Deadly Disease, Fear, and Ostracism in the Credit Market

Abstract

Utilizing the 2014 Ebola outbreak in the United States, this paper examines the impact of fear on credit distortions in the mortgage market. Even though the actual risk of Ebola infection in the United States is extremely low, the prevailing Ebola fear leads to increased rejections for Black mortgage applicants who are perceived to be at an elevated risk of exposure to the virus. Specifically, Black applicants face an additional 2.8 percentage point increase in their denial rate during the Ebola outbreak. We further employ the geographical distribution of the four diagnosed Ebola cases in the United States and algorithm-based lending as a control group to strengthen our analysis of the causal effect of fear on credit distortions in mortgage approval rates. Additional analyses reveal that approved Black applicants tend to have higher FICO scores and lower default probability, and Black borrowers are also less likely to be granted modifications upon delinquency. We also demonstrate a decline in the denial rate of Black applicants immediately after the outbreak, suggesting that loan officers consciously counteract their biases as Ebola fear subsides. Finally, we document that a learning effect translates into a relatively lower denial rate for Asian applicants during the COVID-19 pandemic.

Keywords: Fear, Ostracism, Credit Distortion, Mortgage Market, Loan Officer, Pandemic JEL: J15, G21, G51