings banks SLA - savings and loan associations 6-22 Table 6-5 (continued) Metropolitan areas AST - Albany-Schenectady-Troy BUF - Buffalo NYNS - New York-Nassau-Suffolk ROCH - Rochester SYR - Syracuse b) This is the typical application described in the text. It is the base for calculating the denial ratios. The other applications involve variations from the typical one in one or more characteristics. See Table 6-3 for the probability of denial for the typical application in each bank type-area. c) Since the ratio for MFCB or FONLYCB for the 35 to 44 year old age range of the typical application is greater than one, it is the 25 to 34 year old age range coefficient that makes the ratio in the table less than, or closer to, one. The MFCB or FONLYCB coefficient is not statistically significant at the ten or less percent level. 6-23 Table 6-10 Modification Ratios by Sex and Marital Status for a Typical Application: SEX AND MARITAL STATUS AST-ROCH-SYR COM New York State 5 BUF COM COM NYNS MSB SLA ROC 11 <: i Married MFNCBNW b 1.00 1. 00 1.00 1.00 1. 0 0 1. 0 0 MFNCBW 0.45** 0.31** 0.98 0.83 3. 61** 0. 32 MFCBNW (25--34) 0.31** 0.56 0.93 0.72 2.92** 3.74 MFCBW (25--34) 0.39* 0.21** 0.86 0.50** 2.07** 2.01ci FONLY (25--34) 0.00** 0. 00** 1.42 0.99 0 .00** 3. 17 0.61 2.49** 0.92 0.78 4. 9 4 * * 1 MFNCBNW 0.56 1.10 0.64** 0.96 1. 46 1. 0 6 MFNCBW 0.25** 0.34** 0.63** 0.78 5. 27** 0 . 34 MONLY > Unmarried or separated MFCBNW (25-•34) 0.18** 0.61 0.60** 0.69 4.27** 3.91 MFCBW (25-•34) 0.22* 0.23** 0.55** 0.48** 3.03** 2 .09d 1.00 0.67 0.97 0.80 5. 21** 0. 7 1 0.12** 0.00** 0.80 0.67 1.36 1.71 0.75 0.26** 1. 09 0 . 82 2. 77 FONLYNCB FONLYCB MONLY (25-•34) c 1 . ?1 a) The mutual savings banks estimates are derived from 1976-1977 appli cations data while the other estimates are based on 1977-1978 mortgage applications. The ratio is equal to the probability that an application with the indicated characteristics will be modified divided by the probability that the typical application will be modified. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different than the denominator at the five-to-ten percent level. Two asterisks (**) indicates that the difference is significant at the five or less perccr level. The acronyms in the column headings have the following meanings: Bank type COM - commercial banks MSB - mutual savings banks SLA - savings and loan associations 6-24 Table 6-6 (continued) Metropolitan areas AST - Albany-Schenectady-Troy BUF - Buffalo NYNS - New York-Nassau-Suffolk ROCH - Rochester SYR - Syracuse b) This is the typical application described in the text. It is the base for calculating the modification ratios. The other applications involve variations from the typical one in one or more characteristics. See Table 6-3 for the probability of modification for the typical application in each bank type-area. c) This ratio is greater than one because of the influence of the male only component and not the marital status. d) Since the ratio for MFCB or FONLYCB for the 35 to 44 year old range is less than one, it is the 25 to 34 year old age coefficient that makes the ratio in the table greater than one. The MFCB or FONLYCB coefficient is not statistically significant at the i ten or less percent level. 6-25 The results for the denial equations are inconsistent with the hypothesis that married childbearing women who work (MFCBW) are discriminated against. Although these households have a greater chance of denial than the typical applicant (MFNCBNW) in four of the six bank type-areas, none of these differences are statistically significant at the ten percent level. Married male- female households with a non-working childbearing woman (MFCBNW) are also treated much the same as the typical applicant. There is, however, some evidence that male-female households with a working female beyond childbearing age (MFNCBW) regardless of marital status, are discriminated against by Buffalo commercial banks who are approximately twice as likely to deny their applications than those from otherwise identical typical applicants. This differential is statistically significant at the ten percent level. On the other hand, savings and loan associations in the New York-Nassau-Suffolk area treat these applicants (MFNCBW) more favorably (half the denial rate of the typical application), this differential being statistically significant at the five percent level. New York-Nassau-Suffolk commercial banks and Rochester saving and loan associations disfavor unmarried or separated male-female couples regardless of the age or work status of the woman. Those applicants are 1.36 to 1.73 times as likely to be denied than the otherwise identical typical applicant by New York area commercial banks, and 3.32 to 4.18 times as likely to be denied by the Rochester savings and loan associations. Unmarried or separated female applicants are not significant! 6- 26 m o r e or less likely to b e d e n i e d than the typical a p p l i c a n t in a n y of the b a n k t y p e - a r e a s , whether or not the w o m a n is in the childbearing years. Some a p p l i c a t i o n s contained r e s p o n s e s indicating that the a p p l i c a n t ( s ) w e r e m a r r i e d b u t either all female (FONLY) or all male (MONLY). We were surprised by these responses. Some may be from persons not legally separated who are married but choose to live apart from their spouses. In addition, the spouse could be away from the household for various other reasons such as serving a jail sentence or being hospitalised on a long-term basis. However, the large number of male only married households (approximately ten percent of each sample) leads us to suspect that many of these applications involve husbands buying property in their individual names rather than jointly with their wives. Since the actual household status of these applicants is not clear, we decided to estimate coefficients for these categories to see i f they receive differential treatment. The female only married applicants are much more likely to be denied than the typical applicant at Buffalo covmercial banks and New York area mutual savings banks; the ratios of 5.04 and 2.06, respectively, are both statistically significant at the five percent level. Rochester savings and loan associations, however, virtually never deny fanal^ only married applicants in our sample. The only denial relationships consistent across all six bank type-areas < i. for male only households; regardless of marital status male only applicants more likely to be denied. Three of the six denial ratios for male only married households range in value from 2.03 to 3.04 and c*re statistically significant ai the five or ten percent level; these occur for applications at the Buffalo commercial banks, New York area mutual savings banks, and Rochester savings 6-27 and loan associations. In the case of male only unmarried or sepa- rated a p p l i c a n t s , it is the sex and not the marital status that accounts for the increased likelihood of denial except in the case of New York-Nassau-Suffolk commercial b a n k s . The modification ratios summarized in Table 6-6 show that modification of an application from one of the 13 household types is seldom more likely than modification of the otherwise identical typical a p p l i c a t i o n . Applications at New York-Nassau- Suffolk savings and loan associations are a major exception; aside from married female only households, modification is much more (1.3 6 to 5.21 times as) likely for the other household types in Table 6-6 than for the typical a p p l i c a n t . Nearly all these ratios (fifth column of Table 6-6) are statistically at the five percent level. significant Male only married applicants at Buf- falo commercial banks are the only other households that are significantly more likely to be modified than the otherwise identical typical a p p l i c a n t . A surprising result is the extent to w h i c h many household types are significantly less likely to bo modified than the comparable typical applicant. The withdrawal equations have only two statistically significant coefficients that are consistent w i t h liscrimination on the basis of the housdiold types depicted in Table 6 - 6 . Karried female only appli- cants at mutual savings banks in the New York-Nassau-Suffolk > have a w i t h d r a w a l ratio of 2.19 that is statistically significant 6-28 at the ten percent level. Unmarried or separated male only applicants at commercial banks in the combined upstate sample also have above average chances oT withdrawal. Race of the Applicant Table 6-7 presents ratios of the probability of denial for various racial groups relative to the probability of denial for the typical applicant who is white. A denial ratio greater than one indicates that members of that racial group are more likely to be denied than the otherwise identical typical (white) applicant. Applications from blacks are more likely to be denied than those from similarly situated whites in all but one of the ten bank type-areas. The exception occurs at commercial banks in the combined upstate areas, but the difference is not statistically significant at the ten percent level. Although blacks are more likely to be denied than whites at commercial banks in the Buffalo and New York-Nassau-Suffolk areas, these differences are not statistically significant at the ten percent level. Hence, we conclude that conmercial banks appear to accord black and white applicants approximately equal treatment. Mutual savings banks in contrast to the conmercial banks, hcwever, are significantly more likely to deny a black applicant than a similarly situated white in four of five metropolitan areas. These differentials are large and statistically significant; the denial ratios range from 1.58 in the New YorkNassau-Suffolk area to 3.61 in the Rochester metropolitan area. Although blacks are also more likely to be denied than whites by mutual savings banks in the Albany-Schenectady-Troy metropolitan area, the difference is not statistically significant at the ten percent level. 6-29 Table 6-7 Denial Ratios by Race of the Applicant for Typical Applications b White Black Hispanic Other Minority Albany-Schenectady-Troy SMSA Mutual Savings Banks 1.00 1.44 [^ 1.19 ^ 1.00 0.82 [< 0.35* > Commercial Banks 1.00 1.74 [< 0.54 > Mutual Savings Banks 1.00 2.06** [< 0.87 > Commercial Banks 1.00 1.18 1.07 1.35* Mutual Savings Banks 1.00 1.58** 1.90** 1.35 Savings and Loan Associations 1.00 3.15** 1.78 0.76 Mutual Savings Banks 1.00 3.61** Savings and Loan Associations 1.00 2.64* 1.00 2.56* Albany-Schenectady-Troy, Rochester and Syracuse SMSAs Commercial Banks Buffalo SMSA New York and Nassau-Suffolk SMSAs Rochester SMSA [< 1.41 1.01 > ] 0.74 Syracuse SMSA Mutual Savings Banks [< 1.04 } \ 6-30 Table 6-6 (continued) a) The mutual savings banks estimates are derived from 197C> — J ';7V applications data while the other estimates are based on l(,7 71978 mortgage applications. The ratio is equal to the probability that an application with the indicated characteristics will be denied divided by the probability that the typical application will be denied. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different than the denominator at the five-to-ten percent level Two asterisks (**) indicates that the difference is significant at the five or less percent level. b) This is the typical application described in the text. It: is the base for calculating the denial ratios. The other applications involve variations from the typical one in one or more characteristics. See Table 6-3 for the probability of denial for the typical application in each bank type-area. 6-31 The evidence from the denial equation is also consistcnt with discrimination against black applicants by savings and loun associations. The New York-Nassau-Suffolk associations are 3.1i> times as likely to deny a black applicant than a similarly situated white. In Rochester, the denial ratio is 2.64. Both arc statistically significant at the five and ten percent levels, respectively. There is less evidence of discrimination against Hispanics and other minorities from the denial equations. Hispanics arc significantly more likely to be denied than similarly situated whites in only one bank type-area; mutual savings banks in the New York-Nassau-Suffolk area have a denial ratio of 1.90. New York-Nassau-Suffolk commercial banks are significantly more likely to deny other minorities (largely Asians) than the typical white applicant by a ratio of 1.35. However, commercial banks in the combined upstate area favor Hispanics and other minorities over similar white applicants by a statistically significant margin; the denial ratio is 0.35. The results from the modification equations are summarised in Table 6-8. Although most of the modification ratios exceed one, very few of the racial differentials are statistically significant at the ten percent level. Black applicants are signifi- cantly more likely to be modified than whites at the two types of thrift institutions in the New York-Nassau-Suffolk area; the modification ratio is 1.39 at mutual savings banks and 1.54 at savings and loan associations. Hispanic applicants are also significantly more likely to have their loan requests modified than similarly 6-32 Table 6-10 Modification Ratios by Race of the Applicant for Typical Applications: New York State 5 Other Minority White b Black 1.00 0.71 [ < 1.38 -V 1.00 1.51 [ <- 1. 31 > Commercial Banks 1.00 2.82 Mutual Savings Banks 1.00 1.19 Commercial Banks 1.00 0.77 0.73 1. 17 Mutual Savings Banks 1.00 1.39** 1.07 1.06 Savings and Loan Associations 1.00 1.54** 2.20** 1. 34 Mutual Savings Banks 1.00 0.61 Savings and Loan Associations 1.00 1.20 1.00 0.01 Hispanic Albany-Schenectady-Troy SMSA Mutual Savings Banks Albany-Schenectady-Troy, Rochester and Syracuse SMSAs Commercial Banks Buffalo SMSA 4.23* — 1.80** —> New York and Nassau-Suffolk SMSAs Rochester SMSA [ < 0.78 0.00** -> 1.24 Syracuse SMSA Mutual Savings Banks I <~ 1.01 > 6-33 Table 6-8 (continued) a) The mutual savings banks estimates are derived from 1976-1'.'77 applications data while the other estimates are based on 19771978 mortgage applications. The ratio is equal to the probability that an application with the indicated characteristics will be modified divided by the probability that the typical application will be modified. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different than the denominator at the five-to-ten percent level. Two asterisks (**) indicates that the difference is significant at the five or less percent level. b) This is the typical application described in the text. It is the base for calculating the modification ratios. The other applications involve variations from the typical one in one or more characteristics. See Table 6-3 for the probability of modification for the typical application in each bank type-area. 6-34 situated white applicants at the New York-Nassau-Suffolk savings and loan associations, but are significantly less likely to have them modified at the Rochester associations. Hispanics and other minorities are significantly more likely to be modified than whites in the Buffalo metropolitan area; commercial banks have a modification ratio of 4.23 and mutual savings banks have one of 1.80. The modification decision can be subdivided into modified terms that were accepted by the applicant and modified terms that were followed by the applicant's withdrawal. In the New York- Nassau-Suffolk area, we have a sufficiently large sample of mortgage applications at mutual savings banks to analyze the effect of this refined picture of bank decisions on the racial coefficients if the sex and marital status variables are deleted. The various denial and modification ratios for typical applications are summarized in Table 6-9. These results show that the probability of modificationwithdrawal is more likely than modification-acceptance for all three minorities (blacks, Hispanics, and others), but the differential is statistically significant o n l y for Hispanics. All three minorities are significantly more likely to be denied than the typical white applicant, and denial probabilities exceed both modification probabilities. On the basis of this analysis it is clear that separate treatment of the two types of modification may uncover additional differential treatment. In addition, it would be incorrect to group denials and modification-withdrawals together as a single measure of adverse action because differential treatment occuring with regard to one of these decisions could be dampened by equal 6-3S Table 6-9 Denial, Modification-Withdrawal and Modification-Acceptance Ratios by Race of Applicant for Mutual Savings Banks (Large Sampl?) in the New York-Nassau-Suffolk Metropolitan Areas: 1976-1977° Type of Decision White Black H ispanic OtherMinor it; Denial 1.00 1.56** 1.55** 1.59** Modification-Withdrawal 1.00 1.15 1.42** 1. 17 Modification-Acceptance 1.00 1.06 0.87 0.88 Withdrawal 1.00 1.22 1.05 4.03 a) The ratio is equal to the probability that an application with the indicated characteristics will be denied, modified, or withdrawn, divided by the probability that the typical application will be denied, modified, or withdrawn. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different than the denominator at the five-to-ten percent level. Two asterisks (**) indicates that the difference is significant at the five or less percent level. b) This is the typical application described in the text. It is the base for calculating the denial, modification or withdrawal ratios. The other applications involve variations from the typical one in one or more characteristics. The probabilities of denial, modification-withdrawal, modification-acceptance, or withdrawal for the typical application are 9.15, 3.42, 11.12 and 3.74, respectively. Note that the typical application in this table has no identifiable sex or marital status characteristics. 6- 36 treatment with respect to the other one. For example, the signi- ficantly unfavorable denial ratios for black applicants might not have shown up as strongly if denials and modification-withdrawals had been grouped together. We have very detailed information on housing code violations, vacant buildings, property tax delinquency and serious fires for each census tract in Bronx, Kings (Brooklyn) and Queens counties. Since we have enough observations from mutual savings banks, we estimated a decision model for just these three counties to take advantage of these finer measures of housing market externalities. The results indicate that blacks, Hispanics and other minorities are all significantly (five percent level) more likely to be denied and' to be modified than similar white applicants. This is an indication of even more discrimination against minority applicants by these banks than the results reported in Tables 6-7, 6-8 or 6-9. Several of the race coefficients in the withdrawal equations are also consistent with discrimination against minorities. In particular, applications from blacks at commercial banks in New York-Nassau-Suffolk, and at savings and loan associations in the New York-Nassau-Suffolk and Rochester metropolitan areas are significantly more likely to be withdrawn than those from similarly situated white applicants. 2.75 and 14.75, respectively. The withdrawal ratios are 1.50, In addition, other minorities are more likely to withdraw their applications at Rochester mutual savings banks and savings and loan associations than are similarly situated whites. tively. The withdrawal ratios are 2.73 and 5.75, respec- 6-37 Table 6-10 Denial Ratios by Age of the Applicant for Typical Applications: New York State 25-34 35-44 b 45-54 0.49** 0.35** 1.00 0.85 0.56 0.59 0.67** 1.00 0.59* 0.52* Commercial Banks 1.10 0.94 1.00 1.03 1.07 Mutual Savings Banks 0.65** 0.74** 1.00' 0.78** 0.75 Savings and Loan Associations 0.99 0.62** 1.00 1.64* 1.00 Rochester SMSA Savings and Loan Associations 1.10 1.11 1.00 1.71* 1.18 Under 25 Over 54 Albany-SchenectadyTroy, Rochester and Syracuse SMSAs Commercial Banks Buffalo SMSA Commercial Banks New York and NassauSuffolk SMSAs a) The mutual savings banks estimates are derived from 1976-1977 applications data while the other estimates are based on 1977-1978 mortgage applications. The ratio is equal to the probability that an application with the indicated characteristics will be denied divided by the probability that the typical application will be denied. A single asterisk (*) indicates that the numberator of the ratio is statistically significantly different than the denominator at the five-to-ten percent level. Two asterisks (**) indicates that the difference is significant at the five or less percent level. b) This is the typical application described in the text. It is the base for calculating the denial ratios. The other applications involve variations from the typical one in one or more characteristics. See Table 6-3 for the probability of denial for the typical application in each bank type-area. 6-38 A g e of Applicant Denial ratios for several age intervals in each bank typearea are presented in Table 6 - 1 0 . Applicants under 35 years tend t o be less likely candidates for denial than the typical applicant w h o is 35-44 years o l d . N i n e of the twelve denial ratios for ages under 35 are less than 1.00 and six are based on differences statistically significant at the five percent level. The denial ratios for applicants over 44 years are m o r e mixed; three ratios are significantly less than 1 . 0 0 , and two are significantly greater than 1.00. Applicants between 44 and 55 years of age are more likely to be denied than 35-44 year old typical applicants by savings and loan associations in the New York-Nassau-Suffolk and Rochester metropolitan a r e a s . The results from the d e n i a l equations suggest that younger (under 35) applicants are somewhat less likely to b e denied than older applicants (over 44) at commercial banks in the combined up- state a r e a , and at savings and loan associations. H o w e v e r , Buffalo and the combined upstate commercial b a n k s , and New York-NassauSuffolk m u t u a l savings banks are most likely to deny 35 to 44 vonr old applicants. New York-Nassau-Suffolk commercial banks seem to deny applications equally regardless of the applicant's a g e . 6-39 Modification ratios are summarized in Table 6-11. results vary markedly by metropolitan area. These Commercial banks in the combined upstate area and in the New York-Nassau-Suffolk area are significantly less likely to modify young applicants (under 35) while the Buffalo commercial banks are most likely to modify young applicants. New York-Nassau-Suffolk savings and loan associations are most likely to modify the typical applicant (35-44) while the same type of bank in Rochester is least likely to modify this applicant. Mutual savings banks in New York-Nassau-Suffolk arc significantly less likely to modify the loan requests of 45 to 54 year old applicants than they are to modify those of similarly situated 35 to 44 year old applicants. The withdrawal equation for Buffalo commercial banks is the only one that indicates that applications from any age group are significantly more likely to be withdrawn than those from 35-44 year olds. Withdrawal ratios at these banks for applicants in the 25-34 and 45-54 year old age groups are 1.82 and 1.85, respectively. 6-40 Table 6-10 Modification Ratios by Age of Applicant for Typical Applications: New York State a Under 25 25-34 35-44 b 45-54 0. 39** 0. 60** 1 .00 0. 79 1 .36 3. 12** 0. 64 1 .00 0. 78 0 .00** Commercial Banks 0. 91 0. 91 1 .00 1. 24** 1. 18 Mutual Savings Banks 1. 13 0. 94 1 .00 0. 81** 1. 13 Savings and Loan Associations 0. 67 0. 54** 1 .00 0. 62** 0. 78 1. 95 2. 61** 1 .00 4. 60** 6 .57'** Over 54 Albany-Schenectady-Troy, Rochester and Syracuse SMSAs Commercial Banks Buffalo SMSA Commercial Banks New York and NassauSuffolk SMSAs Rochester SMSA Savings and Loan Associations a) The mutual savings banks estimates are derived from 1976-1977 applications data while the other estimates are based on 19771978 mortgage applications. The ratio is equal to the probability that an application with the indicated characteristics will be modified divided by the probability that the typical application will be modified. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different than the denominator at the five-to-ten percent level. Two asterisks (**) indicates that the difference is significant at the five or less percent level. b) This is the typical application described in the text. It is the base for calculating the modification ratios. The other applications involve variations from the typical one in one or more characteristics. See Table 6-3 for the probability of modification for the typical application in each bank type-area. 6-41 Redlining Three types of redlining allegations have been analyzed: specific neighborhoods that community groups have alleged to be redlined, older neighborhoods, and largely nonwhite neighborhoods . Property location. Denial and modification ratios for typical applications from a variety of property locations in each of five metropolitan areas are summarized in Tables 6-12 to 6 - 1 7 . The role of property location in mortgage lending decisions differs among the five metropolitan areas and the type of l e n d e r . In general, the denial ratios provide little evidence consistent w i t h allegations that specified neighborhoods are redlined. The r e s u l t s , h o w e v e r , are consistent with redlining in six c a s e s . New York-Nassau-Suffolk commercial banks are signi- ficantly more likely to deny applications on properties in the combined neighborhood of Central Brooklyn and Fort Greene than a similar application on a Suffolk County property; the denial ratio is 2.34 (Table 6-14). Although the other allegedly redlined neighborhoods in the New York-Nassau-Suffolk area have denial ratios greater than one at commercial b a n k s , only the Central BrooklynFort Greene one is statistically significant at the ten percent level.® It should be noted that applications on properties in other parts of New York City (Northeast K i n g s , South Kings, the 6-42 Table 6-10 Denial and Modification Ratios by Property Location for Mutual Savings Banks in the Albany-Schenectady-Troy Metropolitan Area; 1 9 7 6 - 1 9 7 7 Property Location a Denial Modification 2.40 5.05 12.51** 1.55 1.06 1.20 Central State Street 0.51 1.04 Hamilton Hill 1.61 0.01 0.50 0.85 10.97** 0.62 0.99 1.03 Rest of the City of Albany 1.01 0.60* Rest of the City of Schenectady 1.24 0.72 Rest of the City of Troy 0.52** 1.50 Rest of Albany County 1.13 1.12 Rest of Schenectady County 1.23 1.16 Rensselaer County outside the City of Troy 0.76 1.51* Saratoga County 1.00 1.00 A l l e g e d l y Redlined Neighborhoods City of Albany Arbor H i l l and South End Hudson / Park West Hill City of Schenectady City of Troy Central South Hillside North Central and 567 O t h e r Neighborhoods 6-43 Table 6-12 (continued) a) The ratio is equal to the probability that an application with the indicated characteristics will be denied or modified divided by the probability that the typical application will be denied or modified. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different than the denominator at the five-to-ten percent level. Two asterisks (**) indicates that the difference is significant at the five or less percent level. b) This is the typical application described in the text. It is the base for calculating the denial or modification ratios. The other applications involve variations from the typical one in one or more characteri sties. See Table 6—3 for the probability of denial or modification for the typical application in each bank type-area 6-44 Table 6-10 Denial and Modification Ratios by Property Location in the Buffalo Metropolitan Area Property Location Commercial Banks Denial Modification Mutual Savings Banks Denial Modification Allegedly redlined neighborhoods City of Buffalo Black Rock Center City T 0.45 Filmore-Leroy Industrial I t 0 . 69 1.13 1.24 3. 59* 0.63 1.9 0 1.76 0.99 0.00** I West Elmwood 0.99 0.00** 0.41** 1. 44 West Side 1.77 4.19 0.80 0 . 82 t t 1.04 0.36** 0 .42* 0.15** 0 . 55 0.43** 0.44** 0 . 56 0.37 Other neighborhoods City of Buffalo Broadway Shiller I University 0.36 East Elmwood 0 .16 South Buffalo * 4 0.67** 0 .87 North Buffalo 0.78 0.73 0.37 0.34** 0.65* City of Niagara Falls 0.60 3.49* 1.06 1.00 Rest of Niagara County 1.23 3.21** 0.89 1.17 f 1.00 4r 0.87 0. 83 1.00 1. 00 City of Lackawanna * 1.00 Rest of Erie County a) * The mutual savings banks estimates are derived from 1976-1977 applications data while the other estimates are based on 19771978 mortgage applications. The ratio is equal to the probability that an application with the indicated characteristics will be denied or modified divided by the probability that the typical 6-45 Table 6-13 (continued) a) (cont'd) application will be denied or modified. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different than the denominator at the five-to-ten percent level. Two asterisks (**) indicates that the difference is significant at the five or less percent level. b) This is the typical application described in the text. It is the base for calculating the denial or modification ratios. The other applications involve variations from the typical one in one or more characteristics. See Table 6-3 for the probability of denial or modification for the typical application in each bank type-area. 6-46 Table 6-10 Denial Ratios by Property Location for the New York-Nassau-Suffolk Metropolitan Areas 5 Property Location Commercial Banks Mutual Savings Banks Savings Small Large and Loan Sample Sample Associations Allegedly redlined neighborhoods South Bronx 1.41 Central Brooklyn 2.34** 1.26 1.07 ~t 0.52 0.82 2.35** Fort Greene Park Slope Crown Heights East Flatbush Southeast Queens 1.25 T 2.00 .0 I 0.44 0.69 1.16 0.66 _JL_ 1.86 0.82 1.65** 0. 37 All of the above Other neighborhoods North Bronx 1 . 09 0 . 83 0 .85 0 . 57 Northeast Kings 2. 16** 0 . 59 1 . 40** 0 .65 South Kings 1 . 66** 1 . 11 1 . 03 0 . 09** Rest of Queens 1 . 57** 1. 32 0. 9 6 0 .18** Nassau 0 . 95 1 . 24 0 . 87** 0 . 21** 1 . 32* 0 . 41 1 . 31 Richmond 0 . 60 0 . 59** 0 . 54 * * 0 . 00** Rockland 1 . 04 0 . 32** 1 . 36** 1 .02 Westchester 0 . 94 0 . 62** 0 . 46** 1 . 54* Suffolk13 1 . 00 1 . 00 1 . 00 1 . 00 New York (Manhattan) - - 6-47 Table 6-14 (continued) a) The mutual savings banks estimates are derived from 1976-1977 appli cations data while the other estimates are based on 1977-1978 mortgage applications. The ratio is equal to the probability that an application with the indicated characteristics will be denied divid by the probability that the typical application will be denied. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different than the denominator at the five-to-ten percent level. Two asterisks (**) indicates that the difference is significant at the five or less percent level. b) This is the typical application described in the text. It is the base for calculating the denial ratios. The other applications involve variations from the typical one in one or more characteristic See Table 6-3 for the probability of denial for the typical application in each bank type-area (Table 6-9 for the mutual savings ban large sample). 6-48 Table 6-15 Modification Ratios by Property Location for the New York-Nassau-Suffolk Metropolitan Area Property Location Commercial Banks Mutual Savings Banks Savings Small Large c and Loan Sample Sample Associations Allegedly redlined neighborhoods 1.08 0.46 Fort Greene 0.45 >lr 1.42 Park Slope 0.74 1.41 t 1.56 * 3.79** 1.46 1.38 South Bronx Central Brooklyn Crown Heights East Flatbush Southeast Queens All of the above 0.92 i — t 1.7 6 — 2.21** 5.23** * — 5.77** - - 3.18** — — 2. 59 Other neighborhoods North Bronx 0.86 0.68 2.01** '3. 49* Northeast Kings 2.35** 1.89** 3.09** 2.60 South Kings 1.33* 1.21 1.84** 3.11** Rest of Queens 0.65** 0.95 1.29** 3.09** Nassau 0.95 0.91 1.03 4.90** 0. 83 1.38 1.35 Richmond 1.23 0.63** 0.35** 4.86** Rockland 0.99 0.59** 0.37** 4.88** Westchester 0.87 0.39** 0.35** 1.84 Suffolk13 1.00 1.00 1.00 1. 00 New York (Manhattan) — 6-49 Table 6-15 (continued) a) The mutual savings banks estimates are derived from 1976-1977 applications data while the other estimates are based on 19771978 mortgage applications. The ratio is equal to the probability that an application with the indicated characteristics will be modified divided by the probability that the typical application will be modified. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different than the denominator at the five-to-ten percent level. Two asterisks (**) indicates that the difference is significant at the five or less percent level. b) This is the typical application described in the text. It is the base for calculating the modification ratios. The other applications involve variations from the typical one in one or more characteristics. See Table 6-3 for the probability of modification for the typical application in each bank type-area (Table 6-9 for the mutual savings banks' large sample). c) For the mutual savings banks' large sample, this column contains ratios for the action of modification followed by withdrawal. 6-50 Table 6-10 Denial and Modification Ratios by Property Location for the Rochester Metropolitan Area 5 Property Location Mutual Savings Banks Denial Modification Savings and Loan Assoc. Denial Modification- Allegedly redlined neighborhoods Dutchtown 1.40 1.06 0.00** 0.00** 0.26 0.62 3.48* 0.00** 1.12 1.42 1.99 7.17 * ZIP Code Area 14621 and the 16th Ward Other neighborhoods Edgerton/Brown Square/ Cornhill/Park/ Oxford South Wedge and Swillberg 0.00 0.00 0.45 0.76 1.00 3.02 Ward 19 0.32 0.00 0.31 2.03 Rest the City of of Rochester 0.68 0.94 2.64 1.58 Livingston, Orleans and Wayne Counties 0 .00 1. 32 Monroe County outside the City , of Rochester 1.00 1.00 * Rest of the Primary Target Area 4. 19 1.00 7.5.1' ].C)0 a) The mutual savings banks estimates are derived from 1976-1977 applications data while the other estimates are based on 1977-1978 mortgage applications. The ratio is equal to the probability that an application with the indicated characteristics will be denied or modified divided by the probability that the typical application will be denied or modified. A single asterisk (,*) indicates that the numerator of the ratio is statistically significantly different than the denominator at the five-to-ten percent level. Two asterisks (**) indicates that the difference is significant at the five or less percent level. b) This is the typical application described in the text. It is the base for calculating the denial or modification ratios. The other applications involve variations from the typical one in one or more characteristics. See Table 6-3 for the probability of denial or modification for the typical application in each bank type-area. 6-51 Table 6-10 Denial and Modification Ratios by Property Location for Mutual Savings Banks in the Syracuse Metropolitan Area; Property Location 1976-1977 a Denial Modification Brighton 0 .00 0 .00 Near Northeast (part) 0 .00 0 .00 Rest of the Community Development Area 1 .94 0. 00 Rest of the City of Syracuse 0 .79 0. 25** Oswego County 1 .60* 0. 81 Madison County 1 .44 0. 89 Onondaga County ^ outside the City of Syracuse 1 .00 1. 00 Allegedly redlined neighborhoods Other neighborhoods a) The ratio is equal to the probability that an application with the indicated characteristics will be denied or modified divided by the probability that the typical application will be denied or modified. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different than the denominator at the five-to-ten percent level. Two asterisks (**) indicates that the difference is significant at the five or less percent level. b) This is the typical application described in the text. It is the base for calculating the denial or modification ratios. The other applications involve variations from the typical one in one or more characteristics. See Table 6-3 for the probability of denial or modification for the typical application in each bank type-area. 6-52 rest of Queens, and Manhattan) are significantly more likely to be denied by commercial banks than a similar application on a Suffolk county property. M u t u a l s a v i n g s b a n k s are significantly more likely to d e n y applications on properties located in the Hudson/Park neighborhood of A l b a n y and the Hillside neighborhood of the city of Troy than they are s i m i l a r applications on suburban Saratoga County prope r t i e s ; t h e denial ratios are 12.51 and 10.97 respectively 6-12). (Table No other neighborhoods in the Albany-Schenectady-Troy metro- politan area have denial ratios from mutual savings banks t h a t are significantly greater than one. New York-Nassau-Suffolk mutual s a v i n g s b a n k s treat applications on properties located in Fort Greene in B r o o k l y n and Southeast Queens less favorably than similar applications on Suffolk County properties. . The denial ratios a r e 2.3 5 and 1 . 6 5 , respectively, and both are based on statistically ficant (five percent level) differentials (Table 6-14). signi- However, o n e of the suburban counties (Rockland) also has a denial ratio from mutual savings banks that is significantly above one. Applications on Northeast Kings properties are also significantly more likely to e denied than those on suburban Suffolk County properties, b u t t h i s result is expected because of the area 1 s generally weak h o u s i n g market. However, the property location coefficients in the New York-Nassau-Suffoik mutual savings bank sample change magnitudes a n d signs between the sample including the sex and marital status v a r i a b l e s a n d the sample without these variables.^ A p p l i c a t i o n s at Rochester savings and loan associations arc more l i k e l y to be denied if the property is located in ZIP C o d e 6-53 Area 14621 or the 16th Ward than if it is located in suburban Monroe County (Table 6-16). The denial ratio of 3.48 is statistic- ally significant at the ten percent level. Although some Roches- ter areas that are not alleged to be redlined also had denial ratios in excess of one, none of them are statistically significant at the ten percent level. Mutual savings banks are the only lenders with modification ratios greater than one for allegedly redlined neighborhoods. These occur in the Buffalo and New York-Nassau-Suffoik metropolitan areas. In Buffalo, applications on Center City properties are 3.59 times as likely to be modified as similar applications on suburban Erie County properties. This is the only Buffalo modification ratio in excess of one that is based on a statistically significant (ten percent level) differential. In the New York-Nassau-Suffolk area; applications on properties in New York City, whether or not they arc in allegedly redlined neighborhoods, are more likely to be modified than similar applications on Suffolk County properties. Withdrawal ratios in excess of one occur in a few cases with statistical significance. They exceed one for the allegedly redli ned neighborhoods of Central Brooklyn and Park Slope at commercia1 banks in the New Y 0 rk-Nassau-Suffoik area, but they also exceed one for other areas not alleged to be redlined (e.g., Nassau and Westchester Counties) Savings and loan associations in the same metropolitan area have withdrawal ratios above one for the neighborhoods alleged to be red 1ined as well as Rockland and Westchester Counties. These inconsistent sets of coefficients offer little support for the redlining allegations. Neighborhood Characteristics. Denial and modification ratios by the age and racial composition of the neighborhood are summarized 6-54 in Tables 6-18 and 6-19. Applications are statistically significantly more likely to be denied in older neighborhoods in four bank type-areas: com- mercial banks in the combined upstate area, mutual savings banks in the Buffalo and Rochester metropolitan areas, and savings and loan associations in the New York-Nassau-Suffolk areal^ Although the results are consistent with allegations that lenders avoid old neighborhoods, they may be due to a spurious correlation between the age of the neighborhood and the condition of the specific property. Unlike California, we were unable to separate these two factors because the age of the building is not provided on the New York EHOL forms. Therefore, caution should be exer- cised in interpreting these and other age of neighborhood results in New York. All but one of the modification ratios for age of neighborhood exceed one in Table 6-19 indicating that applications on properties in older neighborhoods are more likely to be modified 13 than ones in newer neighborhoods. Seven of the differentials are statistically significant at the five percent level. These results are .also consistent with the allegation that lenders redline older neighborhoods but they must not be taken out of context. The caveat presented in the preceding discussion of denial ratios also applies here and is even strengthened because some of the modifications may be maturity period reductions to compensate for the shorter remaining economic lives of older buildings. Applications on properties in neighborhoods with higher 6-55 Table 6-18 Denial Ratios by Age and Racial Composition of Neighborhood: New York State 3 Typical Applicant , (TA) TA in Older Neighborhood (+0.10) TA in a 50 Percent Nonwhite Neighborhood 1. 00 1.01 0.00 1.00 1.08** 0.20 Commercial Banks 1.00 1.02 0 . 50 Mutual Savings Banks 1.00 1.12** 0 . 92 Commercial Banks 1.00 1.00 1 . 33* Mutual Savings Banks 1. 00 1. 00 0 . 93 Savings and Loan Associations 1.00 1.11** 1 .49 Mutual Savings Banks 1.00 1.17 * 0.55 Savings and Loan Associations 1.00 1.06 d 4 .25 1.00 0.99 1.67 Albany-Schenectady-Troy SMSA Mutual Savings Banks Albany-Schenectady-Troy, Rochester and Syracuse SMSAs Commercial Banks Buffalo SMSA New York and Nassau-Suffolk SMSAs Rochester SMSA * Syracuse SMSA Mutual Savings Banks 6-56 Table 6-19 (continued) a) The mutual savings banks estimates are derived from 1976-1977 applications data while the other estimates are based on 19 7 71978 mortgage applications. The ratio is equal to the probability that an application with the indicated characteristics will be denied or modified divided by the probability that t h e typical application will be denied or modified. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different than the denominator at the fiveto-ten percent level. Two asterisks (**) indicates that the difference is significant at the five or less percent level. b) This is the typical application described in the text. It is the base for calculating the denial or modification ratios. The other applications involve variations from the typical one in one or more characteristics. See Table 6-3 for the probability of denial or modification for the typical application in each bank type-area. c) This ratio is so small because nearly all the applications at mutual savings banks on properties in 50 percent nonwhite neighborhoods in the Albany-Schenectady-Troy metropolitan area are withdrawn. el) This ratio is high because nearly none of the applications at this bank type-area in 50 percent nonwhite neighborhoods are likely to be withdrawn. 6-57 Table 6-10 Modification Ratios by Age and Racial Composition of Neighborhood: New York State 3 Typical Applicant , (TA) TA in Older Neighborhood (+0.10) TA in a 50 Percent Nonwhite Neighborhood 1.00 1.11' 0 .01 1.00 0.99 9 . 42 Commercial Banks 1.00 1.19** Mutual Savings Banks 1.00 1.10** 0.42 Commercial Banks 1.00 1.05** 1.14 Mutual Savings Banks 1.00 1.13** 0.7 6 Savings and Loan Associations 1.00 1.06** 0.83 Mutual Savings Banks 1.00 1.03 0 .46* Savings and Loan Associations 1.00 1.02 5. 77 d 1.00 1.17** 0 . 09 Albany-Schenectady-Troy SMSA Mutual Savings Banks Albany-Schenectady-Troy, Rochester and Syracuse SMSAs Commercial Banks Buffalo SMSA New York and Nassau-Suffolk SMSAs Rochester SMSA Syracuse SMSA Mutual Savings Banks 6-58 Table 6-19 (continued) a) The mutual savings banks estimates are derived from 1976-1977 applications data while the other estimates are based on 19771978 mortgage applications. The ratio is equal to the probability that an application with the indicated characteristics will be denied or modified divided by the probability that the typical application will be denied or modified. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different than the denominator at the fiveto-ten percent level. Two asterisks (**) indicates that the difference is significant at the five or less percent level. b) This is the typical application described in the text. It is the base for calculating the denial or modification ratios. The other applications involve variations from the typical one in one or more characteristics. See Table 6-3 for the probability of denial or modification for the typical application in each bank type-area. c) This ratio is so small because nearly all the applications at mutual savings banks on properties in 50 percent nonwhite neighborhoods in the Albany-Schenectady-Troy metropolitan area are withdrawn. d) This ratio is high because nearly none of the applications at this bank type-area in 50 percent nonwhite neighborhoods are likely to be withdrawn. 6-59 percentages of nonwhite population are significantly more likely to be denied than similar applications in nearly all white neighborhoods in only one bank type-area: savings and loan associa- tions in the New York-Nassau-Suffolk metropolitan area. result is consistent with the redlining allegation. This Only one modification ratio is statistically significant but it indicates 14 that Rochester mutual savings banks favor older neighborhoods. Withdrawals are significantly more likely to occur in older neighborhoods at commercial banks in the combined upstate area and mutual savings banks in the Albany-Schenectady-Troy metro15 politan areas. tively. The withdrawal ratios are 1.18 and 1.09, respec- Applications on properties in majority nonwhite neigh- borhoods are significantly more likely to be withdrawn than similar ones in nearly all white neighborhoods in the mutual savings banks in the Albany-Schenectady-Troy and Rochester metropolitan areas. The ratios are 32.42 and 6.65, respectively. SUMMARY In this chapter, decisions on applications for conventional mortgages on owner-occupied one- to four-family houses in five metropolitan areas of New York State are analyzed. areas are: Albany-Schenectady-Troy, Buffalo, New York-Nassau- Suffolk, Rochester and Syracuse. comes are considered: In general, four possible out- approval as applied for, approval after modification, denial, and withdrawal. We view a lender's decision as a function of the financial characteristics of the borrower, requested terms of the loan, and collateral The five 6-60 v a l u e of the p r o p e r t y . Information on the neighborhood surrounding t h e p r o p e r t y , including m e a s u r e s of c h a n g e over t i m e , are used to r e f l e c t the risk of loss a s s o c i a t e d w i t h a p a r t i c u l a r property bec a u s e of the c o n d i t i o n of n e i g h b o r h o o d p r o p e r t i e s . M o s t of these n e i g h b o r h o o d m e a s u r e s a r e based on the C e n s u s of Population and Housing. H o w e v e r , d e t a i l e d information on h o u s i n g code v i o l a t i o n s , v a c a n t b u i l d i n g s , p r o p e r t y tax d e l i n q u e n c y , and serious fires is a v a i l a b l e for e a c h c e n s u s tract in B r o n x , K i n g s , and Q u e e n s counties. The s e x , m a r i t a l s t a t u s , a g e and race of the a p p l i c a n t ; the location of the p r o p e r t y ; and the age and r a c i a l c o m p o s i t i o n of t h e n e i g h b o r h o o d a r e also included to d e t e r m i n e w h e t h e r they affect m o r t g a g e - l e n d i n g d e c i s i o n s a f t e r c o n t r o l l i n g for the other factors. C o m m u n i t y o r g a n i z a t i o n s and r e s i d e n t s identified the n e i g h b o r h o o d s t h a t they b e l i e v e d w e r e redlined b y lending institutions. A s in C a l i f o r n i a , o b j e c t i v e factors play a c e n t r a l role in N e w York lender d e c i s i o n s on m o r t g a g e a p p l i c a t i o n s . The likelihood t h a t an a p p l i c a t i o n w i l l b e denied d e c r e a s e s as i n c o m e , n e t wealth, a n d r e q u e s t e d loan to appraised v a l u e ratio i n c r e a s e , and when the r e q u e s t e d loan e x c e e d s two times i n c o m e . A t least o n e proxy for t h e risk a s s o c i a t e d w i t h the c o n d i t i o n of n e i g h b o r i n g is s i g n i f i c a n t in each d e n i a l e q u a t i o n . a p p r a i s e d v a l u e r a t i o s are buildings H i g h requested loan to a l s o m a j o r c o n t r i b u t o r s to the modifi- c a t i o n of a m o r t g a g e a p p l i c a t i o n prior to a p p r o v a l and an applicat i o n ^ withdrawal. O n l y two of the lender a c t i o n s are c l e a r in their m e a n i n g : a p p r o v a l as a p p l i e d for and d e n i a l . M o d i f i c a t i o n is a m b i g u o u s b e c a u s e , on the o n e h a n d , the m o d i f i c a t i o n c o u l d b e a r e d u c t i o n in m a t u r i t y p e r i o d to r e f l e c t the 6-61 the e c o n o m i c life of the b u i l d i n g or a d e c r e a s e in loan amount; to r e f l e c t an a p p l i c a n t ' s d e s i r e to invest m o r e e q u i t y a n d , on t h e o t h e r , the m o d i f i c a t i o n m a y r e p r e s e n t an a d v e r s e a c t i o n . W i t h d r a w a l s a r e e v e n m o r e a m b i g u o u s b e c a u s e they could b e the r e s u l t of lender d i s c o u r a g e m e n t or a p p l i c a n t success a t a n o t h e r lending i n s t i t u t i o n . For t h e s e r e a s o n s , the a n a l y s i s of dis- c r i m i n a t i o n g i v e s m o r e w e i g h t to the d e n i a l r e s u l t s than to the m o d i f i c a t i o n or w i t h d r a w a l r e s u l t s w h e r e a p p r o v a l a s applied for serves as the r e f e r e n c e p o i n t . S e x and M a r i t a l S t a t u s . The e v i d e n c e supports the view t h a t female o n l y h o u s e h o l d s or m a l e - f e m a l e h o u s e h o l d s w i t h working w o m e n , e s p e c i a l l y w i t h w o m e n in the c h i l d b e a r i n g a g e , e x p e r i e n c e some d i s c r i m i n a t i o n in lending d e c i s i o n s b u t t h a t instances of such d i s c r i m i n a t i o n are l i m i t e d . M a r r i e d female o n l y a p p l i c a n t s a r e m o r e than t w i c e as l i k e l y to b e denied b y B u f f a l o c o m m e r c i a l b a n k s and N e w Y o r k - N a s s a u - S u f f o l k m u t u a l savings b a n k s than married male-female applicants with a nonworking woman beyond the childbearing age. Male-female applicants with working women b e y o n d c h i l d b e a r i n g age (married, u n m a r r i e d , or separated) are twice as likely to be d e n i e d than similar h o u s e h o l d s w i t h a nonworking woman by Buffalo commercial banks. In c o n t r a s t to the limited e v i d e n c e of d i s c r i m i n a t i o n against female o n l y or m a l e - f e m a l e h o u s e h o l d s , w e find substantial e v i d e n c e of a d v e r s e t r e a t m e n t of m a l e o n l y h o u s e h o l d s . These h o u s e h o l d s , w h e t h e r m a r r i e d , u n m a r r i e d , or s e p a r a t e d , are over twice as likely to b e denied than s i m i l a r l y situated married m a l e - f e m a l e h o u s e h o l d s w i t h n o n w o r k i n g w o m e n b e y o n d childbearing age at Buffalo commercial banks, New York-Nassau-Suffolk mutual savings b a n k s and R o c h e s t e r savings and loan a s s o c i a t i o n s . In 6-62 a d d i t i o n , the New York-Nassau-Suffolk commercial banks are m o r e likely to d e n y applications from unmarried or separated m a l e only househ o l d s than those of married m a l e - f e m a l e applicants with a nonw o r k i n g w o m a n p a s t the childbearing a g e . These same b a n k s and t h e Rochester savings and loan a s s o c i a t i o n s also are from 1.44 to 3.82 times as likely to deny the applications of m a r r i e d or separated m a l e - f e m a l e h o u s e h o l d s , regardless of the work status or childbearing age of the w o m a n . T h e m o d i f i c a t i o n results suggest that New York-NassauSuffolk savings and loan a s s o c i a t i o n s are v e r y likely to m o d i f y m a l e - f e m a l e a p p l i c a t i o n s , r e g a r d l e s s of m a r i t a l s t a t u s , providing the w o m a n is either w o r k i n g or in the childbearing y e a r s . Mar- ried m a l e only a p p l i c a n t s a r e a l s o v e r y likely to be modified by these l e n d e r s . R a c e . Considerable e v i d e n c e supports the allegation that black a p p l i c a n t s are denied much m o r e frequently than similarly situated white applicants. Black a p p l i c a n t s at m u t u a l savings banks and savings and loan associations are 1.58 to 3.61 times as likely to be denied than similar w h i t e a p p l i c a n t s . Only one of the seven r a t i o s for lenders of these two types are not statistically significant — that for m u t u a l savings b a n k s in the Albany- Schenectady-Troy metropolitan area. T h e statistically icant d i f f e r e n t i a l s occur for the following lenders: m u t u a l savings banks in Buffalo New York-Nassau-Suffolk Rochester Syracuse? signif- 6-63 savings and loan associations in New York-Nassau-Suffolk Rochester. Although two of the three commercial bank ratios indicate black applicants are more likely to be d e n i e d , none of these are statistically significant. New York-Nassau-Suffolk commercial b a n k s , h o w e v e r , are significantly more likely to deny other minority (neither black nor Hispanic) applicants than similarly situated white a p p l i c a n t s . New York-Nassau-Suffolk mutual savings banks are also significantly more (nearly twice as) likely to deny Hispanic applicants than similarly situated white applicants. The modification results indicate that blacks are more likely to be modified b y mutual savings banks and savings and loan associations in the New York-Nassau-Suffolk a r e a . The latter are also more likely to modify applications from H i s p a n i c s . Commercial anci m u t u a l savings banks in Buffalo are more likely to modify applications from other minorities Age. (nonblack). The evidence suggests that young applicants are less likely to b e denied than older o n e s , b u t this pattern is statistically significant in only two cases: savings and loan associa- tions in the New York-Nassau-Suffolk and Rochester metropolitan areas. Applicants under 35 and over 44 years old are less likely to be denied than 35 to 44 year old ones at Buffalo commercial banks and New York-Nassau-Suffolk mutual savings b a n k s . Appli- cants under 35 are also less likely to be denied than older ones by commercial banks in the combined upstate area (Albany-Schenectady- 6-64 T r o y , Rochester and Syracuse metropolitan a r e a s ) . T h e modification results are m i x e d . Younger applicants are less likely to b e modified by commercial banks in the combined upstate area and the New York-Nassau-Suffolk metropolitan a r e a , w h i l e they are more likely to be modified by Buffalo commercial b a n k s , New York-Nassau-Suffolk mutual savings banks and Rochester savings and loan associations. Redlining. W e have evaluated a large number of community- based allegations that lenders have redlined a particular hood. neighbor- The denial results are consistent with the allegations in only six c a s e s . Commercial banks in New York-Nassau-Suffolk are more likely to deny applications on Central Brooklyn-Fort Greene properties than similar applications on suburban Suffolk County properties. Mutual savings banks in the New York-Nassau- Suffolk area are more likely to deny applications on Fort Greene and Southeast Queens properties. The mutual savings banks in the Albany-Schenectady-Troy area are also more likely to deny applications on Hudson/Park (Albany) or Hillside (Troy) proper- ties than similar ones on suburban Saratoga County properties. F i n a l l y , Rochester savings and loan associations are more likely to deny applications on ZIP Code Area 14621 or 16th Ward properties than similar ones on suburban Monroe County properties. The modification results are consistent with redlining allegations in only one Buffalo neighborhood (Center City) where mutual savings banks are more likely to modify the application than a similar o n e on a suburban Erie County p r o p e r t y . Although m u t u a l savings banks in the New York-Nassau-Suffolk area are more 6-65 likely to modify applications on properties in several allegedly redlined neighborhoods than applications on Suffolk county properties, these banks are also more likely to modify applications in several neighborhoods that are not alleged to be redlined. Community organizations have also alleged that older or nonwhite neighborhoods are redlined by mortgage lenders. The denial results are consistent with the age of neighborhood allegations in four instances: commercial banks in the combined upstate area, mutual savings banks in the Buffalo and Rochester metropolitan areas, and savings and loan associations in the New York-Nassau-Suffolk area. It is important to avoid over- interpreting these results because, unlike in our California analysis, we were unable to control for the age of the building*. Modification was even more closely tied to the age of neighborhood — more modifications in older neighborhoods. However, the same caveat applies with added strength because the modification could have been a maturity period reduction to reflect the remaining economic life of the building. Only one type of lender (commercial banks in New YorkNassau-Suffolk) had significantly higher denial probabilities in largely nonwhite neighborhoods than for similar applications in all white ones. 6-66 Footnotes 1. See Robert S c h a f e r , Mortgage Lending Decisions, and Constraints (Cambridge, Massachusetts: Criteria Joint Center for Urban Studies of MIT and H a r v a r d , 1978), Chapters 7, 11 and 12. 2. Unfortunately, the question asking for the information on years at present occupation is v a g u e . It appears that some applicants gave the number of years at the present position and o t h e r s , the number of years in their present occupation. The possible responses ori the form added confusion by having a "not employed" category. As a r e s u l t , this variable does not perform as consistently as w e would like. H o w e v e r , it is an improvement over the California d a t a , which lacks any measure of the stability (or variance) of the individual applicant's 3. creditworthiness. Because of the categorical nature of the responses to the income q u e s t i o n , some loan requests in excess of two times income are not covered by this v a r i a b l e . 4. See Robert S c h a f e r , Mortgage Lending Decisions: and Constraints (Cambridge, Massachusetts: Criteria Joint Center for Urban Studies of MIT and H a r v a r d , 1978), Chapters 7 , 11 and 1 2 , for a discussion of the m u t u a l savings bank samples. 5. I b i d , Chapter 12. 6. Applications at commercial banks in the Albany-SchenectadyT r o y , Rochester and Syracuse metropolitan areas had nearly equal incidences of incomes in the $15,001 to $25,000 and 6-67 over $25,000 ranges, 42 and 45 percent, respectively, and applications at commercial banks in the New York-NassauSuffolk area had most of their applications in the highest income range (74 percent versus 23 percent in the $15,001 to $25,000 range). 7. See Chapter 3, footnote 3, of this report. 8. For the mutual savings bank model for Rochester, see Robert Schafer, Mortgage Lending Decisions, supra note 1, Table 12-7. 9. The Central Brooklyn-Fort Greene coefficient is actually significant at the five percent level. 10. The results are the same in the Bronx-Kings-Queens mutual savings banks sample with the more detailed measures of neighborhood externalities. 11. In the Bronx-Kings-Queens mutual savings banks sample, only applications on properties in East Flatbush, Fort Greene, Park Slope and Northeast Kings are more likely to be modified than ones on properties located in the portion of Queens County that is not alleged to be redlined. 12. Mutual savings banks in the Bronx-Kings-Queens sample are also significantly (five percent level) more likely to deny appli- cations on older properties. 13. The denial ratio is 1.06. The modification results for mutual savings banks in the BronxKings-Queens sample are similar to those shown in Table 6-19. 14. However, mutual savings banks in the Bronx-Kinds-Queens sample are more likely to modify applications on properties in largely black neighborhoods; the modification ratio is 1.49. Further- 6-68 more, these same banks are also more likely to modify applications on properties in neighborhoods that have had an increase in their nonwhite population. A twenty percentage point in- crease leads to a modification ratio of 1.25. Both of these effects are statistically significant at the five percent level. 15. This also occurs in the mutual savings banks Bronx-Kings-Queens sample. The withdrawal ratio is small: 1.01. CHAPTER 7 MORTGAGE TERMS IN NEW YORK STATE This chapter analyzes the pattern of downward modification of loan amounts b y bank type in those New York metropolitan areas for which sufficient data are available. The analysis covers commercial b a n k s , mutual savings b a n k s , and savings and loan associations in the New York-Nassau-Suffolk metropolitan area; savings and loan associations in the Rochester area; and commercial banks in the Albany-Schenectady-Troy, Rochester and Syracuse metropolitan a r e a s . By focusing on the difference between the requested and the granted loan amount for those applications with downward modifications, this chapter supplements the analysis of modification probabilities discussed in Chapter 6. The m o d e l s in this chapter represent the only analysis of final mortgage terms that can be performed with the New York data set, since interest rate and years-to-maturity data are not available.^" The specific question addressed here is whether some borrowers experience larger downward modifications than others solely because of membership in groups not legally allowed to b e considered by banks in their decision making p r o c e s s . Large downward modifications of loan amounts may yield effects similar to those of loan denial; the applicant may not be able to proceed w i t h the house purchase because he/she cannot raise the additional down payment necessitated by the bank's decision not to lend the requested a m o u n t . The m o d e l used to test for discriminatory bank behavior of 4- 2 this type must adequately control for the factors that banks may legitimately use to determine the size of the downward modification. The control factors included in the modification models reported here are essentially the same as those in the decisionto-lend models of the previous chapter; the only addition is a variable for the size of the requested loan. In the following sections, we first briefly discuss the performance of the overall equations, focusing on the role of the control variables. We then report the equation implications for the hypothesis of discriminatory lending on the basis of sex and marital status, race, age, and property location. The results support the view that banks in the New York-Nassau-Suffolk metropolitan area discriminate on the basis of age and provide weak support for the hypothesis of discrimination against female applicants. CONTROL VARIABLES The estimated equations take the following form: MODOWN = f (REQLOAN, RLTOAV, BORR, NEIGH, DISC) where MODOWN = requested loan amount less granted loan amount, REQLOAN = requested loan amount, RLTOAV = the requested loan amount as a fraction of the appraised value, BORR = a vector of borrower characteristics (including income, net wealth, employment history, and requested loan amount in excess of two times income), 4- 3 NEIGH = a vector of neighborhood characteristics (including level and change variables), and DISC = a vector of discrimination variables (including sex, marital status, race, age, location of property, neighborhood age, and racial composition of neighborhood). The estimated equations for the five separate samples are reported in Appendix C, Tables C-8 and C-9. All equations are linear and were estimated using ordinary least squares. As can be seen from the summary statistics presented in Table 7-1, sample size ranges from a low of 75 for the Rochester savings and loan association sample to a high of 616 for the New York-Nassau-Suffolk commercial bank sample. The fraction of variation explained (R-square) varies from 0.33 for the mutual savings bank sample in New York-Nassau-Suffolk to 0.64 for the savings and loan association sample in Rochester. All equations explain statisti- cally significant proportions of the variation in the dependent variable. The size of the requested loan (REQLOAN) and the requested loan to appraised value ratio (RLTOAV) are the key control variables. In all but the New York-Nassau-Suffolk commercial bank sample, both variables exert statistically significant and positive effects on the size of the downward modification as expected . The requested loan amount acts as a scale variable; for any given degree of loan risk as measured by the requested loan to appraised value and other control variables, the dollar amount of the modification depends on the size of the loan. The coeffi- cients of REQLOAN are remarkably similar across the four samples 6-4 Table 6-7 Summary Statistics for Downward Modification a Equations: New York State AST-ROCH-SYR COM Sample size 90 COM 6.16 NYNS MSB 386 SLA 179 ROCH SLA 75 R-square 0.59 0.43 0. 33 0.30 0.64 F-statistic 3. 86 10 . 66 4.24 1.97 3.10 P-value 0.0001 0.0001 0.0036 0.0003 0.0001 a) The mutual savings banks equation is based on 1976-1977 mortgage applications data while the other equations are based on 19771978 applications. The acronyms in the column headings are: Bank type COM - commercial banks MSB - mutual savings banks SLA - savings and loan associations Metropolitan areas AST - Albany-Schenectady-Troy NYNS - New York-Nassau-Suffolk ROCH - Rochester SYR - Syracuse 6-5 other than the New York-Nassau-Suffolk commercial bank sample and imply that differences of $1000 in the requested loan amount are associated with differences of approximately $100 in the amount by which loans are reduced. A higher requested loan amount in relation to appraised value also increases the predicted magnitudes of the downward modifications in these four samples. A difference of 10 per- centage points in the ratio of the requested loan to appraised value increases the loan reduction by $456 to $1387 across samples, controlling for the size of the requested loan. Consider two applicants each requesting mortgage money for a home appraised at $55,000. If one requested $35,000 and the other $45,000 and if both requests are modified downward, the estimated equation suggest that on average the latter will receive $7805 more than 2 the former, ceteris paribus. ask In other words, borrowers who for larger amounts in relation to appraised value obtain larger amounts, but they receive less than the full amount of the requested difference. The results for the New York-Nassau-Suffolk commercial bank sample are harder to explain. Again the requested loan variable enters positively as expected (and with a larger magnitude than in the other four samples), but the requested loan to appraised value variable exerts a statistically significant negative impact, contrary to expectations. The mean requested loan-to- appraised value is lower and the size of the requested loan is higher on average and is characterized by greater variation in the New York-Nassau-Suffolk commercial bank sample than in the other four samples. The negative coefficient of RLTOAV may thus 6-6 reflect a negative correlation between REQLOAN and RLTOAV and some non-linearities not captured by the linear equation specification . ^ Somewhat surprisingly, very few of the variables representing the financial characteristics of the borrower enter the MODOWN equations significantly. In other words, lenders appear to pay little attention to the income, net wealth, or employment stability of the applicant when deciding how much to reduce loans once it is decided that a loan reduction is in order. Even the size of the loan in relation to income appears to be relatively unimportant; the coefficient of the binary variable measuring whether the requested loan exceeds two times income is statistically insignificant in all but the New YorkNassau-Suffolk commercial bank sample where it has an unexpected negative sign. Unlike the other samples, however, this new York- Nassau-Suffolk commercial bank sample simultaneously implies, consistent with expectations, that applicants with higher incomc have smaller modification, ceteris paribus. Again, the unex- pected negative sign on the requested loan in relation to income variable may reflect a pattern of correlation and nonlinearity not adequately captured by the model. The final set of control variables, the characteristics of the neighborhood, also have little explanatory power. With the exception of the 1975-1970 change in income (DINC) variable which enters positively in the New York-Nassau-Suffolk commercial bank equation and the foreclosure rate (FORRATE) which enters positively in the New York-Nassau-Suffolk mutual savings bank equation, none of the neighborhood variables are significant in any of the equations. 6-7 DISCRIMINATION RESULTS The finding of a positive coefficient on a discrimination variable indicates that applicants who are members of the group in question (e.g. women, old people, blacks, or homebuyers in allegedly redlined neighborhoods) experience larger loan reductions than comparable applicants from the baseline groups. Lar- ger loan reductions translate directly into large downpayments unless the borrower turns to an expensive second mortgage. some cases, In larger loan reductions may keep the applicant from purchasing the home at all and, thus, may be an indirect way for the bank to deny the loan. Provided the control variables in the MODOWN equations adequately represent the legitimate factors affecting the size of downward modifications, we can interpret statistically significant positive coefficients on any of the discrimination variables as support for the hypothesis of discriminatory behavior. For each of the five samples, we have calculated the expected downward modification for a baseline application. This baseline application represents the type of application that bankers typically do not discriminate against; the applicants are a married, white, male-female couple; the wife is beyond childbearing aye and not working; the applicant is betwen 35 and 44; and the prop4 erty is in the suburbs. With respect to all other characteris- tics, the baseline application takes on average values for the particular MODOWN sample involved. In connection with each type of potential discrimination, the predicted downward modification for an application that differs from the baseline application in the 6-8 discrimination dimension only is reported and compared to the baseline downward modification for that sample. In this way, similarly situated applicants can be compared and the magnitude of the discriminatory differential can be put into perspective. Sex and Marital Status The results by sex and marital status are reported in Table 7-2. Each entry represents the predicted amount by which the bankers in each of the five samples reduce requested loan amounts for applications differing from baseline applications only in terms of sex or marital status. The numbers in paren- theses represent the ratio of the predicted MODOWN for the indicated sex or marital status type to the type represented by the base. For example, the second entry in the second column indicates that commercial banks in the New York-Nassau-Suffolk metropolitan area reduce the actual loan below the requested loan on average by $4139 for an application that differs from the base only in that the wife is working. The 1.39 in paren- theses indicates that this loan reduction is 39 percent higher than that for the base application. The absence of asterisks with this entry indicates that the coefficient on which it is based is statistically insignificant at the ten percent level. In general, a single asterisk means that the relevant coefficient is significant at the five to ten percent level, while two asterisks indicate the five or less percent significance level. With respect to discrimination based on sex, we find limited 6-9 Table 6-7 Downward Modifications (Dollar Amounts and Ratios) by Sex and Marital Status for Baseline Applications; New York State 3 AST-ROCH-SYR COM NYNS MSB COM ROCH SLA" SLA Sex MFNCBNW (BASE) 8249(1. 00) 2988(1. 00) 6481(1. 00) 2840(1. 00) MFNCBW 5101(0. 62) * 4139(1. 39) 5621(0. 87) 4242(1. 52) 4403(1. 00) 1 MFCBW25- 34° 3636(0. 44) 4835(1. 62) 4439 (0. 68) 3739(1. 32) 1445(0. 3 3)** MFCBNW25 -34 b 3233(0. 39) 5860 (1. 96) 5350 (0. 82) 3886(1. 37) 867 (0. 20) ** 4310(1. 44) FONLYNCB * 8751(1. 06) * 6321(2. 11) * 5628(0. 87) MONLY 5346 (0. 65) 3721(1. 25) 8249(1. 00) * FONLYCB t) .b 5809 (0. 89) * * 4928(1. 74) 1829 (0. 42) ** 5933(0. 92) 4529(1. 40) 1967(0. 45) ** 2988(1. 00) 6481(1. 00) 2840(1. 00) 4403 (1. 00) 2934(0. 98) 8777 (1. 35) * Marital Status MARRIED (BASE) SEP UNMAR 10156(1. 4 23) 3153(1. 06) 6091 (0. 94) * 2288(0. t 81) 5000(1. 14) * 4, a) The mutual savings banks estimates are based on 1976-1977 mortgage applications data while the other equations are based on 1977-1978 applications. The acronyms used in the column headings are; Bank type COM - commercial banks MSB - mutual savings banks SLA - savings and loan associations Metropolitan areas AST - Albany-Schenectady-Troy NYNS - New York-Nassau-Suffolk ROCH - Rochester SYR - Syracuse The entries in the table represent the predicted downward modification (in dollars) for an applicant similar to the base application in all ways other than the characteristic listed. Numbers in parentheses represent the ratio of the downward modification for an application with the indicated characteristic to the downward modification for the 6-10 Table 6-6 (continued) a) (cont'd) baseline application. See text for definition of the baseline application. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different from the denominator at the five-to-ten percent level. Two asterisks (**) indicate that the difference is significant at the five or less percent level. b) These estimates are constructed by adding the effect of reducing the age of the applicant from the baseline range of 35-44 to the 25-34 year old range to the effect related specifically to the sex category of the application. 6-±5 statistically significant evidence of discriminatory behavior. The one significant finding consistent with discriminatory behavior relates to commercial banks in New York-Nassau-Suffolk, who appear to reduce loans for female only applications with no females under 34 by more than twice the amount they reduce loans for baseline applications. Since this results in an additional downpayment of $3,333, the magnitude is not negligible. Although not statistically significant, the results suggest that these same banks may treat younger female-only applicants adversely as well. Members of this group (FONLYCB, with the applicant be- tween 25 and 34) experience downward modifications 44 percent greater than those faced by baseline applicants. The finding that commercial banks in the New York-NassauSuffolk area modify loans downward more for nonchildbearing female only households than for baseline applications sheds additional light on the Chapter 6 findings of a 0.47 denial ratio and a 1.42 modification ratio (neither of which is based on statistically significant coefficients) for these banks. The ex- planation appears to be that in many cases the commercial banks have chosen not to deny mortgage loans to nonchildbearing women but instead to modify requested loan amounts downward by amounts not justified by the objective characteristics of the application. 6-12 Although the New York-Nassau-Suffolk commercial bank FONLYNCB coefficient is the only statistically significant positive coefficient relating to the sex variables, the positive signs of many of the other female only coefficients should be noted. Ignoring the Rochester savings and loan sample for which all the ratios are well below one, five out of the remaining six ratios for female only applications exceed one. No similarly consistent pattern emerges for any of the other related variables. On the one hand, upstate commercial banks, Rochester savings and loan associations, and New YorkNassau-Suffolk mutual savings banks appear to favor all six categories other than female only relative to the base; just the rever^Tls true for the New York-Nassau-Suffolk commercial banks and savings and loan associations. Turning to the results relating to differential treatment based on marital status, we find evidence to support the view that mutual savings banks in the New York-Nassau-Suffolk metropolitan area discriminate against separated applicants. Speci- fically, separated applicants applying for mortgages from these banks experience downward modifications that average thirty-five percent larger than those of married couples. Thus, a separated applicant must raise on average an additional $2,296 to make the downpayment just because of his/her marital status, given that the person is chosen for a downward modification in the first place. 6-13 No consistent pattern emerges across the other four samples in this regard. The pattern found for the New York-Nassau- Suffolk mutual savings bank sample (i.e. a MODOWN ratio above one for separated applicants and below one for unmarried applicants) suggests that distinguishing between married and separated applicants may be important for the analysis. Unfortu- nately, data limitations.prevent us from doing so in three of the five samples. Race The findings with respect to differential treatment based on race, summarized in Table 7-3, generally are inconsistent with the hypothesis of discriminatory behavior in the decision determining the amount by which requested loan amount is to be reduced. Many of the ratios are less than one, implying that, if anything, lenders modify loans downward by less for members of racial minorities than for similarly situated whites; fur- thermore, none of the three ratios greater than one is derived from a statistically significant coefficient. Recall, however, that minorities may be discriminated against in a more direct fashion; they may be differentially denied the loan (see Chapter 6) . When the results are combined with the denial and modification ratios discussed in Chapter 6, the following picture emerges. 6-3S Table 6-9 Downward Modifications (Dollar Amounts and Ratios) by Race for Baseline Applications: AST-ROCH-SYR COM White (Base) 8249 (1.00) Black Hispanic Other Minority COM New York State ffYNS MSB £ SLA 4403(1.00) 2988(1.00) 6481(1.00) 3673(1.23) 4960 (0.77)* 3616 (1.27) 7125(0.86) 2509(0.84) 5365(0.83) 1951(0.69) 3280 (0.74) I 1910(0.64) 7243 (1.12) 2814(0.99) I t 2840 (1.00) ROCH SLA t a) The mutual savings banks estimates are based on 197 6-1977 mortgage applications data while the other equations are based on 1977-1978 applications. The acronyms used in the column headings are: Bank type COM - commercial banks MSB - mutual savings banks SLA - savings and loan associations Metropolitan areas AST - Albany-Schenectady-Troy NYNS - New York-Nassau-Suffolk ROCH - Rochester SYR - Syracuse The entries in the table represent the predicted downward modification (in dollars) for an applicant similar to the base application in all ways other than the characteristic listed. Numbers in parentheses represent the ratio of the downward modification for an application with the indicated characteristic to the downward modification for the baseline application. See text for definition of the baseline application. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different from the denominator at the five-to-ten percent level. Two asterisks (**) indicate that the difference is significant at the five or less percent level. 7-15 Bankers are more likely to modify the loan amount on applications from minorities than from whites, but once they decide to modify the loan, lenders do not reduce loan amounts excessively below requested amounts for members of racial minorities. Thus, the evidence presented here is not consistent with the view that bankers use the modification alternative to give minorities harsher loan terms than otherwise warranted. Given denial ratios for minorities consistently above one, we conclude that the evidence is consistent with the view that most bankers in New York State discriminate against minorities by denying loans outright rather than by imposing harsher terms. Age of the Applicant Turning now to the results by age, we find evidence that some banks reduce loan amounts by more for applicants over 45 than for otherwise comparable younger applicants. As summarized in Table 7-4, the results support the hypothesis that both commercial banks and savings and loan associations in the New YorkNassau-Suffolk metropolitan area discriminate against applicants between the ages of 45 and 54 and against those over 54. All four coefficients on which this conclusion is based are statistically significant at the five percent level or less. While the direc- tion of impact for applicants in these age groups in the New YorkNassau-Suffolk mutual savings bank sample is consistent with the hypothesis of discriminatory behavior as well, the statistical insignificance of the relevant coefficients makes it impossible to reject the hypothesis that these banks treat older applicants 7-16 Table 7-4 Downward Modifications (Dollar Amounts and Ratios) by Age for Baseline Applications; AST-ROCH-SYR COM Under 25 25-34 COM 3768 (1. 26) 5704 (0. 69) * * 4036(1. 35) * New York State NYNS MSB SLA ROCH SLA 6241(0. 96) 3371(1. 19) 4449 (1 .01) 5574(0. 85) 2855 (1. 01) 3392 (0 .77) 6481(1. 00) 2840(1. 00) 4403 (1 .00) 35-44(Base) 8249(1. 00) 2988(1. 00) 45-54 6083(2. 04) ** 7223 (1. 11) 4738(1. 67) ** 4805(1 .09) t 5358 (0. 65) * * Over 54 7352 (2. 46) ** 7448(1. 15) 6098 (2. 15) ** 2475 (0 .56) a) The mutual savings banks estimates are based oh 1976-1977 mortgage applications data while the other equations are based on 1977-1978 applications. The acronyms used in the column headings are: Bank type COM - commercial banks MSB - mutual savings banks SLA - savings and loan associations Metropolitan areas AST - Albany-Schenectady-Troy NYNS - New York-Nassau-Suffolk ROCH - Rochester SYR - Syracuse The entries in the table represent the predicted downward modification (in dollars) for an applicant similar to the base application in all ways other than the characteristic listed. Numbers in parentheses represent the ratio of the downward modification for an application with the indicated characteristic to the downward modification for the baseline application. See text for definition of the baseline application. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different from the denominator at the five-to-ten percent level. Two asterisks (**) indicate that the difference is significant at the five or less percent level. 6-17 the same as they treat younger applicants. Neither of the upstate samples gives evidence of discrimination against older applicants either; indeed, the commercial banks in the Albany-SchenectadyTroy, Rochester, Syracuse area appear to reduce loans by less for older applicants relative to younger applicants. For the New York-Nassau-Suffolk commercial banks and savings and loan associations samples, the magnitudes of the predicted downward modifications for applicants over 45 who are otherwise comparable to the baseline applicant are substantial; they range from $4738 for 45-54 year old applicants at savings and loan associations to $7352 for applicants over 55 at commercial banks. The differences between the predicted downward modifications for the applicants over 45 and those for the base applicants show that up to 60 percent of each predicted loan reduction for older applicants represents the effect of age alone. These findings shed additional light on the denial and modification ratios reported for these New York-Nassau-Suffolk banks in Chapter 6. Denial ratios close to one suggest that the commer- cial banks do not discriminate against older applicants. The high modification ratios for the two oldest age groups, however, combined with the finding that the commercial banks reduce loans more in the case of older applicants than in the case of younger applicants suggests that the modification ratios indicate discriminatory behavior. In the case of the savings and loan associations, high denial ratios for older applicants directly indicate age discrimination while the large downward loan modifications on applications from older applicants lends further support to the discriminatory 6-18 behavior hypothesis even though the predicted probabilities of modification are low. Because of the way the models are specified, the effect of age on the size of the downward modification is invariant with respect to the sex of the applicant. The specification does im- ply, however, that the effects of sex and age are additive. This additivity is particularly relevant for the New York-Nassau-Suffolk commercial bank sample where larger than warranted downward modifications were found for female only applicants above childbearing age. Combining this finding with the findings by age, the follow- ing implications emerge. Commercial banks would reduce the loan amount by $9416, on average, on applications, otherwise similar to the baseline application, from female applicants between 45 and 54 with no childbearing age women and by $11,685 on applications from those female applicants over 54. These modifications are 3.15 and 3.90 times the predicted downward modifications for the male-female baseline application. Thus, the allegation that older women are treated differently from similarly situated younger male-female couples is supported for New York-Nassau-Suffolk commercial banks. With respect to young applicants, we find little evidence of discriminatory behavior. The one possible exception is the almost statistically significant positive effect for 25-34 year olds in the New York-Nassau-Suffolk commercial bank sample. The direction of impact is mixed across the five samples and none of the positive coefficients are statistically significant at the 10 percent level. 6-19 Redlining Four of the five samples analyzed in this chapter have too few observations to permit examination of the hypothesis of differential downward modifications in neighborhoods alleged to be redlined. Only the New York-Nassau-Suffolk commercial bank sample permits such a test. As reported in Table 7-5, downward modification ratios greater than one occur with respect to applications from only the alleged redlined areas and Manhattan. Although neither of the coefficients on which these ratios are based is statistically significant at the 10 percent (two-tail) level, their magnitudes and their significance at a 10 percent (one-tail) level suggest that they should not be dismissed completely. At most we can say that the evidence weakly supports the view that applicants from areas alleged to be redlined experience greater downward modifications than similarly situated suburban applicants. Finally, the downward modification data do not support allegations that bankers treat applications from older neighborhoods or from neighborhoods with high proportions of blacks differently than those from other neighborhoods. The only pos- sible exception to this conclusion is found in the Rochester savings and loan association sample where a 10 percentage point increase in the percent black is associated with a $1299 increase in the average downward modification for a baseline applicant. The coefficient just misses statistical significance at the 10 percent level. 7-20 Table 7-5 Downward Modifications (Dollar Amounts and Ratios) by Location for Baseline Applications at Commercial Banks in New York and Nassau-Suffolk SMSAs a Suffolk County (base) 2988(1. 00) Alleged redlined areas 5590(1. 87) Northeast Kings 1076(0. 36) South Kings 2002 (0. 67) North Bronx 1706(0. 57) Rest of Queens 2513(0. 84) New York County Richmond (Manhattan) (Staten Island) Rockland 5381(1. 80) 375 (0. 13) 429 (0. 14) Westchester 1616(0. 54) Nassau 1916(0. 64) a) The estimates are based on 19771978 mortgage applications data. The entries in the table represent the predicted downward modification (in dollars) for an applicant similar to the base application in all ways other than the characteristic listed. Numbers in parentheses represent the ratio of the downward modification for an application with the indicated characteristic to the downward modification for the baseline application. See text for definition of the baseline application. A single asterisk (*) indicates that the numerator of the ratio is statistically significantly different from the denominator at the five-to-ten percent level. Two asterisks (**) indicate that the difference is significant at the five or less percent level. 7-21 SUMMARY The evidence does not support the hypothesis that banks in New York State make widespread use of excessive loan reduction as a technique for discriminating against certain types of applications. On the other hand, the evidence supports the view that banks in the New York—Nassau—Suffolk area use this method to discriminate in some instances. The strongest finding is that commercial banks and savings and loan associations appear to discriminate against applicants over 45. When combined with the finding that the commercial banks also treat applications from female only households with no woman of childbearing age adversely, this finding has particularly strong implications for the treatment of older women. Evidence of adverse treat- ment of separated applicants was found in the mutual savings bank sample. While no discriminatory behavior based on the race of the applicant was discovered, the results weakly suggest that excessive modifications may occur for applicants purchasing properties in areas alleged to be redlined. 6-22 Footnotes 1. Since New York State's usury law was binding during our study period, analysis of interest rates would not be fruitful in any case. 2. This calculation is based on a weighted average of the coefficients across the four samples. The 10,000 difference in re- quested loan increases the downward modification by $960 while the increase in RLTOAV from 0.63 to 0.82 increases the modification by $1235. Hence, the additional amount granted is 7805 ( = 10,000 - 2195) instead of $10,000. 3. Because of this unexpected sign of RLTOAV, a variety of alternative model specifications, including non-linear specifications, were estimated for the New York-Nassau-Suffolk commercial bank sample. The results with respect to the discrimina- tion variables were remarkably stable across specifications. 4. In the New York-Nassau-Suffolk metropolitan area, the baseline suburb is Suffolk County and in the Rochester area, it is Monroe County. The combined upstate data base requires two modifications to the baseline application; first, the baseline application is expanded to include those married malefemale couples where the wife is beyond childbearing age and is working and second, since no location variables are included in the equation, the base location is the entire study area. •U.S. GOVERNMENT PRINTING OFFICE : 1980 0-62^-909/1818
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