Unintended Consequences of Risk Based Pricing: Racial Differences in Mortgage Costs
Brent C Smith & Kenneth N. Daniels, 2018. 'Unintended Consequences of Risk Based Pricing: Racial Differences in Mortgage Costs,' Journal of Financial Services Research, Springer;Western Finance Association, vol. 54(3), pages 323-343, December.
Posted: 19 May 2020
Date Written: 2018
The following analysis focuses on the role that risk pricing has had in the allocation and access to mortgage funds, specifically how it results in cost differences by race. Using a sample of fixed-rate first lien mortgages, we control for the risk characteristics of borrowers and assets. We find that borrowers with comparable credit quality experience significantly higher costs for mortgages in neighborhoods with a high density of minority households. Further, when the pricing differential is controlled for in a model of mortgage default, there is no support for neighborhood price differences. This finding illustrates a potential inequity that results from efficient/risk pricing in mortgage underwriting.
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