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What Drives Racial and Ethnic Differences in High Cost Mortgages? The Role of High Risk Lenders

This paper examines racial and ethnic differences in high cost mortgage lending in seven diverse metropolitan areas from 2004-2007. Even after controlling for credit score and other key risk factors, African-American and Hispanic home buyers are 105 and 78 percent more likely to have high cost mortgages for home purchases. The increased incidence of high cost mortgages is attributable to both sorting across lenders (60-65 percent) and differential treatment of equally qualified borrowers by lenders (35-40 percent). The vast majority of the racial and ethnic differences across lenders can be explained by a single measure of the lender's foreclosure risk and most within-lending differences are concentrated at high-risk lenders. Thus, differential exposure to high-risk lenders combined with the differential treatment by these lenders explains almost all of the racial and ethnic differences in high cost mortgage borrowing.

Authors: 
Patrick Bayer, Duke University
Fernando Ferreira, The Wharton School, University of Pennsylvania
Stephen L. Ross, University of Connecticut
Publication Date: 
February, 2016
Publication Status: 
Document Number: 
2016-005
File Description: 
Revised version, February, 2016