Racial Disparity in Mortgage Stress: The Impact of Financial Literacy and Social Capital

This paper investigates racial disparities in mortgage stress. We begin by developing a simple model, and using data from the Panel Study of Income Dynamics (PSID), we find that black borrowers are significantly more susceptible to mortgage stress than their white counterparts, even after controlling for observable factors Our analysis reveals that a substantial portion of this racial gap can be attributed to differences in financial literacy levels, with only 14.1% of black borrowers demonstrating financial literacy compared to 52.9% of white borrowers. In particular, we find that the variance in financial literacy can account for 15.2% of the racial disparity in mortgage stress, and achieving parity in financial literacy could reduce the racial gap by 24.9%. Furthermore, our analysis highlights that the racial disparity is most pronounced in states with low levels of social capital, underscoring the role of social capital in ameliorating racial disparities. Policies and initiatives aimed at enhancing the financial literacy and social capital of black borrowers can help narrow the racial gap in mortgage stress.