Collateral Risk and Demographic Discrimination in Mortgage Market Equilibria

Journal Title: Review of Economics & Finance - Year 2017, Vol 9, Issue 3

Abstract

Observations of significant differences in loan terms between demographically distinct groups of borrowers are often interpreted as evidence of ethnic, racial or gender discrimination by lenders. We consider, in stark contrast to existing models of demographic discrimination, a model of mortgage lending in an economy having complete markets, common knowledge and arbitragefree pricing. Market equilibria in this classical environment may exhibit discriminatory loan pricing by lenders even when borrowers, distinguished only by differences in an observable demographic trait, share identical measures of individual credit risk. Such pricing will be observed if these traits are directly correlated with certain features of the property securing a mortgage loan which, while omitted from standard statistical underwriting and regulatory review procedures, reduce the value of the collateral to the lender in case of foreclosure. When loans are secured by such properties and both lenders and borrowers act strategically, discrimination on this basis maximizes mortgage returns to lenders and will invariably be observed in mortgage market equilibria.

Authors and Affiliations

David Nickerson, Robert Jones

Keywords

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  • EP ID EP258237
  • DOI -
  • Views 107
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How To Cite

David Nickerson, Robert Jones (2017). Collateral Risk and Demographic Discrimination in Mortgage Market Equilibria. Review of Economics & Finance, 9(3), 13-28. https://europub.co.uk/articles/-A-258237