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Differences in subprime loan pricing across races and neighborhoods

Author

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  • Andra C. Ghent
  • Ruben Hernandez-Murillo
  • Michael T. Owyang

Abstract

We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion. We combine loan-level data on the performance of non-prime securitized mortgages with individual- and neighborhood- level data on racial and ethnic characteristics for metropolitan areas in California and Florida. Using a model of rate determination that accounts for predicted loan performance, we evaluate the differences in subprime mortgage rates in terms of racial and ethnic groups and neighborhood characteristics. We find evidence of adverse pricing for blacks and Hispanics. The evidence of adverse pricing is strongest for purchase mortgages and mortgages originated by non-depository institutions.

Suggested Citation

  • Andra C. Ghent & Ruben Hernandez-Murillo & Michael T. Owyang, 2011. "Differences in subprime loan pricing across races and neighborhoods," Working Papers 2011-033, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2011-033
    Note: Originally submitted as “Race, Redlining, and Subprime Loan Pricing.”
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    Cited by:

    1. Gerardi, Kristopher & Willen, Paul S. & Zhang, David Hao, 2023. "Mortgage prepayment, race, and monetary policy," Journal of Financial Economics, Elsevier, vol. 147(3), pages 498-524.
    2. Robert Bartlett & Adair Morse & Richard Stanton & Nancy Wallace, 2019. "Consumer-Lending Discrimination in the FinTech Era," NBER Working Papers 25943, National Bureau of Economic Research, Inc.
    3. Neil Bhutta & Aurel Hizmo, 2020. "Do Minorities Pay More for Mortgages?," Finance and Economics Discussion Series 2020-007, Board of Governors of the Federal Reserve System (U.S.).
    4. Marsha J. Courchane & Stephen L. Ross, 2019. "Evidence and Actions on Mortgage Market Disparities: Research, Fair Lending Enforcement, and Consumer Protection," Housing Policy Debate, Taylor & Francis Journals, vol. 29(5), pages 769-794, September.
    5. Paolo Emilio Mistrulli & Md Taslim Uddin & Alberto Zazzaro, 2023. "Discrimination of Immigrants in Mortgage Pricing and Approval: Evidence from Italy," CSEF Working Papers 675, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    6. Bartlett, Robert & Morse, Adair & Stanton, Richard & Wallace, Nancy, 2022. "Consumer-lending discrimination in the FinTech Era," Journal of Financial Economics, Elsevier, vol. 143(1), pages 30-56.
    7. Matteo Crosignani & Hanh Le, 2023. "Stakeholders’ Aversion to Inequality and Bank Lending to Minorities," Staff Reports 1079, Federal Reserve Bank of New York.
    8. Sumit Agarwal & Yongheng Deng & Jia He & Yonglin Wang & Qi Zhang, 2023. "Lenders’ pricing strategy: Do neighborhood risks matter?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(4), pages 1011-1047, July.
    9. Andra C. Ghent & Rubén Hernández-Murillo & Michael T. Owyang, 2015. "Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(4), pages 820-854, November.
    10. Manthos D. Delis & Panagiotis Papadopoulos, 2019. "Mortgage Lending Discrimination Across the U.S.: New Methodology and New Evidence," Journal of Financial Services Research, Springer;Western Finance Association, vol. 56(3), pages 341-368, December.
    11. Bertrand, Jérémie & Weill, Laurent, 2021. "Do algorithms discriminate against African Americans in lending?," Economic Modelling, Elsevier, vol. 104(C).
    12. H. Young Baek & David D. Cho, 2023. "Are Minorities Still Paying Higher Mortgage Interest Rates?," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 29(1), pages 31-47, May.
    13. Bucciol, Alessandro & Papadovasilaki, Dimitra, 2023. "Portfolio decisions and perceived racial discrimination," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 106(C).
    14. Natalya Presman & Nitzan Tzur-Ilan, 2019. "Does Location Matter? Evidence on Differential Mortgage Pricing in Israel," Bank of Israel Working Papers 2019.14, Bank of Israel.
    15. D Dulani Jayasuriya & Mohamed Ayaz & Michael Williams, 2023. "The use of digital footprints in the US mortgage market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(1), pages 353-401, March.
    16. Suzuki, Masatomo & Kawai, Kohei & Shimizu, Chihiro, 2022. "Discrimination against the atypical type of tenants in the Tokyo private rental housing market: Evidence from moving-in inspection and rent arrear records," Journal of Housing Economics, Elsevier, vol. 58(PB).
    17. Chan, Sewin & Haughwout, Andrew & Tracy, Joseph, 2015. "How Mortgage Finance Affects the Urban Landscape," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 987-1045, Elsevier.
    18. Oberg, Phillip Michael, 2017. "The housing bubble and the evolution of the homeownership gap," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 25-35.
    19. Andreas Fuster & Paul Goldsmith‐Pinkham & Tarun Ramadorai & Ansgar Walther, 2022. "Predictably Unequal? The Effects of Machine Learning on Credit Markets," Journal of Finance, American Finance Association, vol. 77(1), pages 5-47, February.
    20. Natalya Bikmetova & Geoffrey K. Turnbull & Velma Zahirovic‐Herbert, 2023. "Ethnicity in housing markets: Buyers, sellers and agents," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(1), pages 196-232, January.
    21. Jordan van Rijn & Shuwei Zeng & Paul Hellman, 2021. "Financial institution objectives and auto loan pricing: Evidence from the survey of consumer finances," Journal of Consumer Affairs, Wiley Blackwell, vol. 55(3), pages 995-1039, September.
    22. Stephen L. Ross & Yuan Wang, 2022. "Mortgage Lenders and the Geographic Concentration of Foreclosures," Working Papers 2022-001, Human Capital and Economic Opportunity Working Group.
    23. Lei Zhang & Tammy Leonard, 2021. "External validity of hedonic price estimates: Heterogeneity in the price discount associated with having Black and Hispanic neighbors," Journal of Regional Science, Wiley Blackwell, vol. 61(1), pages 62-85, January.
    24. Hanson, Andrew & Hawley, Zackary & Martin, Hal & Liu, Bo, 2016. "Discrimination in mortgage lending: Evidence from a correspondence experiment," Journal of Urban Economics, Elsevier, vol. 92(C), pages 48-65.
    25. James B. Kau & Lu Fang & Henry J. Munneke, 2019. "An Unintended Consequence of Mortgage Financing Regulation – a Racial Disparity," The Journal of Real Estate Finance and Economics, Springer, vol. 59(4), pages 549-588, November.

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    More about this item

    Keywords

    Subprime mortgage; Housing policy; Discrimination in mortgage loans;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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