Analysis of Discrimination in Prime and Subprime Mortgage Markets

47 Pages Posted: 22 Dec 2011  

R. Glenn Hubbard

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Darius Palia

Rutgers Business School; Center for Contract & Economic Organization

Wei Yu

California State Polytechnic University, Pomona

Date Written: November 22, 2011

Abstract

This paper examines evidence of lending discrimination in prime and subprime mortgage markets in New Jersey. Existing single-equation studies of race-based discrimination in mortgage lending assume race is uncorrelated with the disturbance term in the loan denial regression. At the individual loan-level, we show that race is correlated with both observable and unobservable risk variables, leading to biased coefficient estimates. To mitigate this problem, we specify a system of equations and use a full information maximum likelihood (FIML) method that does not need to identify instrumental variables for system identification. We find that minorities are less likely to be rejected than whites in the subprime market. The individual loan-level FIML results are robust to using two-stage least squares when we examine discrimination at the neighborhood-level. We also find that the reduction in rejection rates to minority neighborhoods from 1996 to 2008 cannot be fully justified by risk, suggesting a relaxation of lending standards to minority neighborhoods. Using the methodology of Mian and Sufi [2009], we also find evidence for strong credit supply effects.

Keywords: subprime, discrimination, banking

JEL Classification: J15, G21

Suggested Citation

Hubbard, R. Glenn and Palia, Darius and Yu, Wei, Analysis of Discrimination in Prime and Subprime Mortgage Markets (November 22, 2011). Available at SSRN: https://ssrn.com/abstract=1975789 or http://dx.doi.org/10.2139/ssrn.1975789

Robert Glenn Hubbard (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://www.gsb.columbia.edu/faculty/ghubbard

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Darius Palia

Rutgers Business School ( email )

111 Washington Street
MEC 134
Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)

Center for Contract & Economic Organization ( email )

435 W 116th St.
New York, NY 10027
United States

Wei Yu

California State Polytechnic University, Pomona ( email )

3801 W. Temple Avenue Pomona
Pomona, CA 91768
United States

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