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

See all articles by Kenneth N. Daniels

Kenneth N. Daniels

Daniels Foundation for Impact Investments and Development

Brent C. Smith

Virginia Commonwealth University

Date Written: 2018

Abstract

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.

Suggested Citation

Daniels, Kenneth N. and Smith, Brent C., Unintended Consequences of Risk Based Pricing: Racial Differences in Mortgage Costs (2018). 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., Available at SSRN: https://ssrn.com/abstract=3583309

Kenneth N. Daniels (Contact Author)

Daniels Foundation for Impact Investments and Development ( email )

New Jersey, NJ 07018
United States

Brent C. Smith

Virginia Commonwealth University ( email )

1015 Floyd Avenue
Richmond, VA 23284
United States

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