Differences in subprime loan pricing across races and neighborhoods

• Published in: Regional science and urban economics Vol. 48; pp. 199 - 215
• Main Authors: Ghent, Andra C., Hernández-Murillo, Rubén, Owyang, Michael T.
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01-09-2014; Elsevier Sequoia S.A
• Subjects: California; Determinants; Discrimination; Economic models; Economic theory; Ethnicity; Fair Housing Act; Loan performance; Loans; Minority & ethnic groups; Mortgage rates; Mortgages; Neighbourhoods; Price levels; Pricing; Studies; Subprime lending; Subprime mortgages; U.S.A; Florida; United States > US; California; R23; C11; Fair Housing Act; Discrimination; G21; Loan performance; J15; Subprime mortgages
• ISSN: 0166-0462; 1879-2308
• DOI: 10.1016/j.regsciurbeco.2014.07.006

We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion. We combine loan-level data on the performance of non-prime securitized mortgages with individual- and neighborhood-level data on racial and ethnic characteristics for metropolitan areas in California and Florida. Using a model of rate determination that accounts for predicted loan performance, we evaluate the differences in subprime mortgage rates in terms of racial and ethnic groups and neighborhood characteristics. We find evidence of adverse pricing for Blacks and Hispanics. The evidence of adverse pricing is strongest for purchase mortgages and mortgages originated by non-depository institutions.
•We investigate the effect of race and ethnicity on subprime loan pricing in 2005.•We study non-prime securitized mortgages in California and Florida.•We use a model of rate determination that accounts for loan performance.•We find evidence of adverse pricing for Blacks and Hispanics.•Evidence is strongest for purchases mortgages and by non-depository institutions.