Investigating The Dual Mortgage Market: The Distribution Of Subprime Lending By Race And Its Consequences For Minority Communities

Abstract

This dissertation examines the overlap of the racial composition of a neighborhood and the existence of a dual mortgage market in which prime and subprime lenders serve different neighborhoods and borrowers. Does subprime lending represent the democratization of credit or does it serve to track people by race? This dissertation employs Home Mortgage Disclosure Act Data, U.S. Census Data and the HUD Subprime Lender List to identify subprime loans. I use Hierarchical Linear Modeling to predict the likelihood of subprime for a borrower in Philadelphia, Baltimore, San Francisco and Alameda County California. The findings demonstrate that blacks and borrowers in black neighborhoods have a higher likelihood of originating a subprime loan than whites or borrowers in white neighborhoods. Further, blacks borrowing in largely white neighborhoods have an even higher likelihood of originating a subprime loan compared to their white neighbors than do blacks borrowing in largely black neighborhoods. These findings indicate that subprime lenders not only serve different neighborhoods, but also different borrowers regardless of the neighborhood in which they are borrowing and support the existence of a dual mortgage market that is defined by race. The results from the analysis examining the consequences of subprime lending for neighborhoods indicate that after controlling for neighborhood characteristics, the positive relationship between earlier and later rates of subprime lending disappears. Also, while higher rates of subprime refinance lending were associated with a decrease in neighborhood median income in 2000, subprime lending was associated with positive changes in median house value and percent of homeowners that are black in the neighborhood, although the effects of subprime on median house value disappeared after controlling for neighborhood conditions. The study points to the continued difficulties that black borrowers and borrowers in black neighborhoods face in obtaining a fair loan. As lending practices are reformed, it is important to keep in mind the need to ensure that minority borrowers who are in the position to afford a home loan maintain the ability to get a loan, but increased care must be taken to ensure that they obtain the ability to do so on fair terms.