A Survey and Comparison of Redlining Influences In Urban Mortgage Lending Markets

Hutchinson, Peter M.; Ostas, James R.; Reed, J. David

doi:10.1111/1540-6229.00845

Cited by 26 publications

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“…Early studies of discrimination in mortgage markets, such as Bradbury, Case, and Dunham (1989) and Hutchinson, Ostas, and Reed (1977), examined questions related to the issue of redlining--the practice whereby lenders refuse to make mortgage loans in geographic areas characterized by heavy concentration of racial or ethnic minorities regardless of the creditworthiness of the loan applicants. As noted by Benston (1981), most studies of redlining are inadequate since they fail to control sufficiently for borrower characteristics (see also Benston and Horsky, 1992).…”

Section: Previous Studiesmentioning

confidence: 99%

The cultural affinity hypothesis and mortgage lending decisions

Hunter

Walker

1996

J Real Estate Finan Econ

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This paper conducts an empirical analysis of the cultural affinity hypothesis put forth by Calomiris, et al. (1994) in the mortgage lending market. This hypothesis implies that white loan officers, because of a lack of familiarity with minority applicants, will rely more heavily on characteristics that can be observed at low cost (e.g., objective loan application measures) in evaluating the creditworthiness of minority applicants relative to white applicants. Using a cleansed sample of 1,991 loan applications drawn from data collected by the Federal Reserve Bank of Boston, the results of the analysis were consistent with the cultural affinity hypothesis. In particular, we found that marginal black and Hispanic applicants appeared to be held to higher quantitative standards on such objective factors as credit history and debt obligation ratios than were similarly situated marginal white applicants.A well-known result in the economics of information is that when job applicants have different productive potentials, employers will find it worthwhile to subject them to a screening process. Since productivity typically cannot be observed directly, some observable characteristic that is highly correlated with productivity may serve as a substitute. Thus, possession of a college degree or higher level of education may indicate attributes that will prove useful in certain jobs. Similarly, race or sex, whether or not justifiable on legal or ethical grounds, may be taken by employers as predictors of on-the-job performance.In credit markets, many borrower characteristics serve as signals of borrower quality or creditworthiness. Just as employers may associate the race or sex of job applicants with productivity, so may lenders associate these attributes with creditworthiness. Since the Civil Rights Act of 1964, much legislation has been passed that was aimed at eliminating the use of unalterable personal characteristics such as race in credit approval decisions. Nonetheless, the question remains whether lenders continue to use such information in that way.A recent hypothesis put forward by Calomiris, Kahn, and Longhofer (1994) suggests that continued discrimination against minorities in credit market situations could result from the lack of cultural affinity between white loan officers and minority applicants. This hypothesis states that white loan officers will rely more heavily on characteristics that can be observed at low cost when appraising the creditworthiness of minorities rather than invest marginal resources in gathering additional information about creditworthiness. Stated

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Section: Previous Studiesmentioning

confidence: 99%

The cultural affinity hypothesis and mortgage lending decisions

Hunter

Walker

1996

J Real Estate Finan Econ

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“…For a summary of such studies, see Benston (1981). Several studies appear in professional literature (for example, see Bradbury, Case, and Dunham (1989) and Hutchinson, Ostas, and Reed (1977)). From a public policy standpoint, these findings, if valid, would indicate a need for additional regulation to ensure social equality.…”

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confidence: 99%

Mortgage Redlining: Race, Risk, and Demand

Holmes¹,

Horvitz²

1994

The Journal of Finance

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Charges that geographical redlining is widely practiced by mortgage lenders and is associated with racial discrimination have received much attention. However, empirical research in this area has yet to document a convincing answer to the question of whether redlining even exists. Much of the previous research in this area has suffered from failure to account for variations in risk, and/or failure to adequately control for geographical differences in demand. This study addresses these problems in an effort to determine whether the disparity in the flow of mortgage credit can be explained by differences in risk and demand. THE U.S. MORTGAGE MARKET is operationally efficient with long-term mortgage loans made to highly leveraged borrowers at very thin spreads above the lender's cost of funds. There has long been controversy, however, with respect to considerations of equity. Legislation on this issue began with the Fair Housing Act of 1968, followed by the Equal Credit Opportunity Act of 1974, and the Home Mortgage Disclosure Act of 1975 (HMDA). It is now over 15 years since passage of the Community Reinvestment Act of 1977 (CRA). This legislation was designed to assure that banks meet the credit needs of neighborhoods in their service areas. In recent years much attention in the administration of the CRA has been devoted to the issue of racial discrimination in mortgage lending. Questions still remain as to whether the decisions of mortgage lenders are influenced by the race of the loan applicant or on the racial composition of his neighborhood.Redlining is the refusal of lenders to make mortgage loans in certain areas regardless of the creditworthiness of the individual loan applicant. Many studies claim to verify the existence of racially based mortgage redlining. The earliest studies were generally carried out by community groups and were rather crudely done. For a summary of such studies, see Benston (1981). Several studies appear in professional literature (for example, see Bradbury, Case, and Dunham (1989) and Hutchinson, Ostas, and Reed (1977)). From a public policy standpoint, these findings, if valid, would indicate a need for additional regulation to ensure social equality. Additionally, the existence of redlining in the absence of structural defects in the market would conflict * Sam Houston State University and the College of Business Administration, University of Houston, respectively. We thank Clifford Fry, William Kretlow, Archer McWhorter, Bernell Stone, Michael Pinegar, Grant McQueen, and particularly, George Benston and Rene Stulz for helpful comments. 81 82The Journal of Finance with the economic man assumption upon which much of economic analysis is based. That is, mortgage lenders are rational agents functioning in a competitive market. Rational agents would not reject profitable projects based on noneconomic criteria such as race.Indirect evidence in support of the economic man assumption can be found in the literature on the performance of minority-owned banks. If redlining is racially induc...

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“…8. E.g., Ahlbrandt (1977) and Hutchinson, Ostas, and Reed (1977). Ostas (1985) rigorously reexamines the requirement of the reduced form approach and concludes (p. 87): "Unfortunately, there currently appears to be no way to design the reduced-form experiments so as to be free from criticism concerning demand versus supply ambiguity."…”

Section: Discussionmentioning

confidence: 99%

The relationship between the demand and supply of home financing and neighborhood characteristics: An empirical study of mortgage redlining

Benston

Horsky

1992

J Finan Serv Res

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In this study the hypothesis that central cities are "redlined" was tested with data gathered from three separate central city and matching city-suburban areas. Potentially unmet mortgage deman d was estimated from interviews of people who tried unsuccessfully to sell their homes. A hedonic price function revealed that these owners did not "overprice" their homes. However, they did not attribute their inability to sell to potential buyers' problems with financial institutions. A logit analysis of data provided by home buyers showed that individuals bought in the areas they preferred. We also found that central city and city-suburban home buyers got the type of mortgage they wanted at market terms and home owners in both areas had no difficulty in financing home repairs.Identification of the factors that affect the demand and supply of mortgages has been an important and often divisive issue since the early 1970s, when community groups and legislators claimed that lenders systematically discriminate against certain persons and areas. Allegedly, mortgagees draw a figurative red line around older, often blighted, racially changing, and nonwhite areas, and refuse to lend to potential home buyers. Alternatively, banks and thrift institutions are described as "FHAing" a neighborhood by refusing to offer conventional mortgages to home buyers. Even where lenders do make loans that are demanded, banks and thrifts are said to redline subtly, by requiring harsher terms from people who purchase homes in older city areas than from those who buy in the suburbs. Furthermore, these practices allegedly apply to home improvement loans as well. Community activists and legislators claim that this leads to the accelerated decay of neighborhoods and thwarts rehabilitation efforts. 1As a consequence of these allegations and studies showing that a selected subset of lenders (generally thrift institutions and occasionally commercial banks) made more mortgages in suburban areas than in city areas, Congressional hearings were held in 1975, resulting

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A Survey and Comparison of Redlining Influences In Urban Mortgage Lending Markets

Cited by 26 publications

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The cultural affinity hypothesis and mortgage lending decisions

The cultural affinity hypothesis and mortgage lending decisions

Mortgage Redlining: Race, Risk, and Demand

The relationship between the demand and supply of home financing and neighborhood characteristics: An empirical study of mortgage redlining

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