Actos Supranacionales: el Grupo Bicentenario

The Fannie Mae Foundation data from the survey conducted in Columbus, Ohio have 500 homeowners divided equally between Blacks and Whites. The data set though is not very big, but it should be large enough to study the average characteristics of the homeowners in the two races and get some idea of the underlying cause of this discrepancy. The study asked homeowners as to what rate of annual house price increase did he/ she estimate has actually occurred since buying the house. The African Americans reported an average annual rate of appreciation of 14 percent where as whites reported a 9 percent appreciation. The survey also asked about the expectations the homeowners had in terms of housing appreciation, the blacks reported an average appreciation expectation of 5.5 percent where as Whites reported a 5 percent appreciation expectation. Surprisingly, appreciationfigures reported by Blacks are somewhat higher. However, this does rule out the possibility that on average black homeowners in this sample did not respond to housing capital gains because they do not think they experienced any.

Next, looking at borrowing tendency across races, 31 percent of white homeowners have a second mortgage or a home equity loan, in contrast to 15 percent of blacks. 41 percent of white homeowners have refinanced where as 49 percent of blacks have done the same. Surprisingly, more black homeowners claimed to have refinanced in this data though the difference is not statistically significant. Of those who refinanced, 81 percent of whites claimed that they did it to lower interest rate and 4 percent of them just to cash out equity where as 69 percent of blacks claimed that they did it to lower interest rate and 6 percent of them to cash out equity. As we have seen previously with SCF, more Blacks refinanced to cash out equity. The study asked the homeowners who have not refinanced the reason for not doing so. As shown in table 2.9 below, 16 percent of blacks claimed the reason to be bad credit, compared to only 4 percent of whites. The difference is statistically significant at 1 percent level as shown by the Pearson chi-squared statistic. This is the test of independence which is corrected for the survey design using the second-order correction of Rao and Scott (1984) and converted into an F-statistic.

Not refinance: bad credit Black White

0 84 96

1 16 4

Table 2.9: Not Refinance Due to Bad Crediti

i_{Pearson: Uncorrected chi2(1) = 6.1390, Design-based F(1, 290) = 9.6696 P = 0.0021}

Significantly more black homeowners who did not refinance attribute that to their poor savings.17 percent of blacks blamed their low savings for their inability to pay for their cost of refinancing compared to only 7 percent of Whites. This difference is again statistically significant at 1 percent level as shown in table 2.10 below.

Not refinance: low savings Black White

0 83 93

1 17 7

Table 2.10: Not Refinance Due to Low Savingsj

j_{Pearson: Uncorrected chi2(1) = 2.8559, Design-based F(1, 290) = 5.6782 P = 0.0178}

The study also looked into the borrowing tendency (in terms of proportion who borrowed) of the two races by the level of actual appreciation in house prices. The high appreciations are the ones in top quarter of the distribution where as low appreciation are the ones in the bottom quarter. The table 2.11 suggests that in terms of refinancing, there is not much difference across the races for homeowners experiencing high appreciation. However significantly less blacks experiencing low appreciation have refinanced. Also, proportionately less blacks seem to have taken out a home equity loan or second mortgage irrespective of their level of housing appreciation.

Black homeowners All homeowners High appreciation Low appreciation Refinance 49.00 45.00 28.00 Refinance to lower int 33.00 32.00 9.00 Refinance to cash out 3.00 2.00 1.00 Second mortgage 15.00 13.00 16.00 White homeowners All homeowners High appreciation Low appreciation Refinance 41.00 39.00 41.00 Refinance to lower int 33.00 32.00 35.00 Refinance to cash out 2.00 1.00 0.00 Second mortgage 31.00 32.00 29.00

Table 2.11: Borrowing Pattern by the Extent of Actual Housing Appreciation

The whites who refinanced reported an average interest rate of 5 percent where as blacks reported a 6 percent interest rate. The whites with second mortgage reported a 7 percent interest rate where as blacks reported a 7.5 percent interest rate. Therefore, blacks who refinanced reported a slightly higher interest rate than whites however the difference could possibly be explained by the difference in their credit characteristics.

Next, comparing in terms of access to credit cards, significantly more White homeowners have that access. 91 percent of white homeowners have that access in contrast to 71 percent of blacks. However, 33 percent of blacks with card do not carry a revolving balance in comparison to 46 percent of whites. The difference in terms of carrying revolving balance is also significant atfive percent level.

Next, the study will look into thefinancial savvyness of the homeowners. A measure offinancial savvy- ness would be to check if the respondent is aware of his/ her housing appreciation or have any expectation regarding appreciation of his/ her house price. Not every homeowner in the survey is aware of his/ her actual house price appreciation or has reported any expectation. 65 percent of whites and 64 percent of blacks reported an appreciation in their actual house prices and the difference is not significant as shown in table 2.12. Only 34 percent of black homeowners reported an expected appreciation compared to 55 percent of whites. Therefore in terms of awareness of actual house price appreciation, there is practically no difference between the races, where as in terms of having an expectation, more Whites seem to have a more precise expectation and the difference is significant at 5 percent level.

Know Actual House Price Increase Black White

0 36 35

1 64 65

Table 2.12: Know Actual House Price Increasek

k_{Pearson: Uncorrected chi2(1) = 0.0144, Design-based F(1, 500) = 0.0335 P = 0.8549}

Know Expected House Price Increase Black White

0 66 45

1 34 55

Table 2.13: Know Expected House Price Increasel

l_{Pearson: Uncorrected chi2(1) = 2.1907 Design-based F(1, 500) = 4.9659 P = 0.0263}

Among Whites who know their actual rate of house price appreciation, 32 percent have second mortgage or home equity loan and 44 percent have refinanced, where as among those who claim not to know their actual appreciation, 29 percent have a second mortgage or home equity loan and 34 percent have refinanced. In case of African-Americans, those who are aware of their rate of actual housing capital gains, 15 percent have a second mortgage or a home equity loan and 55 percent have refinanced, where as among those who are not aware, 14 percent has a second mortgage or home equity loan and 37 percent of them have refinanced. Therefore, it seems that people with some idea of their house price appreciation are more likely to borrow leveraging their home equity. Next, let’s try to see if there is a difference in behavior among those with and without any expectation of their rate of housing capital gains. For the whites with some expectation, 33 percent have a second mortgage and 46 percent have refinanced, in comparison, among those without any expectation, 28 percent have second mortgage and 35 percent have refinanced. Now, in case of Blacks with some expectation, 11 percent have second mortgage and 50 percent have refinanced, where as among those with no expectation, 17 percent have second mortgage and 48 percent have refinanced. At least for the Whites, the study suggests those with some expectation of their housing appreciation are more likely to borrow leveraging their home equity.

The study created a measure of knowledge based on 6 knowledge measures. The knowledge measures are coded such that if respondent does not know the information, the variable equals one, else it equals 0. The six measures that this study focuses on are whether respondent compares interest rates on credit cards

before applying for a card (ccintcom), what is the highest credit limit on any of the respondent’s credit cards (cclimit), what is the interest rate on his/ her most frequently used card (ccint), whether aware of his/ her credit rating or credit score (FICO), is it possible tofind out one’s credit score (knowFICO) and whether respondent balances his/ her checkbook every month (balance). The tables below compares the black and white homeowners as well as those with and without collateralized borrowing based on their individual knowledge measures and the aggregate knowledge as well. The table below shows that black homeowners in Columbus have higher financial knowledge than whites. For whites, those who borrow collateralizing home equity have higherfinancial knowledge, however for blacks, those who refinance seem to have lower knowledge. Therefore so far, it does not seem to be the case that African-American home- owners are lessfinancial savvy than their white counterparts and the difference infinancial sophistication among homeowners in the two races is driving their differential borrowing behavior.

Black All homeowners With second mortgage Without second mortgage Ccintcom 0.29 0.30 0.29 Cclimit 0.05 0.01 0.06 Ccint 0.15 0.18 0.15 FICO 0.69 0.57 0.76 KnowFICO 0.04 0.01 0.05 Balance 0.26 0.12 0.29 Aggregate knowledge 1.54 1.18 1.60 White All homeowners With second mortgage Without second mortgage Ccintcom 0.34 0.33 0.34 Cclimit 0.15 0.15 0.15 Ccint 0.33 0.35 0.34 FICO 0.73 0.63 0.72 KnowFICO 0.08 0.03 0.11 Balance 0.34 0.37 0.32 Aggregate knowledge 1.95 1.86 1.99

Black All homeowners Have refinanced Have not refinanced Ccintcom 0.29 0.31 0.27 Cclimit 0.05 0.06 0.05 Ccint 0.15 0.20 0.11 FICO 0.69 0.68 0.78 KnowFICO 0.04 0.03 0.06 Balance 0.26 0.34 0.19 Aggregate knowledge 1.54 1.62 1.46

White All homeowners Have refinanced Have not refinanced Ccintcom 0.34 0.30 0.37 Cclimit 0.15 0.12 0.17 Ccint 0.33 0.27 0.38 FICO 0.73 0.72 0.68 KnowFICO 0.08 0.06 0.10 Balance 0.34 0.31 0.36 Aggregate knowledge 1.95 1.78 2.06

Table 2.15: Financial Knowledge by Refinancing Indicators

However, there is a possibility that there is some difference in their quality offinancial information as the racial groups seem to rely on different sources for their information. 45 percent of black homeowners claim to rely the most on their family for theirfinancial information in contrast to 25 percent of white homeowners. However, 29 percent of blacks also consider professional financial advisors as their most important source of financial information which is not significantly different from 22 percent of white homeowners.

Family Members Black White 0 55 75 1 45 25

Table 2.16: Family Member as Most Important Information Sourcem

Professional Financial Advisors black white

0 71 78

1 29 22

Table 2.17: Professional Financial Advisors as Most Important Information Sourcen

n_{Pearson: Uncorrected chi2(1) = 1.0167, Design-based F(1, 500) = 2.2288 P = 0.1361}

White homeowners in the Fannie Mae sample arefinancially better-offthan their black counterparts. The average annual income of whites being 80,000 dollars, where in comparison blacks homeowners earn approximately 52,000. In terms of net-wealth (asset less debt), the white homeowners are worth 53,500 on an average, where as blacks own 24,000 dollars. To get an idea of the credit history of the respondents, the study asked them about their credit score. Among homeowners who did report, whites reported an average score of 705 where as the correspondingfigure for blacks being 565. These are self-reportedfigures and hence may not be accurate. When asked to evaluate their credit rating, 20 percent of blacks reported below average rating compared to 3 percent of whites and the difference is significant at 1 percent level. 22 percent of African-American homeowners have claimed to havefiled for bankruptcy compared to 9 percent of whites which is again a difference significant at 1 percent. The study looked into the proportion of homeowners in the two races who were denied a home loan in the lastfive years. 18 percent of blacks and 6 percent of whites reported to have been denied. The study also enquired whether respondents were denied any other type of loan in the lastfive years. 25 percent of blacks and 8 percent of whites reported to have been denied. In both cases, more African-Americans have been denied loans, a difference significant at one percent level. 76 percent of blacks and 47 percent of whites who were denied a home loan attribute that denial to their bad credit. Also, 77 percent of blacks and 63 percent of whites who were denied other forms of credit attribute that to their credit history. It seems that credit history of black homeowners is worse than their white counterparts and that can potentially contribute to a large extent to their differing borrowing behavior, even if both races have experienced house price appreciation.

Discrimination or at least the perception/ fear of being discriminated could be another factor con- tributing to this differential borrowing behavior across races. 17 percent of blacks attributed their being denied a home loan to discrimination against them though none of the whites do that. 3 percent of black homeowners cited discrimination to be the reason for being denied other types of loans though none of their white counterparts. These differences are significant at 1 percent level. 7 percent of black homeown- ers and 0.6 percent of white homeowners, who have not refinanced their mortgage, cite the fear of being

discriminated as a potential reason however this difference is not statistically significant. An interesting question in the survey is whether blacks and whites who have equal income, wealth and credit histories have equal opportunities to buy a home. 50 percent of black homeowners and significantly less 26 percent of white homeowners think that not to be the case. Therefore, there is a greater perception of existence of discrimination among Black homeowners. To get an idea of whether the respondent actually got dis- criminated the survey asked whether the respondent has ever been discriminated against when renting or owning a home. 23 percent of black homeowners and 6 percent of whites claimed to have faced some form of discrimination which is a statistically significant difference. Therefore, there is some evidence of market inefficiencies in the form of discrimination in the real-estate market which possibly could also influence borrowing behavior across races.