Why Women Pay More For Mortgages

Co-author of a study about women paying more for mortgages and an industry expert discuss the report’s findings.

Women have a harder time than men securing a home mortgage and often pay higher interest rates. Yet, women repay their mortgages more reliably than men do, notes a recent study by the Urban Institute, a think tank in Washington. While it is unclear if a gender bias is responsible, at the very least the repayment predictors’ models that lenders use are flawed, says Jun Zhu, one of the study’s authors. She and Guy Cecala, CEO of Inside Mortgage Finance Publications, discussed the issue on the [email protected] show on Wharton Business Radio on SiriusXM channel 111.

Why Women Pay More For Mortgages
Mortgages

An edited transcript of the conversation appears below:

[email protected]: Why is it that women are seemingly better at paying off mortgages?

Jun Zhu: We don’t know right now. People will hopefully start looking at why [that is the case] now, because we know that there is definitely a difference.

[email protected]: How does that occur?

Zhu: This is what we find. Even [considering] everything else like FICO [credit] scores, income, LTV (loan-to-value, a risk assessment ratio), etc., we do find out that a single woman performs much better than a single man. Right now, we don’t know why.

[email protected]: Women are also dealing with higher interest rates and higher settlement payments than men do, among several other issues, correct?

Zhu: Right. We find that they pay higher interest rates. There are two reasons why they pay higher interest rates. One is because they have more subprime mortgages, which cost more. We don’t really address that in the paper. The other reason they pay more — the focus of this paper — is they have weaker characteristics. Their weaker characteristics predict that they will default more, but what we find in our research is that this is wrong. They do have weaker characteristics, but they do not default more. There is something about a woman that is not being picked up in the proxies we use to predict how well someone will do in paying their mortgage.

“Our research finds that despite their low incomes women are better at paying their mortgage.” –Jun Zhu

[email protected]: I guess there’s a suggestion that relying more on FICO scores could be useful in determining the best route for people to qualify for mortgages.

Zhu: Right. FICO could be robust. Accurate measures of the risk can take into account the actual loan performance. The new version, FICO 8, which was introduced in July 2009, and [its competing product] VantageScore aim to achieve that. We have not looked at whether or not it might capture this difference better, but government agencies rely on the earlier version of FICO. The scores provided by the credit rating services were used in our paper. FICO can and should evolve.

[email protected]: One other aspect to factor in is that when single women look for a mortgage, many of them are minorities who may live in lower-income areas, which is being counted against them, correct?

Zhu: That’s right. We did not find any discrimination at this point; we just find that there is definitely a flaw in the predictors. Our research showed that the indicators lenders have been using to determine whether or not someone would do a good job of paying their mortgage have been incomplete. It’s inaccurate. Definitely, there’s some impact on people living in low-income communities.

[email protected]: Joining us is Guy Cecala, the CEO of Inside Mortgage Finance. I want your opinion on the data being brought by this study, because you’re in the industry and you see this on a daily basis.

Guy Cecala: The first impression is it’s not that surprising. The mortgage market is heavily reliant on credit scores, which don’t necessarily help single borrowers at all. Ideally, mortgage lenders like two borrowers just because they feel like they’re doubling their chances that somebody is going to pay a mortgage. Finally, there’s always been a disconnect between performance and the ability of a borrower to repay a loan, and what a mortgage lender decides, whether or not they give them the loan. That’s unfortunate. We’ve developed standards for handling millions of loans that were not very good on a case-by-case basis.

[email protected]: What about involving FICO scores on a more regular basis to determine who exactly would be the best qualifiers for a mortgage?

Cecala: The mortgage market has always been, and continues to be overly dependent on credit scores. If your credit score is below 700 you’re considered suspect and you have to have compensating factors before you can get a mortgage at a good rate. That’s unfortunate.

[email protected]: Could there potentially be a level of bias against women borrowers here?

Cecala: I think there can be. The mortgage market prides itself on being color blind, and essentially using a black box, but any sort of black box basically discriminates against single borrowers, lower-income borrowers and borrowers with lower credit scores. If those happen to be predominantly women, you have to assume that they are getting that kind of treatment from the mortgage market.

[email protected]: The current market is a little bit more favorable than it was in the wake of the housing bubble and the recession. Are we seeing this type of approach even after the recession? Maybe part of it is that lenders have to scrutinize the data even more because of what happened in the past, correct?

Cecala: Yes. One of the legacies of the financial crisis is we’ve got significantly tougher mortgage underwriting standards. There is somewhat of a plain vanilla, one-size-fits-all mortgage underwriting standard, and that’s not very good at accommodating minority borrowers in general, or anybody with any sort of a non-typical, non-generic credit profile. Minority buyers in general are getting fewer mortgages than they did before. The good news is that they’re not getting subprime loans, because the subprime market has dried up completely, but they’re not getting mortgages at all in many cases.

[email protected]: Jun, the data you brought looked at the pre-recession period, then the recession period, and post-recession. … Were there any major differences in terms of the success or lack of success of women servicing mortgages between those three periods of time?

Zhu: No. The results are consistent for those three different periods. For all of those three different periods we find that women were better than men.

[email protected]: Is it surprising to you or not surprising that the data is fairly similar across the board?

There is something about a woman that is not being picked up in the proxies used to predict how well someone will do in paying their mortgage.” –Jun Zhu

Zhu: It’s not surprising. The predictors definitely missed something that can make the behavior of women different from the behavior of men. It can be fixed, and it may already be fixed in the most recent FICO models, or other models. But since we used old-fashioned FICO scores, which were developed in 2003, maybe we did not pick up [the differences].

Cecala: There are significant differences in the time bands that the study produced. As you will see, a female-only borrower had an average credit score of

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