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Emergence of Subprime Lending in Minority Neighborhoods

Author

Listed:
  • Egle Jakucionyte

    (Bank of Lithuania, Vilnius University)

  • Swapnil Singh

    (Bank of Lithuania, Kaunas University of Technology)

Abstract

Subprime lending is concentrated among minorities and in minority neighborhoods. However, the literature has little evidence for what led to the rise of subprime lending in minority neighborhoods. We use the endorsement of FICO credit scores in mortgage underwriting by the Government Sponsored Enterprises (GSEs) in 1995 to answer this question. The use of credit scores led to the sorting of prime and subprime lenders across minority and non-minority neighborhoods. In minority neighborhoods prime lenders were substituted by subprime lenders and, as a result, the share of subprime lending in minority neighborhoods increased by 5 percentage points. Prime lenders with a stronger relationship with the GSEs reduced their lending in minority neighborhoods more. The level of securitization by the GSEs in minority neighborhoods also decreased.

Suggested Citation

  • Egle Jakucionyte & Swapnil Singh, 2021. "Emergence of Subprime Lending in Minority Neighborhoods," Bank of Lithuania Working Paper Series 94, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:94
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    More about this item

    Keywords

    Mortgages; Subprime lenders; GSEs; Securitization; Minorities;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • 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

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