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Redlining, the Community Reinvestment Act, and private mortgage insurance

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  • Ross, Stephen L.
  • Tootell, Geoffrey M. B.

Abstract

This paper examines whether neighborhood racial or income composition influences a lender's treatment of mortgage applications. Recent studies have found little evidence of differential treatment based on either the racial or income composition of the neighborhood, once the specification accounts for neighborhood risk factors. This paper suggests that lenders may favor applicants from CRA-protected neighborhoods if they obtain Private Mortgage Insurance (PMI) and that this behavior may mask lender redlining of low income and minority neighborhoods. For loan applicants who are not covered by PMI, this paper finds strong evidence that applications for units in low-income neighborhoods are less likely to be approved, and some evidence that applications for units in minority neighborhoods are less likey to be approved, regardless of the race of the applicant. This pattern is not visible in earlier studies because lenders appear to treat applications from these neighborhoods more favorably when the applicant obtains PMI.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 55 (2004)
Issue (Month): 2 (March)
Pages: 278-297

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Handle: RePEc:eee:juecon:v:55:y:2004:i:2:p:278-297

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Web page: http://www.elsevier.com/locate/inca/622905

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References

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  1. David G. Blanchflower & Phillip B. Levine & David J. Zimmerman, 1998. "Discrimination in the Small Business Credit Market," NBER Working Papers 6840, National Bureau of Economic Research, Inc.
  2. Munnell, Alicia H. & Geoffrey M. B. Tootell & Lynn E. Browne & James McEneaney, 1996. "Mortgage Lending in Boston: Interpreting HMDA Data," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 25-53, March.
  3. Holmes, Andrew & Horvitz, Paul, 1994. " Mortgage Redlining: Race, Risk, and Demand," Journal of Finance, American Finance Association, American Finance Association, vol. 49(1), pages 81-99, March.
  4. Michael H. Schill & Susan M. Wachter, 1994. "Borrower and neighborhood racial and income characteristics and financial institution mortgage application screening," Proceedings, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of Philadelphia, pages 223-243.
  5. Boyes, William J. & Hoffman, Dennis L. & Low, Stuart A., 1989. "An econometric analysis of the bank credit scoring problem," Journal of Econometrics, Elsevier, Elsevier, vol. 40(1), pages 3-14, January.
  6. Brock,W.A. & Durlauf,S.N., 2000. "Discrete choice with social interactions," Working papers, Wisconsin Madison - Social Systems 7, Wisconsin Madison - Social Systems.
  7. Amemiya, Takeshi, 1974. "Multivariate Regression and Simultaneous Equation Models when the Dependent Variables Are Truncated Normal," Econometrica, Econometric Society, Econometric Society, vol. 42(6), pages 999-1012, November.
  8. Cavalluzzo, Ken S & Cavalluzzo, Linda C, 1998. "Market Structure and Discrimination: The Case of Small Businesses," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(4), pages 771-92, November.
  9. Geoffrey M. Tootell, 1996. "Redlining in Boston: do mortgage lenders discriminate against neighborhoods?," Working Papers, Federal Reserve Bank of Boston 96-6, Federal Reserve Bank of Boston.
  10. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, Econometric Society, vol. 48(4), pages 817-38, May.
  11. Michael H. Schill & Susan M. Wachter, . "A Tale of Two Cities: Racial and Ethnic Geographic Disparities in Home Mortgage Lending in Boston and Philadelphia," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 16-93, Wharton School Rodney L. White Center for Financial Research.
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Cited by:
  1. Blackburn, McKinley & Vermilyea, Todd, 2007. "The role of information externalities and scale economies in home mortgage lending decisions," Journal of Urban Economics, Elsevier, Elsevier, vol. 61(1), pages 71-85, January.
  2. Diaz-Serrano, Luis, 2005. "On the negative relationship between labor income uncertainty and homeownership: Risk-aversion vs. credit constraints," Journal of Housing Economics, Elsevier, Elsevier, vol. 14(2), pages 109-126, June.
  3. Diaz-Serrano, Luis, 2004. "Income Volatility and Residential Mortgage Delinquency: Evidence from 12 EU Countries," IZA Discussion Papers 1396, Institute for the Study of Labor (IZA).
  4. Yongheng Deng & Stephen L. Ross & Susan M. Wachter, 2002. "Racial Differences in Homeownership: The Effect of Residential Location," Working papers, University of Connecticut, Department of Economics 2002-05, University of Connecticut, Department of Economics.
  5. Yan Zhang, 2013. "Fair Lending Analysis of Mortgage Pricing: Does Underwriting Matter?," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 46(1), pages 131-151, January.
  6. Ruben Hernandez & Michael Owyang & Andra Ghent, 2011. "Race and Subprime Loan Pricing," ERSA conference papers, European Regional Science Association ersa11p923, European Regional Science Association.
  7. Luis Diaz-Serrano, 2005. "Income Volatility and Residential Mortgage Delinquency: Evidence from 12 EU countries," Economics, Finance and Accounting Department Working Paper Series, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth n1530205, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  8. Stephen L. Ross, 2005. "The Continuing Practice and Impact of Discrimination," Working papers, University of Connecticut, Department of Economics 2005-19, University of Connecticut, Department of Economics, revised Jul 2006.
  9. Diaz-Serrano, Luis, 2005. "Income volatility and residential mortgage delinquency across the EU," Journal of Housing Economics, Elsevier, Elsevier, vol. 14(3), pages 153-177, September.
  10. Ghent, Andra C. & Hernández-Murillo, Rubén & Owyang, Michael T., 2011. "Differences in subprime loan pricing across races and neighborhoods," Working Papers, Federal Reserve Bank of St. Louis 2011-033, Federal Reserve Bank of St. Louis, revised 05 Mar 2014.

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