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
Financial Deepening, Economic Growth and Corruption: The Case of Islamic Banking
As Islamic banking is becoming popular among bank customers, attempts are made in this study to examine the relationship between the corruption level and financial market deregulation, which causes financial deepening, u...
Financial Crisis Transmission: Foreign Ownership vs. Foreign Funding?
We investigate whether the credit contraction that followed the global financial crisis is due to high foreign bank ownership or high reliance of banks on foreign funding. We apply panel vector auto-regressions to quarte...
The Asymmetric Impact of Portfolio Mix on Bank Performance over the Business Cycle: U.S. and Canadian Evidence
We analyze the dynamic linkage between fee-based income and bank performance link-age in the aftermath of the crisis. Surprisingly, our time series approach suggests that the share of fee-based income keeps contributing...
Fiscal Policy and Income Distribution: Measurement for Argentina 1995 – 2010
This paper studies the effect of consolidated –national and provincial– fiscal policy on personal income distribution in Argentina, building a novel panel data for 1995-2010. We find that fiscal policy reduces income ine...
Key Factors for Success of Social Enterprises in Italy: Analysis of Financial and Operating Performance
Assessing social performance is one of the greatest challenges for practitioners and researchers in social entrepreneurship. Even though social enterprises (SEs) have the main goal of achieving social purposes, they shou...