Publications

"How Much Does Racial Bias Affect Mortgage Lending? Evidence from Human and Algorithmic Credit Decision" Neil Bhutta, Aurel Hizmo and Daniel Ringo, 2024. 

Abstract: We assess racial discrimination in mortgage approvals using confidential data on mortgage applications. Minority applicants tend to have significantly lower credit scores, higher leverage, and are less likely than White applicants to receive algorithmic approval from raceblind government-automated underwriting systems (AUS). Observable applicant-risk factors explain most of the racial disparities in lender denials. Further, we exploit the AUS data to show there are risk factors we do not directly observe, and our analysis indicates that these factors explain at least some of the residual 1-2 percentage point denial gaps. Overall, we find that differential treatment has played a more limited role in generating denial disparities in recent years than suggested by previous research.


"Paying Too Much? Borrower Sophistication and Overpayment in the US Mortgage Market" Neil Bhutta, Andreas Fuster, and Aurel Hizmo 2024. 

Abstract: Comparing mortgage rates that borrowers obtain to rates that lenders could offer for the same loan, we find that many homeowners significantly overpay for their mortgage, with overpayment varying across borrower types and with market interest rates. Survey data reveal that borrowers' mortgage knowledge and shopping behavior strongly correlate with the rates they secure. We also document substantial variation in how expensive and profitable lenders are, without any evidence that expensive loans are associated with a better borrower experience. Despite many lenders operating in the US mortgage market, limited borrower sophistication may provide lenders with market power.


"Do Minorities Pay More for Mortgages?" Neil Bhutta and Aurel Hizmo.

Abstract: We test for racial discrimination in the prices charged by mortgage lenders. We construct a unique data set from which we observe the three dimensions of a mortgage’s price: the interest rate, discount points, and fees. Although we find statistically significant gaps by race and ethnicity in interest rates, these gaps are offset by differences in discount points. We trace out point-rate schedules and show that minorities and whites face identical schedules, but sort to different locations on the schedule. Such sorting may reflect systematic differences in liquidity or preferences. Finally, we find no differences in total fees by race or ethnicity.


"Measuring Mortgage Credit Availability: A Frontier Estimation Approach" with Elliot Anenberg, Aurel Hizmo, Edward Kung, and Raven Molloy.

Abstract: We test for racial discrimination in the prices charged by mortgage lenders. We construct a unique data set from which we observe the three dimensions of a mortgage’s price: the interest rate, discount points, and fees. Although we find statistically significant gaps by race and ethnicity in interest rates, these gaps are offset by differences in discount points. We trace out point-rate schedules and show that minorities and whites face identical schedules, but sort to different locations on the schedule. Such sorting may reflect systematic differences in liquidity or preferences. Finally, we find no differences in total fees by race or ethnicity.


"Beyond Signaling and Human Capital: Education and the Revelation of Ability" with Peter Arcidiacono, Patrick Bayer, and Aurel Hizmo.

Abstract: We provide evidence that college graduation plays a direct role in revealing ability to the labor market. Using the NLSY79, our results suggest that ability is observed nearly perfectly for college graduates, but is revealed to the labor market more gradually for high school graduates. Consequently, from the beginning of their careers, college graduates are paid in accordance with their own ability, while the wages of high school graduates are initially unrelated to their own ability. This view of ability revelation in the labor market has considerable power in explaining racial differences in wages, education, and returns to ability.


Working Papers and Projects


"How Resilient is Mortgage Credit Supply? Evidence from the COVID-19 Pandemic" with Andreas Fuster, Aurel Hizmo, Lauren Lambie-Hanson, James Vickery and Paul Willen, 2024. FEDS Working Paper No. 2021-48. 

Abstract: We study the evolution of US mortgage credit supply during the COVID-19 pandemic. Although the mortgage market experienced a historic boom in 2020, we show there was also a large and sustained increase in intermediation markups that limited the pass-through of low rates to borrowers. Markups typically rise during periods of peak demand, but this historical relationship explains only part of the large increase during the pandemic. We present evidence that pandemic-related labor market frictions and operational bottlenecks contributed to unusually inelastic credit supply, and that technology-based lenders, likely less constrained by these frictions, gained market share. Rising forbearance and default risk did not significantly affect rates on "plain-vanilla" conforming mortgages, but it did lead to higher spreads on mortgages without government guarantees and loans to the riskiest borrowers. Mortgage-backed securities purchases by the Federal Reserve also supported the flow of credit in the conforming segment.


"Strictness and Disparate Impact: Why do Lenders Reject Loans with Government Guarantees?" with Neil Bhutta, Aurel Hizmo, Daniel Ringo and Eileen van Straelen, 2024. Work in Progress.


“Risk in Housing Markets: An Equilibrium Approach”. Aurel Hizmo. Working Paper.

Abstract: Homeowners are overexposed to city-specific house price risk and income risks, which may be very difficult to insure against using standard financial instruments. This paper develops a micro-founded equilibrium model that transparently shows how this local uninsurable risk affects individual location decisions and portfolio choices, and ultimately how it affects prices in equilibrium. I estimate a version of this model using house price and wage data and provide estimates for risk premia for different cities, which imply that homes are on average about $20000 cheaper than they would be if owners were risk-neutral. This estimate is over $100000 for volatile coastal cities. Creating assets that hedge city-specific risks increases house prices by about 20% and productivity by about 10%. The average willingness to pay for completing the market per homeowner is between $10000 and $20000. Welfare gains come both from better risk-sharing and from more efficient sorting of households across cities.


"The Effects of the Ability-to-Repay / Qualified Mortgage Rule on Mortgage Lending", Aurel Hizmo and Shane Sherlund. FEDS Notes (2018).


"The Common Variation in Housing Price Returns", Aurel Hizmo. Resting working paper.


"Hedging Housing Risk with Stock Indexes from Local Employers". Aurel Hizmo. Resting working paper.