Algorithms for All: Can AI in the Mortgage Market Expand Access to Homeownership?
Abstract
:1. Introduction
2. AI and ML in the Mortgage Industry
3. A Framework for Evaluating the Impact of AI on Access to Homeownership for Underserved Communities
- Societal values. A digitalized tool or process should be considered from the perspective of similar decisions, the larger context, and historical factors, and should align with the prevailing legal and ethical paradigms [11]. Recent political and social priorities in the U.S. have focused on racial equity and social justice, and the Biden Administration has directed regulatory agencies to increase fair access to homeownership. According to Kroll [8], credit scoring companies must “consider the context and impacts of their credit system and in particular to consider what outcomes are desired, how they might be reached, and how the deployment of a new system or changes to an existing system will alter the world.” New tools could be used to implement fair machine learning (FML) by deploying statistical algorithms to identify and correct unjust or biased outcomes [12].
- Contextual integrity. The appropriateness of a technological tool depends on whether it conforms to contextual norms [13,14]. Regardless of its accuracy, a particular tool must be appropriate for the mortgage lending or housing domain. Walzer [15] described “spheres of justice” to underscore the importance of context in evaluating the fairness of outcomes by arguing that someone who excels in one sphere (e.g., education) should not be granted advantages without merit in another sphere (e.g., mortgage loan access). Certain social media advertising tactics, while appropriate for less consequential product categories, may result in unfair informational asymmetries in the mortgage lending context.
- Accuracy. It is also important to evaluate the extent to which a tool is reliable, error-free, and widely available across all major demographic and economic groups and macroeconomic conditions. One advantage of AI is rapid, systematic, and consistent data collection and modeling. However, inaccuracies can result when certain types of data are systematically omitted or biases are built into algorithms. For example, in property valuation models, due to the varying assumptions about comparable property selection and the historical racial disparities in property values, can models produce the “accurate” measurements necessary to predict risk? What types of errors are acceptable? Accuracy also refers to the absence of bias [5].
- Representation bias occurs when the sample upon which a model is based differs significantly from the characteristics of the population to which the model will be applied. For example, evidence suggests that the effect of credit scores on the likelihood of mortgage default differs for members of historically disadvantaged minority groups [16].
- Historical bias occurs when the data are accurate and correctly sampled, but also capture disparities due to past racism and discrimination. For example, Black and Hispanic borrowers pay higher rates and fees on average, and were more likely to have received subprime loans, faced foreclosure, or sustained significant equity losses during the 2008 global financial crisis.
- Omitted variable bias occurs when a model fails to include a factor that has a significant effect on the outcome. For example, it is illegal to include race or ethnicity as a factor in underwriting models. However, certain variables and combinations of variables are effective proxies for race/ethnicity. The omission of race as an explanatory variable can obfuscate the interpretation of these proxy variables and significantly underestimate the effects of racial/ethnic differences.
- Selection bias occurs when certain categories of people or transactions are systematically excluded from the data upon which a model is based. For example, households with low or missing credit scores would likely be underrepresented in the samples of prospective borrowers.
- Aggregation bias occurs when the characteristics of certain categories of people or transactions are erroneously applied to individual cases. One example is proxy methods, which rely on geographic and/or surname-based information to estimate the probability that a household belongs to a particular race and ethnicity when this information is not reported [17].
- Measurement bias occurs when a variable is systematically inaccurate, missing, or inconsistently measured. For example, a recent study found that credit scores for minority and low-income applicants were less predictive in mortgage default models due to the variations in underlying credit files [18].
- Legality. It is also important to assess whether adopting an AI application will have a negative and disparate impact on protected classes. The disparate impact standard prohibits any practice, including the use of a statistical algorithm, that has a negative, disparate impact on a particular racial/ethnic group when implemented. If a disparate impact occurs, the lender must provide a legitimate business justification and be able to rule out any less discriminatory alternative. The data and algorithms used for AI credit scoring, mortgage underwriting, and property valuation may run afoul of this standard.
- Expanded opportunity. An AI solution should also significantly increase access to credit in addition to cost, efficiency, or risk assessment benefits. Whereas digitalization and AI have facilitated access to credit scores for previously unscorable or “credit invisible” households, it is unclear whether they increase financing opportunities for a larger group of consumers with poor credit histories [19].
4. SCALE Criteria and AI-Driven Marketing
5. SCALE Criteria and AI Credit Scoring and Underwriting Algorithms
6. SCALE Criteria and Automated Property Valuation Models
7. SCALE Criteria Applied to AI Fraud Detection Models
8. Discussion and Conclusions
Author Contributions
Funding
Institutional Review Board Statement
Informed Consent Statement
Data Availability Statement
Conflicts of Interest
References
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Criteria | Digitalized Tool/Process | Impact on Minority Homeownership |
---|---|---|
Societal values | AI/ML use of GPS location | These data violate privacy norms/magnify income and wealth disparities that have resulted from historical racism and discrimination. |
Contextual integrity | Targeted digital advertising that filters content based on demographic or psychographic profiles | Although these tactics work well in the context of apparel or automobiles, digital advertising may be less appropriate for mortgage lending. |
Accuracy | Property valuation algorithms | On average, Black and Hispanic borrowers pay higher rates and fees and are more likely to have received high-cost subprime loans, faced foreclosure, or sustained significant equity losses during the 2008 crisis. Models based on “comparable” home values may unfairly penalize minority communities. |
Legality | AI/ML mortgage underwriting algorithms | AI models may have negative, disparate impacts on certain racial/ethnic groups; due to model complexity, sources of bias may be difficult to detect. |
Expanded opportunity | AI/ML using non-financial data in credit scoring algorithms | Expanded data used for credit scoring may reduce the population of unscorable households by increasing the number of households with high-risk (i.e., low) credit scores. |
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Perry, V.G.; Martin, K.; Schnare, A. Algorithms for All: Can AI in the Mortgage Market Expand Access to Homeownership? AI 2023, 4, 888-903. https://doi.org/10.3390/ai4040045
Perry VG, Martin K, Schnare A. Algorithms for All: Can AI in the Mortgage Market Expand Access to Homeownership? AI. 2023; 4(4):888-903. https://doi.org/10.3390/ai4040045
Chicago/Turabian StylePerry, Vanessa G., Kirsten Martin, and Ann Schnare. 2023. "Algorithms for All: Can AI in the Mortgage Market Expand Access to Homeownership?" AI 4, no. 4: 888-903. https://doi.org/10.3390/ai4040045