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
Related Articles
- EP ID EP258237
- DOI -
- Views 94
- Downloads 0
United States Manufacturing Direct Investment and Trade: The Case of Canada and Mexico under NAFTA and Earlier Trade Liberalization Measures
This paper examines the apparent impact of the formation of the North American Free Trade Agreement (NAFTA) and earlier relevant trade liberalization measures on U.S. manufacturing direct investment and trade vis-à-vis C...
Digital Divide and Income Inequality: A Spatial Analysis
A spatial quantile regression model, which can fully describe the distribution characteristics and spillover effects, is applied to explore the effect of digital divide on the income inequality. Firstly, the estimation r...
Asymmetric Effects on Financial Cycles in a Monetary Union with Diverging Country Preferences for Variable- and Fixed-Rate Mortgages
Before as well as at the time when the European Monetary Union (EMU) was launched, a number of economists were discussing possible asymmetrical effects of monetary transmission stemming from apparent structural differenc...
Operating Performance Evaluation Based on Z-score Model and Profitability between Cross-Straits Credit Cooperatives
This paper extends the literature evaluating credit cooperatives practices for two sides of Taiwan Strait. It finds evidence of different regulations and systems between cross-straits credit cooperatives resulting in the...
The US Monetary Base and Major World Equity Markets: An Empirical Investigation
This paper investigates the relationship between the US monetary base and the five largest equity indices of the world. The mainstay of the study is the vector autoregressive approach (VAR). Analyzing impulse response fu...