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

Benston, George J.; Horsky, Dan

doi:10.1007/bf00115320

Cited by 28 publications

(12 citation statements)

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“…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). In addition, as noted by Holmes and Horvitz (1994), these studies do not adequately control for the risk differences across different geographic areas.…”

Section: Previous Studiesmentioning

confidence: 98%

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: 98%

The cultural affinity hypothesis and mortgage lending decisions

Hunter

Walker

1996

J Real Estate Finan Econ

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“…Although redlining is a well-documented factor in the origins of contemporary racial residential segregation (see Massey & Denton 1993), studies after the 1974 Equal Credit Opportunity Act, which outlawed redlining, and since the 1977 Community Reinvestment Act, which made illegal having a smaller pool of mortgage funds available in minority neighborhoods than in similar white neighborhoods, find little evidence of its persistence (Benston & Horsky 1991, Schafer & Ladd 1981, Munnell et al 1996). This conclusion depends in part, however, on one's definition of neighborhood-based discrimination.…”

Section: Credit Marketsmentioning

confidence: 99%

The Sociology of Discrimination: Racial Discrimination in Employment, Housing, Credit, and Consumer Markets

2008

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Persistent racial inequality in employment, housing, and a wide range of other social domains has renewed interest in the possible role of discrimination. And yet, unlike in the pre-civil rights era, when racial prejudice and discrimination were overt and widespread, today discrimination is less readily identifiable, posing problems for social scientific conceptualization and measurement. This article reviews the relevant literature on discrimination, with an emphasis on racial discrimination in employment, housing, credit markets, and consumer interactions. We begin by defining discrimination and discussing relevant methods of measurement. We then provide an overview of major findings from studies of discrimination in each of the four domains; and, finally, we turn to a discussion of the individual, organizational, and structural mechanisms that may underlie contemporary forms of discrimination. This discussion seeks to orient readers to some of the key debates in the study of discrimination and to provide a roadmap for those interested in building upon this long and important line of research. Keywordsrace; inequality; measurement; mechanisms; African Americans; racial minorities Persistent racial inequality in employment, housing, and other social domains has renewed interest in the possible role of discrimination. Contemporary forms of discrimination, however, are often subtle and covert, posing problems for social scientific conceptualization and measurement. This article reviews the relevant literature on racial discrimination, providing a roadmap for scholars who wish to build on this rich and important tradition. The charge for this article was a focus on racial discrimination in employment, housing, credit markets, and consumer interactions, but many of the arguments reviewed here may also extend to other domains (e.g., education, health care, the criminal justice system) and to other types of discrimination (e.g., gender, age, sexual orientation). We begin this discussion by defining discrimination and discussing methods for measuring discrimination. We then provide an overview of major findings from studies of discrimination in employment, housing, and credit and consumer markets. Finally, we turn to a discussion of the individual, organizational, and structural mechanisms that may underlie contemporary forms of discrimination.

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“…The recent work of Bradbury, Case, and Dunham (1989) attempts to deal with the need to control for differences in demand. However, that study has been criticized by, among others, Benston and Horsky (1992).…”

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

Cited by 28 publications

References 7 publications

The cultural affinity hypothesis and mortgage lending decisions

The cultural affinity hypothesis and mortgage lending decisions

The Sociology of Discrimination: Racial Discrimination in Employment, Housing, Credit, and Consumer Markets

Mortgage Redlining: Race, Risk, and Demand

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