Observations of significant differences in loan terms
between demographically distinct groups of borrowers are often interpreted as
evidence of demographic discrimination. The competitive nature of mortgage
lending undermines explanations of such differences based on managerial
preferences for certain demographic groups while the ease and accuracy of
measuring credit risk render common theories of lending discrimination based on
exogenous asymmetric information increasingly implausible. Statistical procedures
lacking economic foundations may also expose empirical tests for discrimination
to model risk. Seeking the simplest possible explanation for these
observations, we consider the valuation of secured mortgages by lenders in a
classical asset-pricing model having complete markets, common knowledge and
arbitrage-free valuation. Using both analytical and numerical solutions, we
show that the effect of neighborhood variations in housing price volatility and
the irretrievability of the value of housing services on the strategic exercise
of the options embedded in common mortgage contracts induce rational lenders to
offer different loan terms and balances to borrowers who exhibit identical
measures of credit risk and are distinguished only by observable demographic
traits.
Author (s) Details
Author (s) Details
Dr. David Nickerson
Ryerson University, Canada.
View Book :- http://bp.bookpi.org/index.php/bpi/catalog/book/198
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