Financial Inequalities and the Household: How Mortgage Underwriting Calculations Shape Wealth-Building Trajectories in the United States
To examine the stratifying effects of mortgage credit, my paper analyzes mortgage originations between 1980 and 2013 using American Housing Survey (AHS) data. In particular, I measure stratification in what is often considered one of the most traditional, wealth-building, and equalizing segments of mortgage finance: new, first-position, fixed-payment, self-amortizing, conforming loans that are collateralized by owner-occupied site-built homes and originated by financial institutions after the fair-lending reforms of the 1960s and 1970s. Specifically, this paper asks whether the distribution of credit characteristics, even in this most traditional segment of the mortgage market, creates divergent wealth-building opportunities for low-income versus high-income borrowers. Further, I ask whether these divergences exacerbate existing economic inequalities, how these divergences have changed over the past thirty-three years, and whether these divergences are attributable to within-market calculative approaches or between-market sorting.
To examine these questions, I begin by mathematically generating an amortization schedule for each mortgage in my data set, based on the specific loan characteristics reported in the AHS data. Through close empirical attention to the mortgage’s structure and calculations, this modeling allows me to identify the wealth-building trajectory – operationalized as the cost and rate of building equity – of each mortgage in my data set. Next, I use statistical analysis to evaluate whether these mortgage-based wealth-building trajectories vary by household income within the traditional segment of the mortgage market, even after controlling for a series of literature-informed borrower, property, and mortgage characteristics. I also test whether income-associated inequalities in the cost and rate of equity building have changed over time, and I analyze how underlying income and origination trends from 1980 through 2013 shape these inequalities. To evaluate whether stratification patterns in the traditional mortgage market as a whole are attributable to between- versus within-market stratification processes, I quantify how the cost and rate of building equity through a mortgage varies by household income between and within four submarkets that comprise the traditional mortgage market: the conventional home-purchase market; the conventional refinance market; the government home-purchase market; and the government refinance market.
Based this analysis, my paper presents four key findings: First, borrowers with higher incomes receive mortgage terms that enable them to build equity both at a lower cost and more quickly than lower-income borrowers, even within the most traditional and purportedly wealth-equalizing segments of the market. Second, this stratification pattern has not always been present in the U.S. housing market, but rather emerged in the early 1990s and has remained stable over the past two decades. Third, this stratification pattern is twofold, involving both stratification between markets as well as stratification within submarkets. Finally, trends in income inequality and origination timing exacerbate these mortgage-based stratification dynamics. By way of conclusion, this paper contextualizes the empirical findings and discusses the implications of these findings for policy reforms. In so doing, this study renders debatable financial techniques and calculations that are central to mortgage underwriting in the U.S.
This paper makes three key contributions. Theoretically, this work speaks to a gap in the literature: specific linkages between growing economic inequality and changes in finance have not been determined (Carruthers and Kim 2011). Even housing-finance literature, which emphasizes questions of inequality, under-examines direct relationships between financial logics and stratification (Reid 2012; Stuart 2003). My research advances this knowledge by analyzing how financial instruments themselves shape wealth-building inequalities.
Methodologically, this research strengthens prior research designs by studying the wealth-building implications of meaningful combinations of mortgage characteristics. Studies that have touched on mortgage-finance instruments’ direct impacts on inequality have generally looked at approval- and interest-rate disparities (e.g., Boehm et al 2006). However, this approach under-analyzes other mortgage characteristics, such as amortization term, that fundamentally shape mortgage costs. My methodology incorporates financial modeling – and the specific calculations that are internal to mortgage products and structures – to more accurately capture disparities in mortgage-based wealth-building trajectories.
Empirically, this work focuses on a research site that has been understudied: stratification within the core of homeownership policies. While the literature on housing-finance inequalities is robust, much of this scholarship focuses on explicitly discriminatory and predatory practices, such as redlining, subprime lending, and discrimination net of underwriting criteria. My proposed research redresses this empirical gap by taking the traditional and purportedly most equalizing mortgage segment as its central object of study.
At its core, this work engages directly in analyzing domestic effects of financial economies. Indeed, a central focus of this work is how everyday usage of financial products shapes social inequalities between households. Specifically, I probe how the structures and calculations of mortgage-finance instruments affect household wealth-building trajectories, and how these mortgage-shaped wealth-building trajectories differ between low- and high-income households. At the same time, this research considers how domestic financial products are entangled with “high” finance, and particularly how the sorting and valuation processes of financial underwriting and loan structuring affect household-level wealth-building trajectories and financial encounters. In particular, this study provides insight into how stratification patterns have changed in relation to new transactional technologies and valuation processes in the mortgage industry, including automated underwriting and risk-based pricing. Ultimately, through these projects, this research provides more comprehensive insight into the role that mortgage-finance structures and calculations play in shaping everyday household-level wealth inequalities in the U.S.