Consumer Law

Michael Barr, Jane Dokko, and Benjamin Keys on the Effect of Race on the Likelihood of Troublesome Subprime Loan Terms

By Jeff Sovern

Michael S. Barr of Michigan, Jane Dokko of the Fed, and Benjamin J. Keys of Michigan's Economics Department have co-authored "Who Gets Lost in the Subprime Mortgage Fallout? Homeowners in Low- and Moderate-Income Neighborhoods."  Here's the abstract:

With the subprime mortgage crisis going full bore, policy makers face the challenge of resolving the current mess, reforming the mortgage markets going forward, and balancing the risk of "abusive" lending against the rewards of financial deepening and access to credit. To better understand the challenges of homeownership for low- and moderate-income households, this paper makes use of a unique and proprietary dataset of LMI households based on a survey we designed and implemented with the Survey Research Center at the University of Michigan. We establish a profile of the demographic characteristics of homeowners in LMI communities. We then identify relationships between high-cost pricing and demographic characteristics (such as race) in low-income neighborhoods. We find that even within similar low-income neighborhoods, black homeowners are significantly more likely to have prepayment penalties or balloon payments attached to their mortgages than non-black homeowners, even after controlling for age, income, gender, and creditworthiness. We link the attitudes of homeowners and the constraints that they face to their financial decisions. We then suggest key areas for policy reform.

Full post as published by CL&P Blog on November 03, 2008 (boomark / email).