The Effects of Property Price Volatility, Rent Flows and Foreclosure Costs on Rational Discrimination in Mortgage Lending | Chapter 8 | Modern Perspectives in Economics, Business and Management Vol. 6

 Significant disparities in credit availability, loan terms, and lending volume between demographically dissimilar groups of borrowers are sometimes regarded as evidence of possible ethnic, racial, or gender discrimination by lenders. Extant models of lending discrimination based on assumptions of credit market inefficiencies, such as adverse selection, are becoming increasingly implausible due to the competitive structure of credit markets and the accuracy of evaluating individual credit risk. We explore a model of mortgage lending in an economy with complete markets, common information, and arbitrage-free pricing, which is in sharp contrast to existing models of demographic discrimination. Even when borrowers who are only distinguishable by observable demographic factors share an identical measure of individual credit risk, market equilibria in this classical context may demonstrate discrimination. When rational lenders believe that one or more of these traits are directly related to adverse features of the representative property securing the loan to a borrower in this class, higher loan terms, a higher frequency of loan denials, or complete rationing of credit to this class of borrowers may be a value-maximizing strategy. These qualities, which are not included in typical statistical underwriting and regulatory review procedures, lower the value of the collateral available to the lender in the case of future default. Discrimination on this basis will be a property of all market equilibria and can be consistent with an efficient allocation of credit when loans are secured by such properties and both lenders and borrowers act strategically.

Author (S) Details

David Nickerson
Rogers School of Management, Ryerson University, 350 Victoria Street, Toronto, Ontario M5B 2K3, Canada.

View Book :- https://stm.bookpi.org/MPEBM-V6/article/view/3410

Mortgage Lending Discrimination and Differential Volatility in Neighborhood Property Values | Chapter 11 | Current Strategies in Economics and Management Vol.4

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

Dr. David Nickerson
Ryerson University, Canada.

View Book :- http://bp.bookpi.org/index.php/bpi/catalog/book/198