Government Intervention in the Mortgage Market: A Study of Anti-Redlining Regulations

20 Pages Posted: 15 Feb 2008 Last revised: 15 Feb 2010

See all articles by Ronald W. Masulis

Ronald W. Masulis

University of New South Wales, Sydney; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Abstract

This study explores whether economic incentives exist for mortgage lenders to minimize mortgage originations in neighborhoods inhabited primarily by low-income racial minorities. Using an option pricing model, we show how the market value of a mortgage is affected by specific borrower characteristics. To the extent that existing laws on credit discrimination inhibit mortgage lenders from varying either origination prices or mortgage terms to reflect economically relevant variables that affect the market values of mortgages, incentives are created for both the mortgage lender and mortgage insurer to avoid originations and underwritings in areas with relatively high default probabilities. Pricing restrictions on fire insurance can indirectly affect mortgage lending, by discouraging insurance coverage in neighborhoods with high fire hazards. Various changes in mortgage lending regulations are suggested to eliminate incentives against mortgage lending and the effects of alternative programs to subsidize mortgage borrowers with relatively high default probabilities are analyzed.

Keywords: Mortgages, default, option pricing, mortgage insurance, redlining, price controls

JEL Classification: D12, D82, G21, G22, G28, J71, K23

Suggested Citation

Masulis, Ronald W., Government Intervention in the Mortgage Market: A Study of Anti-Redlining Regulations. Journal of Monetary Economics, Vol. 10, 1982. Available at SSRN: https://ssrn.com/abstract=1092476

Ronald W. Masulis (Contact Author)

University of New South Wales, Sydney ( email )

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