Racial, Economic, and Institutional Differences in Home Mortgage Loans: St. Joseph County, Indiana

Abstract

Numerous studies have documented racial and economic disparities in the home mortgage market. Almost all of these have been done in large urban areas, many of which have long histories of racial conflict and discrimination. Further, little attention has been paid to institutional disparities, i.e., the ways in which mortgage lenders differ among themselves in their community reinvestment performance. In this study, we profile the home mortgage lending of several institutions doing business in the medium-sized urban area of St. Joseph County, Indiana. We find tremendous differences between lenders, suggesting that bank practices and policies exert a great impact on how well low income and minority neighborhoods and individuals are served. Lender characteristics, such as the legal structure of the institution (e.g.. commercial bank, credit union, savings and loan), branch locations, and other factors are associated with these disparities. We conclude by suggesting that several heretofore ignored variables need closer examination. are virtually unanimous. Studies across the country show that blacks proportionally apply for fewer loans than whites, yet are rejected more often. Researchers consistently find that white neighborhoods receive many (three to four) times more loans per 1,000 mortgageable structures than do minority neighborhoods. Regression analyses, using various model specifications and data sets, agree that redlining and racial variables show consistent, significant and negative associations with home mortgage lending. This is true even after applying controls for obligation ratios, credit history, loan to value ratios, and property characteristics.In this study, we make three important contributions to the literature on residential mortgage patterns. Throughout this study "banks" refers generically to banks, savings and loans, savings banks, credit unions, and bank holding companies.First, almost all studies have focused on aggregate bank performance, i.e., how well do all the lending institutions in an area do at serving the community. Very little attention has been paid to institutional disparities (i.e., the ways in which banks differ among themselves in their community reinvestment performance). As Kim and Squires (1995) put it, most studies of mortgage lending have focused on the demand side (characteristics of borrowers, the properties they intend to purchase, and the surrounding neighborhoods) while paying little attention to the supply side (the characteristics of lending institutions). We examine measures and create indices that allow us to look individually at the community reinvestment performance of several institutions. This allows us to examine whether and why some lending institutions do better than others at serving low income and minority areas and individuals. Wide variations between lenders may suggest that bank practices and policies exert a strong impact on how well different groups and areas are served. We go a step further to see what lender characteristics, if any, seem to be he...

Originating lender localness and mortgage sustainability: an evaluation of delinquency and foreclosure in Indiana's mortgage revenue bond program

“…Many LMI borrowers lack the ''market credibility'' associated with higher incomes and higher credit scores that provide for easy appraisal of borrower risk; thus, soft information becomes more important to evaluate the true mortgage preparedness of such borrowers (Ergungor 2007a;Holyoke 2004). One of the purported advantages of local lenders is that they have local knowledge and access to soft information in a geographically targeted area, potentially unavailable to non-local lending entities (Bostic and Robinson 2004;Williams and Nesiba 1997;Nakamura 1994). While larger non-local lenders may benefit from ''informational returns to scale'' when providing mortgages to LMI borrowers (Campen 1993;Avery, Beeson, and Sniderman 1999;, lenders established in a particular community (with concentrated lending in that community) may be better positioned to form the relationships necessary to collect and appraise soft information about borrower mortgage preparedness.…”

“…1 Specifically, the proportion of mortgages originated by banking institutions located within the community where a borrower purchased a home (or with concentrated lending activity in the area) has declined substantially over the past two decades, with fewer than half of all mortgage loans to borrowers from banks located within their community (Apgar and Duda 2003;Avery, Bostic, Calem and Canner 1999;Hoffman 2001). Some researchers suggest that LMI borrowers may be more susceptible to these variations in localness due to their lack of financial sophistication and/or access to resources (which may affect their ability to search for a mortgage), and that decreases in local lending may be associated with decreased access to mortgage credit and decreased mortgage sustainability for LMI borrowers (Ergungor 2007a;2007b;Belsky and Essene 2008;Immergluck 2004;Williams and Nesiba 1997).…”

“…While previous research has examined the influence of the localness of the origination channel on access to mortgage credit (Campen 1993;Avery, Beeson, and Sniderman 1999;Williams and Nesiba 1997;Williams, McConnel, and Nesiba 2001), 2 little research evaluates the influence of lender localness on mortgage sustainability. In particular, to what extent is the localness of originating lenders associated with mortgage delinquency and foreclosure for LMI borrowers?…”

“…2 This research has generally found that non-local lenders (and in particular less regulated nonbank mortgage companies and broker institutions) tend to lend as much or more (in terms of total volume) to LMI borrowers as do local banks, due in part to ''informational returns to scale.'' Larger banks may have more resources to target, appraise and service LMI borrowers (Campen 1993;Avery, Beeson, and Sniderman 1999;Williams and Nesiba 1997;Williams, McConnel, and Nesiba 2001). There is some evidence that regulated banks operating in communities with Community Reinvestment Act (CRA) agreements in place increase their lending activity to LMI borrowers (Bostic and Robinson 2005;Shlay 1999;Schwartz 1998).…”

“…While, in general, larger lenders may be assumed to be ''less local'' and thus less likely to be associated with mortgage sustainability, very (NCRC 2007), and may also be pressured (from above and below) to provide for long term mortgage sustainability. Further, very large lenders may have informational advantages when assessing the default risk of LMI borrowers due to access to advanced technology and/or resources not available to smaller lenders (Bostic and Robinson 2004;Williams and Nesiba 1997). Thus, both small and very large lenders may be associated with mortgage sustainability, for different reasons.…”