we have just published a second brief on outcomes in the mortgage market based on the interesting paper by natee amornsiripanitch a senior financial economist at the federal reserve bank of philadelphia again the analysis is based on home mortgage disclosure act data which contain applicant and coapplicant age and a rich set of applicant property and loan characteristics the first brief concluded that older mortgage applicants were significantly more likely to be turned down for a loan than their younger counterparts one fairly convincing rationale for the pattern was agerelated mortality risk having a borrower die can be costly to the lender because it increases the likelihood of the loan being paid off early prepayment risk or entering foreclosure default and recovery risk since mortality risk is higher for older borrowers than for younger borrowers a rational and riskaverse lender should consider agerelated risks when making lending decisions read medicare and hsas don’t mix what nearretirees need to know this brief focuses on the relationship between age and the cost of mortgages the analysis compares the rate on the loan with that on the fannie mae and freddie mac loanlevel pricing adjustment grids the notion is that if the loans were originated to be sold then for a given lender any deviations by age in coupon rates for loans in the same grid cell must be unrelated to the lender’s cost structure or credit risk in practice the analysis is implemented using a regression that relates the rate on the loan to demographic variables controlling for the grid fees and the lender while the grid sounds very complicated it merely lays out the fees that fannie mae and freddie mac charge lenders to insure them against default specifically the grid is a matrix with the mortgage’s loantovalue ratio along one axis and the borrower’s credit score along the other axis for example in the case of loans with a loantovalue ratio of 80018500 and a borrower with a credit score of 680699 fannie mae requires the lender to pay an additional 15 of the loan amount freddie mac’s grid is very similar figure 1 presents the results for home purchase loans that were sold to fannie mae separate estimates for freddie mac loans produced the same qualitative conclusions several notable patterns emerge first starting from the 3039 age group the relationship between borrower age and coupon rate increases monotonically for example 70 borrowers pay on average 72 basis points more than the reference group or 84 basis points more than the 3039 group the generally positive relationship between borrower age and coupon rate is robust the economic magnitudes of the coefficients however are not very large when compared with the sample’s unconditional average of 391 basis points read hit with that extra premium for medicare here’s when you can drop it one possible explanation for the positive correlation between borrower age and coupon rate is differences in shopping behavior across age groups since search can be costly it is plausible that due to a higher likelihood of physical or mental fatigue and technology aversion older borrowers perform a less comprehensive search of potential lenders than younger borrowers therefore older borrowers end up receiving less favorable coupon rates because they cannot provide competing rates for lenders to match the bottom line however is that while the difference in application denials by age were large the differences in coupon rates are small pretty interesting