By Cynthia Corzo
Three groups of people with equal finances, credit scores and qualifying factors apply for a mortgage loan, and each is approved. However, the sole woman applicant is assigned a significantly higher interest rate than other buyers, who are a sole male borrower and joint male and female co-borrowers.
A study by Lu Fang, an assistant professor at the Hollo School of Real Estate at FIU Business, found that the disparity in the contract rate is not attributable to differences in borrowers' default probability or prepayment probability, but rather due to gender itself.
"The study reveals that female sole subprime mortgage borrowers are charged 13 basis points higher than joint male-female co-borrowers even after controlling for default and prepayment risks," said Fang. "While the sole female tends to default a little bit more than the joint male-female, the sole male with the same results doesn't pay more."
Published in the 2020 winter issue of Real Estate Economics, the research examined 2,206 observations of 30-year fixedrate subprime home purchase mortgages in Miami-Dade County from January 1997 to December 2006. Fang and her co-author tracked monthly performance of the loans from January 2000 to October 2010, which included the last financial crisis.
Several possible explanations are provided for the sources of this disparity, including discrimination and gender-based differences in loan shopping behavior, bargaining power and financial literacy.
THE DISPARITY IN THE CONTRACT RATE IS NOT ATTRIBUTABLE TO DIFFERENCES IN BORROWERS' DEFAULT PROBABILITY OR PREPAYMENT PROBABILITY, BUT RATHER DUE TO GENDER ITSELF.
Lenders may use gender as a proxy for unobserved loan risk factors to predict loan performance or to directly set the interest rate when gender is not associated with loan termination risk. Both of these approaches are clear violation of the fair lending laws that have been in place for decades.
Can sole female borrowers stop paying higher rates?
"Yes," said Fang. "One approach is to shop aggressively for the loan and negotiate with the lender." The topic of gender equality in the mortgage market has moved into the spotlight as females make up a growing share of borrowers and lenders tighten regulation on loan origination. According to the National Association of Realtors' 2021 report, single women accounted for 18% of home purchases.
Fang conducted the research with Henry Munneke of the University of Georgia.