What Drives Racial and Ethnic Differences in High Cost Mortgages? The Role of High Risk Lenders
57 Pages Posted: 12 Feb 2016
Date Written: February 1, 2016
This paper examines racial and ethnic differences in high cost mortgage lending in seven diverse metropolitan areas from 2004-2007. Even after controlling for credit score and other key risk factors, African-American and Hispanic home buyers are 105 and 78 percent more likely to have high cost mortgages for home purchases. The increased incidence of high cost mortgages is attributable to both sorting across lenders (60-65 percent) and differential treatment of equally qualified borrowers by lenders (35-40 percent). The vast majority of the racial and ethnic differences across lender can be explained by a single measure of the lender’s foreclosure risk and most of the within-lender differences are concentrated at high-risk lenders. Thus, differential exposure to high-risk lenders combined with the differential treatment by these lenders explains almost all of the racial and ethnic differences in high cost mortgage borrowing.
Keywords: Mortgage Lender; Cost of Credit; Race; Ethnicity; Ratespread Loans; Foreclosure Risk; Delinquency Risk; Subprime; Credit Score; Loan to Value Ratio; Disadvantaged Neighborhood
JEL Classification: G21, I28, J15, J71, R21
Suggested Citation: Suggested Citation