Working paper
Temporal Focal Points and Economic Outcomes: Evidence from U.S. Mortgage Lending
Best Paper, Midwest Finance Association Annual Meeting.
Abstract. We develop modified benchmarking tests for disparate treatment that we apply to 25 years of mortgage lending. Our tests limit the scope for omitted variables by linking high-frequency mortgage decisions to an economic mechanism — loan officers have volume quotas that cause increased approval rates at month-end. We estimate that these quotas at least halve the unexplained 7 ppt Black approval gap. Loan officers more likely to miss their quotas have larger increases in Black approvals. Suggesting supply-side mechanisms, applications arrive at a constant rate within-month, and neither differences in credit risk nor applicant preferences explain the month-end decline in racial differences.
Keywords: mortgage lending, racial disparities, disparate treatment, discrimination testing, loan officer quotas, month-end effects, HMDA.
In brief
Monthly volume quotas for loan officers reveal how much of the racial gap in mortgage approvals stems from lender behavior.
Studying 25 years of mortgage lending, the authors develop a new test for disparate treatment: approval rates rise at the end of each month as loan officers try to hit their quotas, and they estimate these quotas at least halve the unexplained 7-percentage-point gap in approval rates for Black applicants. Loan officers more likely to miss their quotas show larger increases in Black approvals. Because applications arrive at a steady rate through the month and neither credit risk nor applicant preferences explain the pattern, the evidence points to supply-side (lender) mechanisms.
| Panel A. Design | ||
|---|---|---|
| Question | How much of the racial gap in mortgage approvals reflects lender behavior? | |
| Setting | Loan officers’ monthly volume quotas, which raise approval rates at the end of each month | |
| Data | 25 years of U.S. mortgage lending | |
| Method | Modified benchmarking tests for disparate treatment that link high-frequency lending decisions to month-end quotas | |
| Panel B. Reported effects | ||
| Unexplained gap in Black approval rates | 7 pp | |
| Share of the gap the quota effect closes | At least half | |
| Loan officers more likely to miss quotas | Larger increases in Black approvals | |
| Alternative explanations | Applications arrive steadily within the month; credit risk and applicant preferences do not explain the pattern | |
Summarized from the paper. See the paper for exact estimates and specifications.
Read and cite
- Working paper, SSRN
Giacoletti, Marco, Rawley Z. Heimer, and Edison Yu. “Temporal Focal Points and Economic Outcomes: Evidence from U.S. Mortgage Lending.” Working paper.
@unpublished{heimer2021temporal,
author = {Giacoletti, Marco and Heimer, Rawley Z. and Yu, Edison},
title = {Temporal Focal Points and Economic Outcomes: Evidence from {U.S.} Mortgage Lending},
note = {Working paper},
year = {2021},
url = {https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3795547}
}
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