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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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number
2000-04.
Length: 44 pages Date of creation: 2000 Date of revision: Publication status: Forthcoming in Journal of Urban Economics Handle: RePEc:uct:uconnp:2000-04
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Find related papers by JEL classification: R38 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location - - - Government Policies; Regulatory Policies G12 - Financial Economics - - General Financial Markets - - - Asset Pricing G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation J71 - Labor and Demographic Economics - - Labor Discrimination - - - Hiring and Firing
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