Abstract
This study explores the role of information externalities and neighborhood characteristics in mortgage lending. It assumes that a lender's knowledge about a neighborhood depends on its physical distance to that neighborhood. In addition, this paper proposes a measure of correlation in outcomes of loans made for neighboring properties, to assess the effect of neighborhood attributes. The empirical results reveal that loan rejection rates rise with increases in the lender-property distance for applications received by small institutions. Furthermore, the effect of neighborhood attributes is modest, conditional on loan, applicant, and lender characteristics. Further exploration indicates group disparities in these effects.
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