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Information Externalities, Neighborhood Characteristics and Home Mortgage Pricing and Underwriting

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  • Ioan Voicu
  • Irina Paley
  • Andres E. Lopez
  • Irene Fang

Abstract

type="main"> Theories of rational redlining suggest thinness in housing markets should lead to greater uncertainty in house price appraisals, increasing mortgage denial rates or pricing. Empirical tests found support for this theory in mortgage underwriting using 1990s data. Using 2006 data and bank-specific regression models, we revisit this topic in light of two developments leading to the recent mortgage bubble: the widespread securitization that allowed banks to shift loan risk to investors and the advent of risk-based pricing. Consistent with expectations, we find that information externalities have become economically very small and have shifted from underwriting to pricing decisions.

Suggested Citation

  • Ioan Voicu & Irina Paley & Andres E. Lopez & Irene Fang, 2015. "Information Externalities, Neighborhood Characteristics and Home Mortgage Pricing and Underwriting," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(3), pages 719-749, September.
    • Handle: RePEc:bla:reesec:v:43:y:2015:i:3:p:719-749
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    File URL: http://hdl.handle.net/10.1111/1540-6229.12079
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    References listed on IDEAS

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    1. Nothaft, Frank E. & Perry, Vanessa G., 2002. "Do mortgage rates vary by neighborhood? Implications for loan pricing and redlining," Journal of Housing Economics, Elsevier, vol. 11(3), pages 244-265, September.
    2. Blackburn, McKinley & Vermilyea, Todd, 2007. "The role of information externalities and scale economies in home mortgage lending decisions," Journal of Urban Economics, Elsevier, vol. 61(1), pages 71-85, January.
    3. Ling, David C. & Wachter, Susan M., 1998. "Information Externalities and Home Mortgage Underwriting," Journal of Urban Economics, Elsevier, vol. 44(3), pages 317-332, November.
    4. William C. Gruben & Jonathan A. Neuberger & Ronald H. Schmidt, 1990. "Imperfect information and the Community Reinvestment Act," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 27-46.
    5. Avery, Robert B. & Beeson, Patricia E. & Sniderman, Mark S., 1999. "Neighborhood Information and Home Mortgage Lending," Journal of Urban Economics, Elsevier, vol. 45(2), pages 287-310, March.
    6. Harrison, David M., 2001. "The Importance of Lender Heterogeneity in Mortgage Lending," Journal of Urban Economics, Elsevier, vol. 49(2), pages 285-309, March.
    7. Calem, Paul S, 1996. "Mortgage Credit Availability in Low- and Moderate-Income Minority Neighborhoods: Are Information Externalities Critical?," The Journal of Real Estate Finance and Economics, Springer, vol. 13(1), pages 71-89, July.
    8. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(1), pages 307-362.
    9. James A. Berkovec & John L. Goodman, 1996. "Turnover as a Measure of Demand for Existing Homes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(4), pages 421-440, December.
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    Cited by:

    1. Ambrose, Brent W. & Coulson, N. Edward & Yoshida, Jiro, 2018. "Reassessing Taylor rules using improved housing rent data," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 243-257.

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