The role of neighborhood characteristics in mortgage default risk: Evidence from New York City

Abstract

Using a rich database of non-prime mortgages from New York City, we find that census tract level neighborhood characteristics are important predictors of default behavior, even after controlling for an extensive set of controls for loan and borrower characteristics. First, default rates increase with the rate of foreclosure notices and the number of lender-owned properties (REOs) in the tract. Second, default rates on home purchase mortgages are higher in census tracts with larger shares of black residents, regardless of the borrower's own race. We explore possible explanations for this second finding and conclude that it likely reflects differential treatment of black neighborhoods by the mortgage industry in ways that are unobserved in our data.

Lending in the Modern Era: Does Racial Composition of Neighborhoods Matter When Individuals Seek Home Financing? A Pilot Study in New England

“…It cannot conclusively be determined from this study that discrimination accounts for the large negative disparity in lending between minority and white neighborhoods. Past research has found neighborhood racial composition to be a proxy for both unobserved characteristics and very local economic conditions (Chan et al 2010). Established minority neighborhoods are typically located in central cities where housing stock is older and more likely to be multiunit, such as two or four family homes (Munnell et al 1996).…”

“…Other unobserved reasons for variations in credit offered which may be correlated with neighborhood racial composition or borrower race include loan-to-value ratio, housing indebtedness, wealth, job history, and stability of income or employment and condition of the property (Berkovec et al 1994;Calem, Gillen, & Wachter 2004;Pedersen and Delgadillo 2007). The mortgage industry treats nonblack neighborhoods differently from black neighborhoods because of borrower and loan characteristics that are both more prevalent in black neighborhoods and correlated to higher default risk (Chan et al 2010). Van Order and Zorn (2000) confirm the higher the neighborhood black population, the higher the default risk.…”

“…Borrowers in black neighborhoods and loans made in them carry significantly worse unobserved neighborhood characteristics than those in predominantly nonblack neighborhoods. Chan et al (2010) correlate these characteristics with the tendency of lending institutions (brokers, lenders, underwriters) to treat black neighborhoods differently than nonblack neighborhoods.…”

A multidisciplinary survey on discrimination analysis

“…The latter methodology outperforms reverse regression. Finally, Chan et al (2011) relate the 90-day mortgage default rate available in HDMA data to neighborhood characteristics, hence highlighting possible sources of redlining.…”

Opportunities for the United States condominium foreclosure market to provide amenable affordable housing options: The case of Tampa/Hillsborough, Florida

“…The literature indicates, in general, that residential mortgage foreclosures concentrate in low-income minority neighbourhoods, and thus, without policy and redevelopment intervention, housing stock and neighbourhoods might not be desirable for quality affordable housing (Apgar & Duda, 2004;Immergluck & Smith, 2006a, 2006bBelsky, 2008;Bocian et al, 2008;Chan et al, 2010). On the other hand, condominium foreclosures might provide quality affordable housing opportunities without redevelopment.…”