Credit Standards and Segregation

Abstract

How do credit standards affect racial segregation? During the latest US mortgage credit boom, metropolitan areas that experienced larger increases in loan-to-income ratios and acceptance rates also experienced smaller declines in Black segregation. Bank liquidity and loan securitizability (measured in 1990-1994) are used to instrument changes in lending standards. The relaxation of credit standards during the credit boom caused Black households to live with between 2 and 8 percentage points more same-race neighbors. The relaxed lending standards led to significant outflows of White households from Black census tracts. Accounting for the foreclosure crisis has no significant effect on our estimates.