Competition, Neighborhood Demographics, and the Distribution of Higher-Cost Mortgage Credit

Abstract

This paper analyzes the determinants of higher-cost 'subprime' mortgage credit in the U.S. The analysis is based on a tract-level data set consisting of mortgage data from the 2005 and 2006 Home Mortgage Disclosure Act databases and economic/demographic data from the 2000 Census. The empirical analysis also accounts for competitive market effects by calculating and including a tract-level Herfindahl-Hirschman Index. The empirical results underscore the primacy of race and income as key factors in the distribution of higher-cost mortgage credit: Even after controlling for factors related to neighborhood credit risk such as vacant units, rental capitalization rates, and median home values, tracts with larger concentrations of African Americans and Hispanics receive significantly larger proportions of higher-cost first- and subordinate-lien purchase and refinance loans. Lower levels of mortgage market competition are associated with consistently decreased proportions of higher-cost loans.