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What Drives Racial and Ethnic Differences in High Cost Mortgages? The Role of High Risk Lenders

57 Pages Posted: 12 Feb 2016  

Patrick J. Bayer

Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Fernando V. Ferreira

University of Pennsylvania - The Wharton School

Stephen L. Ross

University of Connecticut - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2016

Abstract

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

Bayer, Patrick J. and Ferreira, Fernando V. and Ross, Stephen L., What Drives Racial and Ethnic Differences in High Cost Mortgages? The Role of High Risk Lenders (February 1, 2016). Economic Research Initiatives at Duke (ERID) Working Paper No. 206. Available at SSRN: https://ssrn.com/abstract=2730894 or http://dx.doi.org/10.2139/ssrn.2730894

Patrick Bayer

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Fernando Ferreira

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-7181 (Phone)
215-573-2220 (Fax)

HOME PAGE: http://real.wharton.upenn.edu/~fferreir/

Stephen L. Ross (Contact Author)

University of Connecticut - Department of Economics ( email )

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

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