Subprime Mortgage Default in Minority Neighborhoods

44 Pages Posted: 26 Jun 2016 Last revised: 29 Jun 2016

See all articles by Robert A. Connolly

Robert A. Connolly

University of North Carolina (UNC) at Chapel Hill - Finance Area

Lynn M. Fisher

Mortgage Bankers Association

Gary Painter

University of Southern California - Sol Price School of Public Policy

Date Written: May 23, 2016

Abstract

In this paper, we empirically examine differences in subprime borrower default decisions by Census tract characteristics in order to clarify how the subprime foreclosure crisis played out in minority areas. An innovation in our modeling approach is that we do not constrain the impact of neighborhood composition to be identical across diverse decision-making settings. Rather, we focus on variation in decision-making when the option to default is more likely to be in the money. Carefully controlling for dynamic loan balances and home values, as well as other loan characteristics and economic conditions, we find that borrowers in minority neighborhoods, delineated by Census tracts, were less likely to default at high contemporaneous, combined loan to value ratios (CLTV) than those in neighborhoods with fewer minorities. Borrowers in tracts with a greater share of recent immigrants where overall mobility is greater are more likely to default at high CLTVs, however. Our finding that subprime borrowers in minority neighborhoods have a lower propensity to default at high CLTV stands in contrast to assertions that households in these neighborhoods may have been more willing to strategically default, that is, to default when equity turned negative regardless of their ability to repay. By contrast, our findings show that borrowers in white neighborhoods were more likely to default when they had relatively higher negative equity.

Keywords: mortgage, subprime, default, prepayment, gateway cities, race, ethnicity, immigrant status

JEL Classification: G21

Suggested Citation

Connolly, Robert A. and Fisher, Lynn M. and Painter, Gary, Subprime Mortgage Default in Minority Neighborhoods (May 23, 2016). Available at SSRN: https://ssrn.com/abstract=2800230 or http://dx.doi.org/10.2139/ssrn.2800230

Robert A. Connolly (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Campus Box 3490
Chapel Hill, NC 27599-3490
United States
919-962-0053 (Phone)
919-962-5539 (Fax)

HOME PAGE: http://itr.bschool.unc.edu/faculty/connolly

Lynn M. Fisher

Mortgage Bankers Association ( email )

1919 M Street NW
Washington, DC 20006-3404
United States

Gary Painter

University of Southern California - Sol Price School of Public Policy ( email )

Los Angeles, CA 90089-0626
United States
213-740-8754 (Phone)
213-740-0001 (Fax)

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