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

Author

Listed:
  • Patrick Bayer

    (Duke University)

  • Fernando Ferreira

    (The Wharton School, University of Pennsylvania)

  • Stephen L. Ross

    (University of Connecticut)

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 lenders can be explained by a single measure of the lender's foreclosure risk and most within-lending 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.

Suggested Citation

  • Patrick Bayer & Fernando Ferreira & Stephen L. Ross, 2016. "What Drives Racial and Ethnic Differences in High Cost Mortgages? The Role of High Risk Lenders," Working Papers 2016-005, Human Capital and Economic Opportunity Working Group.
    • Handle: RePEc:hka:wpaper:2016-005
    Note: MIP
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    File URL: https://humcap.uchicago.edu/RePEc/hka/wpaper/Bayer_Ferreira_Ross_2016_race-eth-high-cost-mortgage.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    mortgage lender; cost of credit; race; ethnicity; ratespread loans; foreclosure risk; delinquency risk; subprime; credit score; loan to value ratio; disadvantaged neighborhood;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy
    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
    • J71 - Labor and Demographic Economics - - Labor Discrimination - - - Hiring and Firing
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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