Why Black and Latino homeowners profit less than whites

Credit: Leslee for iStock/Getty Images

New research has found Black and Latino homeowners make significantly lower returns on buying a home than whites, on average. But surprisingly, it’s not because of differences in home prices or appreciation rates in their neighborhoods.

In fact, when it comes to regular home sales, minority sellers realize about the same returns on average as whites. The study found instead that almost all of the disparity is driven by higher rates of foreclosures and other distressed home sales among Blacks and Latinos, which wipes out a huge chunk of potential wealth and lowers average returns.

Amir Kermani
Assoc. Prof. Amir Kermani

“Most of us think of home ownership as an excellent way to build wealth, so I think it’s natural for politicians and policymakers to believe that the best way to reduce the wealth gap is to promote home ownership among minorities,” said Berkeley Haas Assoc. Prof. Amir Kermani, study co-author. “What’s striking is that we found that equalizing rates of first-time home ownership would have almost no effect on the housing wealth gap, whereas helping people keep their homes would make a huge difference.”

The National Bureau of Economic Research (NBER) working paper, co-authored with Francis Wong of NBER, has important implications for housing policy, and also identifies the disturbing and deep-seated disparities in job stability and liquid wealth that underlie the higher foreclosure rates for Blacks and Latinos—even those with higher incomes.

The persistent wealth gap

In the United States, the median white household holds ten times the wealth of the median Black household. But although Black home ownership has increased from 23% in 1920 to 45% in 2021, the wealth gap has barely budged. Kermani was curious as to why decades of policies to increase homeownership hadn’t made more of a difference in closing the wealth gap.

He and Wong harnessed massive datasets linked together by the Fisher Center for Real Estate and Urban Economics, capturing 6 million home ownership spells from 1990 to 2017. The data includes Home Mortgage Disclosure Act records with self-reported race and ethnicity from loan applicants, real estate transaction records from data provider ATTOM; credit reports and loan-servicing data from Equifax-McDash; plus loan information from several other government and private sources. The study is the first to estimate the gap in returns on home ownership for Blacks and Latinos using data on individual transactions.

Across the housing market, discrimination has been well-documented, from redlining to unequal tax assessments to unfavorable loans and refinancing deals. And historically, minorities have often faced lower house price growth in their neighborhoods. That’s why Kermani was surprised to find that for regular home sales over the last two decades, average returns were very similar across racial groups—within neighborhoods with many minority homeowners and those that are primarily white. While some individual Black and Latino sellers sold their homes for much lower prices, gentrification pushed prices sky-high in other neighborhoods, bringing up the average. 

Yet averaged across all types of sales annually, Black and Latino homeowners make 3.7 and 2.0 percentage points less than white homeowners, the researchers found. Compounded over ten years, that’s a 44% lower return for Blacks and 22% lower for Latinos. These disparities in returns on home investments exist across all income levels, even the richest one-third of minority homeowners. (The magnitude is greatest among lower-income and single-parent families.)  

Averaged across all types of sales annually, Black and Latino homeowners make 3.7 and 2.0 percentage points less than white homeowners. Compounded over ten years, that’s a 44% lower return for Blacks and 22% lower for Latinos.

Distressed sales

It’s among distressed sales where the chasm emerges. Distressed sales include foreclosures, where a borrower stops making payments on their mortgage and the lender sells the home to recover the balance, as well as short sales, where a lender forces the homeowner to sell for the outstanding mortgage balance. 

Minority homeowners are 5% more likely to experience a distressed sale, and to live in neighborhoods where forced sales carry a steeper price discount, likely because there are fewer buyers, Kermani said. Distressed sales usually carry a price penalty, but even within distressed sales, Black and Latino homeowners make 3.8 and 2.7 percentage points lower returns than white homeowners, respectively. 

“If we could equalize the rate of return on homeownership for Blacks and whites—without any increase in home ownership—we would reduce the Black/white housing wealth gap by about 40% at retirement,” said Kermani. “If we were able to equalize both home purchases and the rate of return on ownership, we’d reduce the gap by 50%.”

Less job security, fewer assets

So why are minorities so much more likely to lose their homes in forced sales? It’s not because they take on more debt to buy them, and although differences in income and overall wealth play a role, they’re not the primary driver, the study found. For Blacks in particular, the researchers found a huge gap in liquid assets—cash or its equivalent—that accelerates from age 50 on. They also found that Blacks and Latinos are much more likely to lose their jobs than whites, across all sectors, education levels, geographic locations, and income levels.

“That was what surprised me the most: Even Black households with income over a hundred thousand dollars are still about 5% more likely to experience a layoff,” Kermani said. “The combination of higher job instability and fewer liquid assets makes people very vulnerable to a temporary shock, and increases the chances of losing all the wealth they’ve accumulated in their house.”

The researchers found that controlling for liquid assets and income shocks explains one-third of the higher mortgage delinquency for Blacks, and nearly half the difference for Latinos. Kermani said he hopes to dig deeper into the causes of the layoff disparities in future research.

Policy implications

“What’s clear is that the main problem seems to be rooted in the labor market, and the main fix has to be creating more stable jobs and ways to build liquid assets,” he said. “But in the short term, one solution is more flexible mortgage contracts and more mortgage modifications.”

The researchers estimated that receiving a modification after three months of failing to make mortgage payments can reduce the likelihood of a foreclosure by 37 percentage points, and increase a homeowner’s average annual returns by nearly 9 percentage points.

MBA team wins 2021 UT Austin Real Estate Competition

Group of male MBA students and woman faculty advisor holding big check
The Haas MBA team wins first place and $10,000 in prize money. (From L-R: Ian MacLean, Alex Dragten, Abby Franklin (faculty advisor), Carson Goldman, Andrew Johnson, Fukang Peng, and Travis Kauzer.)

Converting an office building into a life science center to lease to medical and biotech companies landed a team of Berkeley Haas MBA students a first place win at the 2021 UT Austin Real Estate Competition. 

The competition was held Thursday, Nov. 18 and hosted by the University of Texas at Austin McCombs School of Business. 

Team members include Carson Goldman, Andrew Johnson, Ian MacLean, Alex Dragten, all MBA 22, Fukang Peng, and Travis Kauzer, both EWMBA 22.

Haas bested 19 other teams from top U.S. business schools including Columbia, Yale, Wharton, NYU Stern, and University of Michigan’s Ross School of Business, and won $10,000 in prize money. This is Haas’ third first place win at this competition in the last four years. 

MBA teams were tasked with creating a business plan for a building with a single tenant whose lease was about to expire. They had to consider maximizing risk-adjusted returns and demonstrate an understanding of macroeconomic trends, including the effects of inflation and the COVID-19 pandemic.

The Haas MBA team decided to convert the building into a life science center to attract multiple tenants and maximize high returns.

Team lead Carson Goldman credited the team’s win to practicing case presentations every week this semester and to work they did with their faculty advisors.

“Our coaches Bill Falik and Abby Franklin provided constant feedback and guidance and were wholly committed to this competition,” Goldman said. “Our alumni were just as important as they had volunteered weekly to judge our practice cases and offer constructive criticism,” he added.

“It’s very gratifying to see our students progress over the semester and to win first place,” said Haas Lecturer Bill Falik. “We’ve had victories, but to win first place in three out of the four years at this national competition–this has never been done before.”

Oakland firestorm escape fuels Prof. Nancy Wallace’s research on climate risk

This month marks the 30th anniversary of the start of the Oakland Hills firestorm, which occurred on the hillsides of northern Oakland and southeastern Berkeley, California, over the weekend of October 19–20, 1991.

Chimneys of homes destroyed in the Oakland Hills by fire are visible beyond the black, charred trunks of trees also consumed by the firestorm which swept through the area in Oakland, Ca., Oct. 22, 1991. (AP Photo/Olga Shalygin)

Thirty years ago, Professor Nancy Wallace and her husband scrambled into their car with their family cat and a few belongings and fled for their lives as the Oakland Hills Firestorm roared through their neighborhood. The heat from the fire, fueled by dry pine needles and the Diablo winds, was so intense that within an hour almost 800 buildings were in flames.

Prof. Nancy Wallace
Prof. Nancy Wallace

“By the time we drove out, we were already encircled by fire and couldn’t go down the hill, but there were zero police or fire trucks on the scene. At the top of our street, I wanted to go right and my husband wanted to go left, and unfortunately I won,” said Wallace, who was at the time a new assistant professor with a six-year-old son, who luckily had stayed over at a friend’s house. “That’s when a car came speeding out and said if you go one inch farther, you’re going to die. Tom had to turn around on the rooftop garage of a house engulfed in flames…There were people ahead of us on motorcycles who were on fire. That’s not something you ever want to see.”

They made it out, but 25 people died, about 150 were injured, and about 2,900 homes were burned in California’s third deadliest wildfire. Wallace, who went on to become one of the country’s foremost experts on mortgage markets, has been haunted by it ever since. “We were told this was a hundred-year event, but my street had burned three times before,” she said. “Lots of places in California have burnt multiple times. And yet we build back.”

As wildfires bordering developed areas in the Western U.S., Australia, and around the world grow increasingly frequent and intense, Wallace has been crisscrossing the country and globe, presenting to government, business, and academic groups about the massive financial risk fires pose to the housing, real estate, and insurance markets—and to investors and homeowners. She has developed a new framework to quantify and evaluate the risk not only of wildfires, but also floods and other extreme weather events.

“The markets aren’t priced for climate change, and the situation is dire,” said Wallace, the Lisle and Roslyn Payne Chair in Real Estate and Capital Markets, chair of the Berkeley Haas Real Estate Group, and co-chair of the Fisher Center for Real Estate and Urban Economics. “Given my experience, I had an incentive to figure that out. I just didn’t have the data.”

“The markets aren’t priced for climate change, and the situation is dire.” – Prof. Nancy Wallace

Her recent working paper, co-authored by Prof. Richard Stanton; Paulo Isser, PhD 13, MBA 98, director of the Haas Real Estate & Financial Markets Lab; and Carles Vergara-Alert, MFE 04, PhD 08, now of Spain’s IESE Business School, is based on a massive data crunching effort.

It combines digitized maps on wildfire boundaries, geospatial measures of wind speed, direction and temperatures and humidity; topographical features such as slope and elevation; and vegetative coverage for 1.5 kilometer-square-grids covering all California wildfires from 2000 to 2018. The researchers combined that with data on housing prices, mortgage defaults, household demographics and wealth, and other market indicators.

“This allows us to quantify the risks of loss and the vulnerabilities in the fire insurance and mortgage capital markets, given changing weather patterns,” Wallace said.

Oakland Hills fire aftermath
Photo: Burned cars abandoned on Charing Cross Road in Oakland, Ca., Oct. 21, 1991. The bodies of six people were recovered from this area. One of them was an Oakland battalion fire chief, another an Oakland police officer. (AP Photo/Sal Veder)

Fire insurance rates in California have been skyrocketing, and many companies are refusing to write new policies on homes in particularly risky areas, such as canyons. Meanwhile, hundreds of thousands of homeowners have been dropped by their insurance companies. Based on Wallace’s analysis, about 1 million California homes are in high or very high-risk areas, with another 2 million to 4.5 million in vulnerable wildland-urban interface zones.

“Without a better pricing model, all the insurance companies can do is cancel the policies,” Wallace says.

Even so, Wallace and her co-workers found that the incentives in the current system are to rebuild: Wildfires have acted as a sort of gentrifying force, with people building back larger and more expensive homes. Homes in fire zones increased in size and value five years after a wildfire, the researchers found.

Now, Wallace is on a campaign to reform the hazard insurance pricing market, advocating for a switch from deterministic pricing—based on maps of past incidents—to more sophisticated probabilistic pricing, based on the probabilities that fires will occur in  hazard zones. She believes the technology she and her collaborators have developed can be applied to estimate climate-change risk on housing and mortgage markets elsewhere.

“We just can’t pretend it’s not real,” she said. “We have no choice but to face it.”


Berkeley Haas real estate curriculum gets a climate change makeover

Flooding in the streets of Pensacola, Fla., in September 2020 as Hurricane Sally made landfall near Gulf Shores, Alabama.  (AP Photo/Gerald Herbert)

The first thing real estate professor Nancy Wallace asked her students to think about last semester was rain.

 “Pick a city like Miami,” said Wallace, chair of the Real Estate Group at Haas. “When it rains in Miami, the sewage treatment plants flood, the water mains back up, and the streets are flooded. The same with Houston. We’re not talking about a hurricane, which would be 10 times worse—just a regular very rainy day. Because the infrastructure in these cities is below sea level, the risk is just huge.”

Nancy Wallace
Prof. Nancy Wallace

And with that intro, students in Wallace’s Real Estate Investment and Sustainability class began to consider the risks for cities that are fundamentally unequipped and slow to adapt to the impacts of climate change.

From flooding to wildfires to rising temperatures and other extreme weather events, climate impacts have rapidly moved from the theoretical future to the most pressing challenges facing the real estate industry today. Wallace, co-chair of the Fisher Center for Real Estate and Urban Economics at Berkeley Haas, has responded by reshaping the real estate curriculum to focus on sustainability.

“The classes, our research, and everything that we now do will be taught through a lens of sustainability,” said Wallace, the Lisle and Roslyn Payne Chair in Real Estate and Capital Markets. “We’re addressing how climate change impacts all parts of the industry—from development and building to mortgages and mortgage-related securities to the insurance markets.”

Course changes

The Fisher Center’s real estate program provides both academic and interdisciplinary training in real estate investment, real estate law, and the role of real estate development in the built environment. MBA students, along with students in the College of Environmental Design and Berkeley Law, can earn the Center’s Interdisciplinary Graduate Certificate in Real Estate (IGCRE)

Recent curriculum changes impacted two core real estate courses: Real Estate Investment and Sustainability, and Real Estate Finance and Securitization. 

Project work in both classes centers on developments in cities, which occupy 2% of the world’s land mass but consume two-thirds of the world’s energy and account for 70% of carbon dioxide emissions, according to C40, a network of the world’s megacities addressing climate change. What’s more, most of the world’s urban areas are on coastlines that are at risk from rising sea levels and coastal storms.  

Project work in both classes centers on developments in cities, which occupy 2% of the world’s land mass but consume two-thirds of the world’s energy.

“It’s so important that Haas is making this shift to help students approach these problems and move to solve them from the sustainability side,” said Michele de Nevers, executive director of Sustainability Programs at Haas. 

Bayfair real estate proiect
Students proposed a multilevel garage-based transportation hub for the Bayfair project, which includes street level retail, a shared electric vehicle program, and a solar canopy.

The Real Estate Investment and Sustainability class, which Wallace co-taught with architect Edward McFarlan, examines the challenges and opportunities in creating the next-generation city, including rethinking density, transit, mobility, infrastructure, and equity. 

Last spring, students worked on final team projects centered on sustainable redevelopment of two Bay Area sites: the Stonestown Mall in San Francisco, owned by Brookfield Properties; and the Bayfair Mall in San Leandro, owned by Madison Marquette. 

Students assumed that both sites could be redeveloped with a “blank slate” approach, and their charge was to convert both sites to a mixed-use development with affordable housing and live-work-shop components.

The Bayfair Project, outlined in a class project book Wallace compiled called “Building the Sustainable City,” included ground floor retail, a solar canopy over the garage, a shared electric vehicle program, and EV charging.  Students also recommended installing puzzle lifts, a semi-automatic parking system that moves cars both vertically and horizontally to create more parking space.

Looking back, Kyle Raines, MBA 21, said the project made him understand how ESG and sustainability extend to the community around a project and can help a project thrive in the long term. “Not only will it get good press, but it will help develop land around the project and create momentum,” he said.

Kyle Raines
Kyle Raines said what he learned in the The Real Estate Investment and Sustainability class helped him pitch investors.

What Raines learned in the class also helped him pitch investors when he was starting Crown Point, a real estate private equity fund. “The thing I think that most struck me from the class is how much investors care about ESG and sustainability—how creating that sense of community at that property is not only a competitive advantage, but also the right thing to do,”  he said.

Angus Maguire, MBA 21, said the Bayfair Project helped him better understand the real estate industry and apply what he’d learned in class from the many industry speakers.

“I took the course because I knew I would be working with real estate developers or real estate asset owners sometime in the future in my renewable energy career, so wanted to better understand how they think about project economics,” he said.

Real-world research

In the Real Estate Finance and Securitization course, Wallace, who is teaching the class this semester, draws from real-world research and the students explore real estate market data in depth.

Sabin Ray, MBA 22, said one highlight was learning about Berkeley Law’s recent findings on the City of Berkeley’s well-intentioned Property Assessed Clean Energy Program. The program allowed property owners to borrow money for renewable energy systems or energy efficiency improvements, and make payments through a special assessment to their property tax bills. But the research found that the program raised the property taxes of low-income residents, while underdelivering the promised green benefits.

For their final projects, students in the class will be able to access the electronic S&P Global database through a subscription that the Fisher Center subsidized. The database includes balance sheet, performance, and corporate Environmental, Social, and Corporate Governance (ESG) strategies. Students tap the data to analyze current ESG strategies in the Real Estate Investment Trust (REIT) industry.

“The purpose of the Fisher Center subsidy is to provide MBA students with very granular firm-level data that connects the dots between performance and sustainability strategies within real estate operating companies,” Wallace said.  

Ray said the sustainability focus of the course appealed to her and that the project finance work will help her as she pursues an impact investing career. “A lot of things we are learning in class I can apply to other areas of financing,” she said.

Prof. Nancy Wallace wins Williamson Award, top Haas faculty honor

Berkeley Haas Prof. Nancy Wallace
Prof. Nancy Wallace

Prof. Nancy Wallace, who uses her deep knowledge of finance and the mortgage market to influence policy to protect the public good, guide UC Berkeley in complex real estate and financial issues, and help launch the careers of students for 35 years, has received the school’s highest faculty honor. 

Wallace is the fifth recipient of the Williamson Award, named after Nobel Laureate and economics professor Oliver Williamson, who passed away last year. The award recognizes Haas faculty members who exemplify all four of the school’s Defining Leadership Principles.

“Nancy’s research has repeatedly questioned received wisdom, pointing out the structural weaknesses in the mortgage markets and recently sounding the alarm on wildfire risks and the urgent need for more sustainable development,” says Dean Ann Harrison. “She works tirelessly for her students and colleagues, the school, and the greater good.” 

Wallace joined Haas in 1986, and is the Lisle and Roslyn Payne Chair in Real Estate Capital Markets, chair of the Real Estate Group, and co-chair of the Fisher Center for Real Estate and Urban Economics. She has served on multiple committees advising the Federal Reserve and the U.S. Treasury on financial crises and reform, and for five years was a leader on the Campus Academic Planning and Resource Allocation (CAPRA) committee, for which she won the Berkeley Faculty Service Award in 2019.

Hard-working and thoughtful

In the award nomination, Professors Candi Yano and Richard Stanton wrote that Wallace has made huge contributions without “the slightest thought of personal gain or advancement” and without demanding “recognition for her contributions.” They also noted that she is “almost universally…viewed as the hardest-working, most thoughtful voice on campus on matters of financial analysis, control, and reporting.”

Wallace played an important role at the national level as one of the very few people who warned of the 2008 financial crisis, after she recognized that the entire underlying structure of the mortgage lending market was collapsing. Since then, she has advised the Fed and the Treasury on reforms to the mortgage and banking industries. She has also warned that the mortgage industry remains on shaky ground today.

Beyond herself

In addition to her work for the campus and the federal government, which required nearly weekly flights to the East Coast, Wallace has for two decades taken on much of the administrative burden of running the Fisher Center, including conferences, fundraising to support PhD students and faculty, and collecting an “unparalleled suite of data sources and computational resources,” Stanton noted. 

Under her leadership, the Haas Real Estate Group “is now regarded as the best in the country,” allowing the school to recruit the best new PhDs to its faculty, he said. 

“It is hard to think of anyone who exemplifies (the principle Beyond Yourself) more than Nancy,” Stanton wrote.  

Passionate teacher

A passionate researcher and teacher, Wallace has also given generously to her students and other faculty members, said Yano, who previously served as Associate Dean for Academic Affairs. For example, when she co-teaches a course with a more junior assistant professor, Wallace often gives them her instructional points (IPs)—which faculty earn for teaching. 

“Despite this, she has still managed to accumulate probably the largest teaching surplus at the Haas School,” Yano wrote. 

“As long-time chair of the Real Estate Group, even if someone drops out of a teaching assignment at the last minute, she views it as so important that core real estate courses are taught well that she will often step in to teach additional courses herself, despite having a surplus equivalent to almost six years of extra teaching.”

Past Williamson Award winners are Prof. Andy Rose, Prof. Toby Stuart, Prof. Teck Ho, and Prof. John Morgan. Recipients are selected by a committee made up of prior winners and the dean. 

Williamson was the winner of the 2009 Nobel Memorial Prize in Economic Sciences and was a beloved teacher and leader at Berkeley Haas. He embodied the spirit of the Haas School Defining Leadership Principles: Question the Status Quo, Confidence Without Attitude; Beyond Yourself; and Students Always.

Edward Peterson, BS 58

Real estate mogul

Edward Peterson, BS 58Edward Hinshaw “Big Ed” Peterson, 84, succumbed to MDS on Feb. 17 at his home in Indian Wells, California. Peterson enjoyed a lifelong career in real estate, selling and leasing what he said was “almost every building in the San Francisco financial district.” He also led fundraising efforts for Berkeley and served as chairman of the UC Berkeley Foundation and later as trustee emeritus. Read a full obituary.

Those darn property taxes! Insights from Texas tax protests

Aerial view of suburban neighborhoodEveryone loves to complain that their taxes are too high. Yet few people actually take the time to formally protest them.

A recent deep-dive into property tax appeals in Texas offers new insights on what motivates people to protest or accept their tax obligations.

“Historically, the study of people’s support for taxation was limited to survey data, asking people whether they prefer higher or lower taxes,” says Berkeley Haas Assoc. Prof. Ricardo Perez-Truglia says. “However, some individuals may say that they want higher taxes but, when the stakes are real, they may not put their money where their mouths are.”

Some individuals may say that they want higher taxes but, when the stakes are real, they may not put their money where their mouths are. —Ricardo Perez-Truglia

In his National Bureau of Economic Research working paper, Perez-Truglia worked with Brad Nathan and Alejandro Zentner from the University of Texas at Dallas on unique field experiments that measured how different types of information affected people’s propensity to protest their taxes. Through this first-hand look at how people actually behave when it comes to protesting taxes, they found that people are generally motivated by self-interest—but that can be dampened when they find out they’re paying less than their neighbors. They also found significant differences between Democrats and Republicans.

Dallas County tax protests

The researchers conducted their experiments in Dallas County—the second largest county in Texas, with a population of about 2.6 million. Given that the state has no income tax, property taxes provide a large source of revenue. The average household currently pays about 2% of their home’s market value annually, or about $6,000. Yet local rules allow residents to appeal their tax bills. This year, 8.4% of households filed a protest on their own, and an additional 8.4% filed a protest with the help of an agent. The researchers estimated that around half of all protests were successful; those who prevailed got a $600 tax-bill reduction, on average.

Perez-Truglia and his co-authors were interested in why people make the decision to protest or not. They first examined whether higher tax rates led to more protests, which would support the idea that homeowners act in their own self-interest. Due to a rule in the Texas property code that lets homeowners apply for “homestead” status, which caps increases in the appraised value of their primary residence at 10% per year, the researchers were able to compare homes that fell under that cap with those that didn’t. That allowed them to calculate that the probability of protesting does increase by about 3.7 percentage points per a 0.1 percentage point increase in the tax rate cap.

Hassle costs

Next, they looked at what prevents people from filing protests. There’s no fee requirement, but it does take time to learn how to submit an appeal. To examine these hassle costs, the researchers randomly sent letters to certain homeowners with information on how to file a protest. Some people received letters with a step-by-step guide on how to file an appeal, while others got additional information on how to argue for why their property taxes should be reduced. The letters were customized with the homeowners’ name, a suggested argument that the property was worth less than the assessed value, and a mention of websites like Zillow and Redfin, where people can look up prices of comparable properties. (The letters were labeled as coming from a University of Texas research study and included a url where people could find more information.)

Among those households which didn’t receive any letter, about 9% filed protests on their own. The group that received the basic information on how to appeal increased their probability of protesting by about 1.8 percentage points. Meanwhile, the group that received more details on how to form an argument filed protests at a rate 3.5 percentage points higher than the control group—which represented a 40% increase. This implied that a large reason for why homeowners did not file protests was due to the extra work it took to figure out how to file. Using these results, the researchers calculated that the hassle costs were about $226 on average. Given that only about half of appeals are successful—making the average benefit under $300—this suggests that the costs of filing likely outweighs the benefits.

But what do the neighbors pay?

The researchers also examined whether people considered how their decisions related to broader social goals. In letters sent to an additional group of homeowners, they included information on the county’s average tax rate. They did this to explore whether people are willing to accept their assessed tax rate if they know others are facing even higher burdens—a phenomenon that economists call conditional cooperation. Indeed, they found that giving people additional information on what other residents pay decreased the likelihood that they would file a protest. In sum, they estimated that a 0.1 percentage point increase in the tax rate would increase the likelihood that an individual household would file a protest by almost 10 percentage points. But if taxes were raised countywide by 0.1 percentage point, then the household’s likelihood of protesting would only increase by about 6.4 percentage points.

Finally, the researchers also analyzed differences by whether people were registered as Democrats (about 55% of the county’s homeowners) or Republicans (about 45% of homeowners). Both voter groups responded to information about the benefits and costs of protesting, but Republicans were more likely than Democrats to increase their rate of protests after receiving the detailed letter. However, Perez-Truglia noted that the differences were not as great as our political rhetoric suggests.

Survey data shows that Republicans and Democrats are worlds apart in their support for taxation, but our preliminary findings suggest that those differences are more modest when you look at their behavior. —Ricardo Perez-Truglia

“Survey data shows that Republicans and Democrats are worlds apart in their support for taxation, but our preliminary findings suggest that those differences are more modest when you look at their behavior,” Perez-Truglia says. “I see this finding as good news: there may be a lot more room for agreement than what the survey data (and the media) may suggest.”

Open-source smartphone database offers a new tool for tracking coronavirus exposure

Researchers from Berkeley Haas and four other universities have released a trove of smartphone tracking data in an open-source database—a powerful tool for studying how people are changing their movement patterns and potential exposure levels during the coronavirus pandemic.

Asst. Prof. Victor Couture
Victor Couture

The Covid-19 Exposure Indices, created by Berkeley Haas Asst. Prof. Victor Couture and researchers from Yale, Princeton, the University of Chicago, and the University of Pennsylvania in collaboration with location data company PlaceIQ, is aimed at academic investigators studying the spread of the pandemic. The data sets allow researchers to visualize how people can potentially be exposed to those infected with the virus, based on cell-phone movements to and from businesses and other locations where a great deal of the exposure happens.

Couture hopes that researchers may start to find correlations between the disease and certain venues and travel patterns. Looking forward, the data also could be useful in anticipating the movement patterns that predict where future outbreaks could reemerge once restrictions are lifted. “The end goal is to identify how changes in exposure rates within different types of venues and for different demographic groups impact the number of cases,” says Couture.

Couture and his collaborators are the first academics to release open-source smartphone location data. They are part of a much bigger movement of researchers, companies, and institutions making data easily and freely available to study the pandemic. For instance, Apple, Google, Foursquare, and other big companies have also released movement data. Couture hopes that by being transparent about their data source, methodology, and potential biases, they can make available data that is suitable for peer-reviewed research.

“We’re in the midst of an unprecedented sharing of data from the academic and technical communities,” Couture says. “We hope everyone can use this data to influence better policies during the coronavirus pandemic.“

We’re in the midst of an unprecedented sharing of data from the academic and technical communities. We hope everyone can use this data to influence better policies during the coronavirus pandemic.

The smartphones in our pockets are all equipped with GPS, and depending on privacy settings, many popular applications record our geolocation. Data providers buy and aggregate location information from different applications, and build databases that record the movement and visits to various venues for millions of devices.

Couture and his colleagues have so far released two indices derived from this smartphone movement data: the location exposure index (LEX), showing our movements between states and counties, such as people flying or driving across the country; and the device exposure index (DEX), showing how many people (as measured by their devices) we are coming into close proximity with outside the home. For instance, if you drive to Walmart and 100 other phones are at that same location, and then you drive to a drugstore with 50 people with phones inside before returning home, your DEX exposure level would be 150 people. More detailed data that includes types of venues (grocery stores, drugstores, big-box stores, parks) will be released soon.

An application of the data is shown below. This animated time-lapse map from January 23 to April 2 shows how people’s movements dropped much more quickly in some areas than in others, such as in the South and Southeast of the United States. This is represented by color changes from yellow to green to dark purple as the average device exposure within a county went down.

Device Exposure Index gif

The data can’t tell researchers how well people are practicing social distancing at any given location, and therefore their specific risk of catching the coronavirus. But it can start to reveal how successful various policies—such as states of emergencies and shelter-in-place orders—have been. “When you prescribe rules of movement, when you tighten them, and when you relax them—you can correlate that with what people are actually doing and which groups and areas are reducing their exposure,” says Couture.

“It often looks like people start to reduce their exposure when a state of emergency is declared, but when the actual shelter in place order comes in, it has less impact on movement,” says Couture. An example is the analysis charted below for New Haven-Milford, Connecticut, which showed that the announcement of the state of emergency itself appeared to be a powerful mechanism that convinced people to reduce their movements, and hence their exposure, to the virus.

The exposure indices Couture and colleagues have compiled also include demographic information that can show which groups are at greater risk for exposure, such as minorities and low-income people. Exposure levels vary over time: The top chart in the set below shows that people living in New Haven, Connecticut neighborhoods with median incomes in the top 10% initially had higher exposure rates than those in the bottom 10%.  After a state of emergency was declared, exposure levels in high-income neighborhoods declined much faster than in low-income neighborhoods. This may be because lower income people are more likely to work on the front lines in essential business, and have less ability to reduce their exposure than those who can afford to shelter at home.

The bottom panel shows the ratio of the device exposure index (DEX) for people living in neighborhoods with median income levels in the bottom 10% relative to those in the top 10%. A value higher than 1 signals that exposure is higher in low-income than in high-income neighborhoods

Tracking device expose by income

These patterns could prove helpful in showing which locations and demographics have the potential for greater exposure under different types of orders when policies have been gradually lifted.

As another example, the graphic below shows that metropolitan areas with more jobs that can be done from home had larger reductions in potential exposure to the coronavirus. Again, this correlation suggests that who works from home depends on who can afford to do so while remaining gainfully employed.



Eventually, the explosion of location data has the potential to tease out even deeper stories explaining not just the hidden patterns behind our unique location in the world, but also the unexpected things that larger groups and types of places share in common. “One of the things we want to encourage is careful work to identify the causations behind these correlations,” says Couture.

The Covid-19 Exposure Indices were created by Jonathan Dingel of the University of Chicago’s Booth School of Business, Kevin Williams of the Yale School of Management, Jessie Handbury of the Unviersity of Pennsyania’s Wharton School of Business, Allison Green of Princeton University, and Victor Couture at Berkeley Haas.

Looming nightmare in mortgage industry, experts warn

Powerful lightning storm front passes over residential houses
A powerful lightning storm front passes over residential houses. Photo credit: Stuart Monk/Adobe Stock

Berkeley Haas Professors Nancy Wallace and Richard Stanton were some of the few voices to forewarn of the massive risk posed by shoddy practices in the mortgage industry prior to the 2008 financial crisis.

Unfortunately, history seems to be repeating itself.

Berkeley Haas Prof. Nancy Wallace
Prof. Nancy Wallace

More than two years ago, Wallace and Stanton again began raising the alarm that the mortgage landscape that emerged from the last crisis is dominated by “nonbank” lenders who operate with little of their own capital or access to emergency cash. It was another disaster waiting to happen, they warned, and called for increased oversight.

No one predicted a shock the size and speed of the coronavirus pandemic, but it’s now upon us, and Wallace fears the worst. Millions of laid-off Americans won’t be able to make mortgage payments, and have been given a temporary payment reprieve by the federal rescue package. This plummeting cash flow could quickly push fragile nonbanks into bankruptcy. And since so many of the loans they service are backed by the U.S. government, that’s who will be left holding the bag.

“The $2.2. trillion (coronavirus relief act) was the largest in history, but we’re talking about liabilities that are orders of magnitude bigger,” Wallace says. “Solutions are going to have to involve trillions of dollars. It could be the bailout of all bailouts.”

“Solutions are going to have to involve trillions of dollars. It could be the bailout of all bailouts.”

Berkeley Haas Prof. Richard Stanton
Prof. Richard Stanton

Wallace says this new crisis will begin to show itself within the next 30 days, as people forgo their monthly payments and the highly leveraged nonbanks face margin calls from the brokers they’ve borrowed from—commercial banks like JP Morgan Chase and Wells Fargo Bank and investment banks such as Morgan Stanley. They need cash to pay these lenders, and they don’t have it. The nonbanks have already begun asking for a rescue.

We asked Wallace, who has studied real estate industry financial dynamics for the past three decades, to explain this looming mortgage crisis.


What are nonbanks, and who are the biggest players?

Mortgages are originated and serviced by two types of institutions. Traditional lenders are the highly regulated banks, funded with deposits or Federal Home Loan Bank advances. They tend to have multiple lines of business. Nonbank lenders, in contrast, are lightly regulated and get their funding through short-term credit. Usually their only line of business is originating and servicing residential mortgages.

Some of the biggest players are Quicken Loans, Mr. Cooper Group, and Freedom Mortgage. They include about 1,088 smaller companies as well.

When did you become aware of the risks posed by nonbanks?

The standard narrative of the 2007-2010 housing crisis centers on the collapse of the housing bubble that was fueled by low interest rates, easy credit, low regulation, and subprime mortgages. However, we found nonbanks played an overlooked role, defaulting on their credit agreements and contributing to the collapse.

Why and how have nonbanks grown?

After the financial crisis, the traditional banks were put under heavy regulation. Because of the stringent capital requirements and the fact that they lost a lot of money servicing defaulted mortgages, most of the big banks scaled back their residential mortgage businesses. A number of large banks sold off loan servicing rights, and the nonbanks stepped in.  The growing market share of the nonbanks came about in part because they were very nimble with new platform lending technology—like Quicken, with the eight-minute mortgage.

Nonbanks originated 20% of single-family home loans in 2007, and that had grown to half of loans by 2016. Today they service about two-thirds of home loans. The bigger problem is they tend to have a high proportion of the riskier loans to low- and moderate-income people, which are backed by the U.S. government. We’re talking trillions of dollars. As of February 2020  they originated 88% of the loans sold to Ginnie Mae, which is part of the Department of Housing and Urban Development and has a $2.1 trillion portfolio. And 61% of loans sold to the GSEs (government sponsored enterprises) Fannie Mae and Freddie Mac, which have a combined residential single family loan portfolio of about $4.9 trillion.

The bigger problem is they tend to have a high proportion of the riskier loans to low- and moderate-income people, which are backed by the U.S. government. We’re talking trillions of dollars.

How do nonbanks get their money, and how big is their debt exposure?

They rely on short-term lending known as warehouse lines of credit. These credit lines are usually provided by larger commercial and investment banks. It’s difficult to get data because most nonbank lenders are private companies which are not required to disclose their financial structures. That was the subject of our Brookings paper, which was the first public tabulation of the scale of warehouse lending to nonbanks. We found there was a $34 billion commitment on warehouse loans at the end of 2016, up from $17 billion at the end of 2013. That translated to about $1 trillion in short-term “warehouse loans” funded over the course of one year.  As of year end 2019, there was $101 billion of warehouse commitments on the books of warehouse lenders.

Last year was a banner year. Nonbanks originated nearly a trillion dollars of mortgages that were securitized by Fannie Mae, Freddie Mac, and Ginnie Mae—the largest origination volume since 2006. However, the high levels of refinancing due to historically low interest rates had a significant negative impact on the value of the mortgage servicing rights held by nonbanks.

If nonbanks are so big and borrow so much money, why aren’t they regulated like banks?

The simple answer is they have a very powerful lobby, the Mortgage Bankers Association. What the industry leaned on was that they were saving the mortgage market because the banks didn’t want to hold mortgages anymore. Nonbanks were happy to promise that they would service 30-year loans and pay the bondholders, whether or not they received borrower principal and interest payments, but there are no mechanisms in place to hold them to that promise. They were gambling that the market wouldn’t crash.

What the industry leaned on was that they were saving the mortgage market because the banks didn’t want to hold mortgages anymore.

The nonbanks have actively resisted paying for any form of liquidity insurance or supporting any credible oversight similar to banks. Their regulator, the Conference of State Bank Supervisors (CSBS), does not have high-quality loan-level data for the mortgage industry. That’s why they recently asked our team—Paulo Issler, Christopher Lako, Richard Stanton and me, here at the Real Estate and Financial Markets Lab in the Fisher Center for Real Estate and Urban Economics—to perform detailed data breakdowns and analysis for them. They do not have the data to perform this analysis themselves.

Did anything change after your 2018 paper, co-written with Federal Reserve economists, which called for greater oversight?

Ginnie Mae started trying to require higher capital and liquidity thresholds as well as stress tests, requiring them to show how they would handle an economic shock. They had an initiative called Ginnie Mae 2020, but they were getting major pushback from the industry. In addition, the Conference of State Bank Supervisors has been trying hard to standardize the reporting rules, but they have no data, and they have little power.

Under the $2.2 trillion emergency CARES Act (Coronavirus Aid, Relief and Economic Security), mortgage servicers are required to allow borrowers to delay payments for as long as a year. What do you expect will happen now?

I think the situation is extremely serious, a looming nightmare. We’ve had 16 million people file for unemployment in three weeks. We know that most Americans can’t even withstand a $400 shock to their finances. Millions of people won’t be able to make their mortgage payments. They’ve been told to call their lenders and tell them they can’t pay, and the phones are ringing off the hook.

I think the situation is extremely serious, a looming nightmare.

The immediate problem for the nonbanks is the risk to their warehouse lines of credit, and the fact that the nonbank loan servicers still have to make payments to the mortgage-backed security bondholders, even if people don’t pay their mortgages. Margin calls have been in the level of tens of millions of dollars and the creditors are demanding cash. Not making your margin calls on lines of credit is a serious problem and could trigger default. Nonbanks are also facing millions of dollars of margin exposure from short sales of mortgage-backed securities. These onerous margin calls, some as large as $100 million for a single institution, are what’s leading their lobbyists, the Mortgage Banking Association, to go to the Securities and Exchange Commission and demand that the brokers be forbidden from exercising their margin rights. It’s ridiculous, because the brokers—big banks like Goldman Sachs and Morgan Stanley—have every right to play hardball. The SEC has turned down the request.

Why does this pose such a threat to the U.S. government, and ultimately, to taxpayers?

Most of these loans are guaranteed by the U.S. government through Ginnie Mae, Fannie Mae, and Freddie Mac. The nonbank lenders have been given some forbearance, and will eventually receive compensation for the payment shortfalls they are experiencing, but they have a timing problem. In the meantime they still have to make timely payments of interest and principal—for 120 days to the Fannie and Freddie MBS bondholders, and, in the case of those who owe to Ginnie Mae mortgage-backed security bondholders, until they go bankrupt. I’m not sure some of them have the liquidity to last even 30 days, and many won’t be able to do it for three months, much less a year. We are going to see bankruptcies, and substantial loss in lending capacity as we did in 2007, when we lost two-thirds of lending capacity. This might be worse because unemployment may be worse.

They can’t keep pushing the envelope and then expect to be rescued. They don’t want to follow any of the rules that banks follow, and then they want to be treated  like banks when liquidity shocks occur. It’s just wrong.

Will any of the stimulus measures passed so far help?

The nonbanks are already asking for a bailout, but none of the federal relief efforts so far have included them. The MBA tried to get some protection in the CARES Act, which had $450 billion in loans and loan guarantees from the Fed and Treasury. But they were excluded for a reason—because these firms have pushed every boundary and rejected every form of oversight. Thus far, they have also been excluded from the actions the Fed has been taking, including a new round of quantitative easing, and participation in the Term Asset-Backed Securities Loan Facility, which is a way to provide liquidity. Ginnie Mae has now created an assistance program to provide loans to its nonbank counterparties who are unable to cover the principal and interest payments to bondholders.  Fannie Mae and Freddie Mac have refused to provide such assistance to their nonbank counterparties, because they are still under conservatorship status from the 2008 crisis and face their own capital shortfalls.

So some kind of bailout is nearly inevitable?

To save the market, the nonbanks will have to be bailed out either by the Fed or by the U.S. Treasury. This will be very difficult under restrictions put in place concerning nonbank bailouts under the Dodd-Frank Act.  The cost is going to be very high. In my opinion, there has to be a quid pro quo from the industry in the form of significant future fees in return for such extraordinary support—they can’t keep pushing the envelope and then expect to be rescued. They don’t want to follow any of the rules that banks follow, and then they want to be treated  like banks when liquidity shocks occur. It’s just wrong.

Real estate & economics forecast: a recession is on the horizon

San Francisco skyline: A recession is on the horizon

Unemployment is at its lowest rate in 50 years, there are almost 7 million job openings nationwide, and consumer confidence is at its highest level in a decade. There’s more venture capital flowing than at any point since 2000, and commercial real estate loan origination is at its highest point ever. So, what could go wrong?

Lots, said Kenneth Rosen, faculty director for the Haas School’s Fisher Center for Real Estate & Urban Economics, who foresees a recession within the next 18 to 24 months.

“We’ve had a sugar high for the economy, and it will wear off,” said Rosen, delivering his annual forecast at the 41st Annual Real Estate & Economics Symposium in San Francisco this week.  “We’re in the last stages of a very good recovery, but we’re buying this time by spending a lot of money that we don’t have.”

Kenneth Rosen
Kenneth Rosen

Even so, Rosen does not foresee a crash in the real estate market anything like 2004 to 2007 or the late 1980s, and there’s still plenty of “dry powder”—or cash available for investment, he said. While real estate is overvalued compared to historical prices, it’s not overvalued compared to everything else, he said.

“This is not a very dramatic forecast, but the risks have risen dramatically and this is just the beginning of volatility,” he said. “There will be correction, and the Bay Area is likely to have a bigger correction than the rest of the country, because we’ve gone up so much.”

“A sledgehammer to break open a walnut”

Rosen pointed to rising interest rates, a ballooning national deficit, increasingly restrictive immigration policies in a tight labor market, and the escalating trade war with China as trouble signs. With $250 billion in tariffs imposed and $257 billion more threatened by President Trump, Chinese retaliation is to be expected.

“We certainly have problems with China, but tariffs are an exceptionally a blunt tool. It’s like using a sledgehammer to break open a walnut,” said Rosen, who is also chairman Rosen Consulting Group, a real estate market research firm. “No one wins in a trade war.”

The combined economic stimulus of tax cuts and increased spending has overheated the economy, and left few tools in policy makers’ arsenal to recover from the next recession, he said.  A gridlocked Congress would not be able to pass a spending increase bill, or another tax cut. “In a full employment economy, the deficit should be zero or positive, so we should be at a balanced budget today. We’re doing the opposite. We’re not going to be ready for the next big downturn.”

While he had plenty of critiques of President Trump and his administration, he said Congress is also at fault. “There are no fiscal hawks any more. There’s no one who believes in balanced budgets.”

Red-hot economy

In the immediate future, however, the economy remains red hot. There’s a boom in job creation nationwide, especially throughout the West. California as a whole is a bit lower than the rest of the region, but it still had 1.9 percent growth in job creation year-over-year. Unemployment in San Francisco hovers just over 2 percent.

“The tech cities are going strong: Seattle, Austin, Silicon Valley, Denver, San Francisco, and Oakland are still very strong. The only thing constraining these places is the fact that housing is so expensive that they can’t get people to come. We’d be growing faster if we can solve some of those issues.”

Real estate forecast

Nationwide, retail is still struggling while industrial properties are hot, with vacancy rates at their lowest point since the 80s. “It’s a red-hot sector because of e-commerce, which is driving the demand for this space and bypassing retail network.”

In terms of commercial real estate, Rosen predicts cap rates—or the rates of return on commercial property—are expected to rise after historic lows. He warned the crowd of 300 real estate and  finance professionals in the room to not be too smug. “We’ve had big periods of appreciation in the last decade because cap rates went down. Don’t think it’s because you’re smart—it’s because they repressed interest rates. It’s going to reverse. We’ll have headwinds.”

His advice? “As a lender, I’d say now’s the time to be cautious. Don’t lend to inexperienced people. You’ve got to be able to hold through the next six years—don’t think you’re going to miss this recession,” he said. “As an investor, it’s now is the time harvest or hedge, don’t wait for the next cycle.”

Nationally there’s strong demand for office space, but it’s nothing like previous booms. And vacancy rates have stopped going down because businesses need less space per worker—thanks to open floor plans and co-working spaces.

“The WeWorks of the world are 50 percent more dense than traditional office spaces,” he said.

Although the rental market peaked several years ago and home ownership is creeping back up, rental vacancy rates are low. The proportion of young adults living with their parents has begun to drop from a high of 32 percent in 2016. In the Bay Area, apartment vacancy rates are below 4 percent, and rents are rising again after appearing to top out.

California—a victim of its own success?

California homes have become increasingly unaffordable–just 30 percent of people can afford a median priced home, compared with 50 percent nationally. In the Bay Area, prices were up almost 10 percent year-over-year in September. Recently, however, there are signs that home prices may be beginning to drop—whether it’s due to rising interest rates or people leaving the region.

All this leads Rosen to believe California may soon be a victim of its own success.

“We may be the cause of our own demise. With high housing prices and congestion, people are going to move elsewhere,” he said. “You’ve seen reports that up to a third of people are thinking of relocating in the next five years. Add to that the higher taxes that we keep on voting on ourselves, and I think we could be in a situation where we’ve hit our peak moment and it’s just a question of how fast we can slow down.”

Minority homebuyers face widespread statistical lending discrimination, study finds

UC Berkeley study finds Minority Homebuyers Face Widespread Statistical Lending Discrimination

Face-to-face meetings between mortgage officers and homebuyers have been rapidly replaced by online applications and algorithms, but lending discrimination hasn’t gone away.

A new University of California, Berkeley study has found that both online and face-to-face lenders charge higher interest rates to African American and Latino borrowers, earning 11 to 17 percent higher profits on such loans. All told, those homebuyers pay up to half a billion dollars more in interest every year than white borrowers with comparable credit scores do, researchers found.

The findings raise legal questions about the rise of statistical discrimination in the fintech era, and point to potentially widespread violations of U.S. fair lending laws, the researchers say. While lending discrimination has historically been caused by human prejudice, pricing disparities are increasingly the result of algorithms that use machine learning to target applicants who might shop around less with higher-priced loans.

“The mode of lending discrimination has shifted from human bias to algorithmic bias,” said study co-author Adair Morse, a finance professor at UC Berkeley’s Haas School of Business. “Even if the people writing the algorithms intend to create a fair system, their programming is having a disparate impact on minority borrowers—in other words, discriminating under the law.”

First-ever dataset 

A key challenge in studying lending discrimination has been that the only large data source that includes race and ethnicity is the Home Mortgage Disclosure Act (HDMA), which covers 90 percent of residential mortgages but lacks information on loan structure and property type. Using machine learning techniques, researchers merged HDMA data with three other large datasets—ATTOM, McDash, and Equifax—connecting, for the first time ever, details on interest rates, loan terms and performance, property location, and borrower’s credit with race and ethnicity.

The researchers—including professors Nancy Wallace and Richard Stanton of the Haas School of Business and Prof. Robert Bartlett of Berkeley Law—focused on 30-year, fixed-rate, single-family residential loans issued from 2008 to 2015 and guaranteed by Fannie Mae and Freddie Mac.

This ensured that all the loans in the pool were backed by the U.S. government and followed the same rigorous pricing process—based only on a grid of loan-to-value and credit scores—put in place after the financial crisis. Because the private lenders are protected from default by the government guarantee, any additional variations in loan pricing would be due to the lenders’ competitive decisions. The researchers could thus isolate pricing differences that correlate with race and ethnicity apart from credit risk.

The analysis found significant discrimination by both face-to-face and algorithmic lenders:

  • Black and Latino borrowers pay 5.6 to 8.6 basis points higher interest on purchase loans than White and Asian ethnicity borrowers do, and 3 basis points more on refinance loans.
  • For borrowers, these disparities cost them $250M to $500M annually.
  • For lenders, this amounts to 11 percent to 17 percent higher profits on purchase loans to minorities, based on the industry average 50-basis-point profit on loan issuance.

“Algorithmic strategic pricing”

Morse said the results are consistent with lenders using big data variables and machine learning to infer the extent of competition for customers and price loans accordingly. This pricing might be based on geography—such as targeting areas with fewer financial services—or on characteristics of applicants. If an AI can figure out which applicants might do less comparison shopping and accept higher-priced offerings, the lender has created what Morse calls “algorithmic strategic pricing.”

“There are a number of reasons that ethnic minority groups may shop around less—it could be because they live in financial deserts with less access to a range of products and more monopoly pricing, or it could be that the financial system creates an unfriendly atmosphere for some borrowers,” Morse said. “The lenders may not be specifically targeting minorities in their pricing schemes, but by profiling non-shopping applicants they end up targeting them.”

This is the type of price discrimination that U.S. fair lending laws are designed to prohibit, Bartlett notes. Several U.S. courts have held that loan pricing differences that vary by race or ethnicity can only be legally justified if they are based on borrowers’ creditworthiness. “The novelty of our empirical design is that we can rule out the possibility that these pricing differences are due to differences in credit risk among borrowers,” he said.

Overall decline in lending discrimination

The data did reveal some good news: Lending discrimination overall has been on a steady decline, suggesting that the rise of new fintech platforms and simpler online application processes for traditional lenders has boosted competition and made it easier for people to comparison shop—which bodes well for underserved homebuyers.

The researchers also found that fintech lenders did not discriminate on accepting minority applicants. Traditional face-to-face lenders, however, were still 5 percent more likely to reject them.



Read the full paper.

Berkeley Haas Media Relations: Laura Counts, lcounts@haas.berkeley.edu, (510) 643-9977

Berkeley Law: Prof. Robert Bartlett, rbartlett@berkeley.edu

Meet the faculty: Haas welcomes three rising academic stars

Three new assistant professors have joined the Berkeley Haas faculty, with research interests that range from how financial news influences markets to the unintended consequences of mortgage market regulations to developing more accurate ways to predict consumer behavior.  

Anastassia Fedyk and Matteo Benetton will join the Finance Group, while Giovanni Compiani will be part of the Marketing Group.

“We’re thrilled to have these three rising stars join us this year,” said Prof. Candace Yano, associate dean for academic affairs and chair of the faculty.

The three new faculty members have already won awards for their research and have published in top journals. As is customary, they will spend the fall semester working on their research and plan to begin teaching in the spring semester.

Assistant Professor Anastassia Fedyk, Finance

Berkeley Haas Asst. Prof. Anastassia Fedyk
Asst. Prof. Anastassia Fedyk

For Anastassia Fedyk, coming to Haas is a homecoming of sorts. Though she was born in Ukraine and moved to the United States at age 10, she spent her high school years in Berkeley while her mother earned her PhD in accounting at Haas.

“I really loved living here back in high school, so it was always a dream to move back,” says Fedyk. “And the fact that there are so many people here working in behavioral economics makes it a perfect fit with my work.”

Knowing early on that she wanted to become a research economist, Fedyk majored in math at Princeton and did a two-year stint doing research at Goldman Sachs before heading to Harvard University to earn her PhD in business economics.

Her work spans finance and behavioral economics, and she has pursued three main research threads so far. The first focuses on financial news and how it translates into prices and trading volume in the markets. She’s looked at trading around news events and how the news is presented. “For example, if the news is printed on the front page that will prompt a much faster price response than if it’s less prominent,” she said. Or, when two old news stories are reprinted together, they are perceived as a new piece of information.

Her second line of research centers on present bias and procrastination. She’s found that although people fail to recognize these tendencies in themselves—and really do believe they’ll follow through on their plans for a new gym routine or diet—they easily recognize them in others.

Fedyk’s third line of inquiry looks at how employees’ skills relate to companies’ performance, working with a large dataset of resumes from a startup that collects public profiles. She has found that companies with an unusually high focus on sales-oriented skills tend to outperform, while companies that are heavy on administrative and bureaucratic personnel tend to do worse.

She will be teaching core finance in the evening & weekend MBA program.

Assistant Professor Matteo Benetton, Finance

Berkeley Haas Asst. Prof. Matteo Benetton
Asst. Prof. Matteo Benetton

Matteo Benetton also feels a kinship with Berkeley, although he had only spent three days here interviewing before moving 5,500 miles this month from the U.K, where he completed his PhD at the London School of Economics.

“The vast majority of Italian economists study at Bocconi, which is a private university, but I went to the University of Pisa’s Sant’Anna School of Advanced Studies, which is public,” said Benetton, who originally hails from Treviso near Venice. “I love the idea of a high-quality public university, and the research mindset that goes with that. That’s something I value a lot. Plus, after six years in London I’m looking forward to some sunshine.”

Benetton, whose work centers on the intersection between competition in the lending market, mortgage product design, and regulation, says he was excited to find so many faculty at Haas who share his interests, both in the Finance and Real Estate groups.

Benetton’s research has shown that some banking regulations put in place after the global financial crisis have had unintended consequences, giving more advantages to big banks over smaller banks. “The regulation can actually distort competition, and increase market concentration,” he said. In one paper, Benetton recommended that regulations apply evenly to big banks and smaller lenders, to prevent established banks from gaining additional advantages.

He has also researched how innovative mortgage product design can benefit consumers and prevent the buildup of risk in the housing market. He’s looked at shared-equity mortgages, in which a government or bank lender provides a homebuyer with part of the down payment but takes some of the equity. These profit-sharing contracts can reduce risk, but homebuyers who expect prices to go up tend to avoid the since they don’t want to share the gains.

While much of his work has been focused on Europe, with his new proximity to Silicon Valley Benetton says he’s interested in exploring how fintech is changing banking and payment systems, as well as branching out into household finance.

Benetton will be finishing up a research project this fall and will begin teaching finance in the undergraduate program in January.

Assistant Professor Giovanni Compiani, Marketing

Berkeley Haas Asst. Prof. Giovanni Compiani
Asst. Prof. Giovanni Compiani

Giovanni Compiani is also a native of Italy, who comes to Haas via Yale University, where he earned a PhD in economics. He’s looking forward to opportunities for working across disciplines at Berkeley, and also to the proximity to Silicon Valley and its trove of consumer data.

“Being at a business school and at Berkeley in particular, there’s a more question-oriented approach—rather than a focus on methods it’s about ‘What real-world question do we want to address?’”, Compiani said. “At Yale, I acquired a rich set of econometrics and structural methods tools which I now look forward to applying. There are so many relevant topics in the digital economy, and at Berkeley an economist can work with a computer scientist and say something very meaningful and interesting.”

Compiani grew up in Bologna before studying economics at Italy’s prestigious Bocconi University in Milan. He completed part of his master’s at Yale and returned for his doctorate.

He has focused much of his research so far on consumer behavior, building a model that gives more flexibility than established models allow for in predicting consumer reactions to price changes. “Let’s say a tax is levied on a supermarket. The market could lower the price of products to keep  the final price to consumers unchanged, or they could pass on the full increase to consumers. The best strategy depends on knowing how consumers react,” he said. “This model relaxes certain strict assumptions typically made for ease of programming, and thus delivers more robust results.”

Compiani is also investigating patterns of how consumers search across different product characteristics, such as price. “Understanding these patterns has implications both for policy and for firm strategy,” he said.

With the possibility of increased access to data sources from Silicon Valley companies, Compiani is interested in exploring new lines of research on how concerns about data privacy influence consumer behavior.

He will begin teaching marketing analytics in the undergraduate program in the spring.

A decade after housing bust, mortgage industry is on shaky ground, experts warn

Professors Richard Stanton and Nancy Wallace found the boom in nonbank lenders poses a systemic risk to the mortgage market.

Despite tough banking rules put in place after last decade’s housing crash, the mortgage market again faces the risk of a meltdown that could endanger the U.S. economy, warn two Berkeley Haas professors in a paper co-authored by Federal Reserve economists.  The threat reflects a boom in nonbank mortgage companies, a category of independent lenders that are more lightly regulated and more financially fragile than banks—and which now originate half of all US home mortgages.

“If these firms go out of business, the mortgage market shuts down, and that has dire Implications for the overall health of the economy,” says Richard Stanton, professor of finance and Kingsford Capital Management Chair in Business at Haas. Stanton authored the Brookings paper, “Liquidity Crises in the Mortgage Market,” with Nancy Wallace, the Lisle and Roslyn Payne Chair in Real Estate Capital Markets and chair of the Haas Real Estate Group. You Suk Kim, Steven M. Laufer, and Karen Pence of the Federal Reserve Board were coauthors.

Bank regulation fueled boom in nonbank lenders

Berkeley Haas Prof. Richard Stanton
Prof. Richard Stanton

During the housing bust, nonbank lenders failed in droves as home prices fell and borrowers stopped making payments, fueling a wider financial crisis. Yet when banks dramatically cut back home loans after the crisis, it was nonbank mortgage companies that stepped into the breach. Now, nonbanks are a larger force in residential lending than ever. In 2016, they accounted for half of all mortgages, up from 20 percent in 2007, the Brookings Institution paper notes. Their share of mortgages with explicit government backing is even higher: nonbanks originate about 75 percent of loans guaranteed by the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA).

Nonbank lenders are regulated by a patchwork of state and federal agencies that lack the resources to watch over them adequately, so risk can easily build up without a check. While the Federal Reserve lends money to banks in a pinch, it does not do the same for independent mortgage companies.

Scant access to cash

Prof. Nancy Wallace
Prof. Nancy Wallace

In stark contrast with banks, independent mortgage companies have little capital of their own and scant access to cash in an emergency. They have come to rely on a type of short-term funding known as warehouse lines of credit, usually provided by larger commercial and investments banks. It’s a murky area since most nonbank lenders are private companies which are not required to disclose their financial structures, so Stanton and Wallace’s paper provides the first public tabulation of the scale of this warehouse lending. They calculated that there was a $34 billion commitment on warehouse loans at the end of 2016, up from $17 billion at the end of 2013. That translates to about $1 trillion in short-term “warehouse loans” funded over the course of a year.

If rising interest rates were to choke off the mortgage refinance market, if an economic slowdown prompted more homeowners to default, or if the banks that extend credit to mortgage lenders cut them off, many of these companies would find themselves in trouble with no way out. “There is great fragility. These lenders could disappear from the map,” Stanton notes.

Risk to taxpayers

The ripple effects of a market collapse would be severe, and taxpayers would potentially be on the hook for losses posted by failed mortgage companies. In addition to loans backed by the FHA or VA, the government is exposed through Ginnie Mae, the federal agency that provides payment guarantees when mortgages are pooled and sold as securities to investors. The mortgage companies are supposed to bear the losses if these securitized loans go bad. But if those companies go under, the government “will probably bear the majority of the increased credit and operational losses,” the paper concludes. Ginnie Mae is especially vulnerable because almost 60 percent of the dollar volume of the mortgages it guarantees comes from nonbank lenders.

Vulnerable communities would be hit hardest. In 2016, nonbank lenders made 64 percent of the home loans extended to black and Latino borrowers, and 58 percent of the mortgages to homeowners living in low- or moderate-income tracts, the paper reports.

The authors emphasize that they hope their paper raises awareness of the risks posed by the growth of the nonbank sector. Most of the policy discussion on preventing another housing crash has focused on supervision of banks and other deposit-taking institutions. “Less thought is being given, in the housing finance reform discussions and elsewhere, to the question of whether it is wise to concentrate so much risk in a sector with such little capacity to bear it,” the paper concludes.

Stanton adds, “We want to make the nonbank side part of the debate.”

MBA team wins first place at National Real Estate Challenge

Eight people holding plaques and check.
MBA team wins first place in National Real Estate Challenge held at the University of Texas at Austin on Nov. 21. From left to right: David Eisenman, Maribel Garcia Ochoa, Jon Lam, Abby Franklin, Lecturer Bill Falik, Matt Tortorello, Andrew Sublett and Eric Valchuis.

Haas took first place in the 17th annual
National Real Estate Challenge for the second year in a row, taking home a $10,000 prize. Teams from the nation’s top-ranked business schools competed at the University of Texas at Austin on Nov. 21.

The Team: David Eisenman, MBA 20, Andrew Sublett, MBA 20, Matt Tortorello, MBA 20, Eric Valchuis, MCP 20 (city planning), Maribel Garcia Ochoa, JD 21, and Jon Lam, MBA 21 & MRED+D 20 (real estate development and design).

The Field: Finalists included Haas, Georgetown’s McDonough School of Business, University of Chicago’s Booth School of Business, and UPenn’s Wharton School. 

The Challenge: Playing the role of a real estate investment firm, the Haas team had to decide if it should buy 1,000 mixed-income housing units in Lakewood, a fictional city modeled after New York. The firm would receive a tax abatement from the city if it converted a portion of the units into affordable housing.

The Team’s plan: The team weighed the pros and cons of investing in a housing portfolio that included market-rate and affordable housing units. After careful consideration, the team decided to invest in the Lakewood property.

The Haas Factor: The Haas team received coaching from Professor Nancy Wallace, Lecturer Bill Falik, Abigail Franklin, an investment banking and real estate student advisor, and Haas alumni.“Questioning the status quo and having confidence without attitude set us apart from the pack,” said Eric Valchuis, MCP 20. “We prepared for this challenge for months and delivered a story-centered presentation to the judges.”

The team also benefited from Berkeley’s unique Interdisciplinary Graduate Certificate in Real Estate program, allowing us to take classes at Haas, the College of Environmental Design, and Berkeley Law, Valchuis said. “As a result, we demonstrated a cohesive understanding of the social, political, and financial impacts of our investment that may have been more difficult for other schools to match.”

House Pall

A warning about the mortgage industry

As millions of laid-off Americans struggle to make housing payments during the pandemic, Prof. Nancy Wallace issues a dire forecast: the mortgage industry itself could collapse.

For more than two years, Wallace and Prof. Richard Stanton have been raising the alarm that fragile “nonbank” lenders have grown to dominate the market, originating two-thirds of all single-family home loans—up from 20% in 2007—but are subject to little oversight. They have scant capital of their own or access to emergency cash, and they also target more vulnerable borrowers who are more likely to miss payments early on, their research has found.

It is another disaster waiting to happen, they warn. During the pandemic, homeowners have been given a temporary payment reprieve by the federal rescue package, which meant plummeting cash flows for nonbanks.

In the short run, vulnerable nonbank lenders have been saved from bankruptcy by rock-bottom interest rates that spurred a wave of refinancing and new loan originations. They also got government backup from Ginnie Mae, Fannie Mae, and Freddie Mac.

“Defaults are on the rise,” Wallace says. “A lot depends on what happens with unemployment and how long this drags on, but my position remains that nonbank lenders are in a very precarious position.”

Wallace argues that any government assistance should have come with a quid pro quo: future fees and increased oversight. “Nonbank lenders can’t keep pushing the envelope then expect to be rescued. They don’t want to follow any of the rules that banks follow, and then they want to be treated like banks when liquidity shocks occur.”

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