Neighborhood Patterns of Racial Steering of Subprime Mortgage Lending

Abstract

For decades, several studies have been done on redlining of minority and low income neighborhoods. But, the recent explosion of subprime lending in these communities may have been accompanied by some sort of redlining in reverse — so-called “steering.” Using data for 2005, I estimate probabilistic models of loan approvals jointly for two non-prime mortgage products for riskier borrowers — subprime and FHA loans. The estimates show that, in five of 22 major metropolitan cities (Baltimore, Chicago, Denver, Houston, and Tampa), applications for subprime loans in minority neighborhoods were more likely to be approved than applications for FHA loans, relative to non-minority (white) neighborhoods — suggesting racial steering of subprime mortgage lending across these neighborhoods. Several of these cities have experienced tremendous increases in subprime lending, and subsequently have had high mortgage delinquencies and home foreclosures in predominantly minority neighborhoods.