Fed: Niggers, Spics Biggest Subprime Borrowers

Subprime Mortgages: What, Where, and to Whom?

Chris Mayer, Columbia University
Karen M. Pence, Federal Reserve Board of Governors

Even controlling for credit scores and other Zip code characteristics,
race and ethnicity appear to be strongly and statistically
significantly related to the proportion of subprime loans.

A 5.4 percentage point increase in the percent of non-Hispanic blacks
– a 50 percent increase relative to the mean – is associated with an
8.3 percent increase in the share of subprime originations in the Zip
code.9 A similar 5.4 percentage point increase in the percent of
Hispanics – also a 50 percent increase relative to the mean – is
associated with a 6.8 percent increase in proportion of subprime
loans.

However, skewness in the racial composition of Zip codes suggests that
subprime originations are much more prevalent in Zip codes with large
shares of minority residents. Moving from the median to the 90th
percentile Zip code share of black and Hispanic residents (an increase
from 3.6 to 30.5 and from 4.1 to 30.1 percent of residents,
respectively), suggests an increase in subprime originations of 41.5
and 32.9 percent. However, without more information on borrowers’
credit constraints and borrowing options, we cannot assess whether
these subprime loans displaced lowercost conventional loans in
minority communities or provided additional credit where lending was
not previously available.

The extent to which these differences across races represent steering,
discrimination, or unobserved characteristics correlated with race
remains an unsettled question.

http://works.bepress.com/karen_pence/10/
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