Neighborhood Patterns of Racial Steering of Subprime Mortgage Lending

35 Pages Posted: 3 Aug 2009 Last revised: 28 Sep 2009

See all articles by John A. Karikari

John A. Karikari

US Government Accountability Office (GAO)

Date Written: September 23, 2009

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.

Keywords: FHA, redlining, seemingly unrelated regression, steering, subprime mortgage lending

JEL Classification: G21, G28, R21

Suggested Citation

Karikari, John A., Neighborhood Patterns of Racial Steering of Subprime Mortgage Lending (September 23, 2009). Available at SSRN: https://ssrn.com/abstract=1439854 or http://dx.doi.org/10.2139/ssrn.1439854

John A. Karikari (Contact Author)

US Government Accountability Office (GAO) ( email )

Center for Economics
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Washington, DC 20548
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202-512-4950 (Phone)

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