Race and Subprime Loan Pricing

Conference object, Preprint OPEN
Ruben Hernandez ; Michael Owyang ; Andra Ghent (2011)
  • Publisher: Louvain-la-Neuve: European Regional Science Association (ERSA)
  • Subject:
    • ddc: ddc:330
    mesheuropmc: education | health care economics and organizations

In this paper we investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion. We combine loan-level data on the performance of non-prime securitized mortgages with individual- and neighborhood-level data on racial and ethnic characteristics for metropolitan areas in California and Florida. Using a model of rate determination that accounts for predicted loan performance, we evaluate the presence of disparate impact and disparate treatment from race and ethnicity on rate-setting behavior across the most popular subprime mortgage products. In contrast with previous studies of the subprime market, we find evidence of adverse pricing effects for black and Hispanic borrowers.
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