Volume 15, Issue 3

2004

This article estimates a model of prime versus subprime allocations of loans for seven cities in 1997 and 2002; the model is based on both individual loan and neighborhood attributes. Of immediate interest is the effect of neighborhood racial and ethnic composition on the likelihood of receiving a subprime loan. We also allow for the interaction of borrower race and ethnicity with neighborhood controls for the aggregate level of credit risk and the neighborhood level of equity risk.

 

We find some evidence of tightening loan standards in the subprime market over this five-year period. Even with risk controls, the neighborhood minority share is consistently significant and postively related to subprime share in both years. Furthermore, the neighborhood educational level is consistently significant and negatively related to subprime lending.