Association for Public Policy Analysis & Management

This paper uses financial modeling and statistical analysis of American Housing Survey (AHS) data from 1985 to 2013 to analyze whether the distribution of mortgage characteristics – even within the most traditional segments of the mortgage market – creates divergent wealth-building opportunities for low-income vs. high-income borrowers. Specifically, this research examines how the cost and rate of building equity through mortgage finance varies by borrower income, and how this relationship has changed over time. In addition to analyzing stratification patterns in the traditional mortgage market as a whole, this paper evaluates whether such stratification patterns are attributable to between- versus within-market stratification processes, by comparing stratification trends within four submarkets: the conventional home-purchase submarket; the conventional refinance submarket; the government home-purchase submarket; and the government refinance submarket. Based on these analyses, this 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 persisted over the past two decades, even after the recent financial crisis. Third, trends in origination timing and income inequality exacerbate these mortgage-based stratification dynamics. Finally, this stratification pattern is twofold, involving both stratification between submarkets as well as stratification within submarkets. In short, these findings suggest that low-income borrowers have received loan terms that substantially disadvantage their ability to build wealth through mortgage instruments in relation to higher-income borrowers since the early 1990s, even within the market segment that scholars and practitioners have invoked to close U.S. wealth gaps. By way of conclusion, this paper contextualizes the empirical findings in relation to broader economic determinants of mortgage-based wealth building, and discusses the implications of these findings for policy reforms. In so doing, this paper provides more comprehensive insight into the role that mortgage finance plays in shaping wealth inequalities in the U.S., and renders debatable some of the central underwriting and risk assumptions in the U.S. mortgage market.