Professor Ross’s paper “What Drives Racial and Ethnic Differences in High-Cost Mortgages? The Role of High-Risk Lenders” was just published in the Review of Financial Studies, a Top 3 Finance Journal.
This paper documents the existence of large differences in the cost of credit for minority borrowers, and the fact that most of the racial differences arise across lenders, rather than being driven by lenders who treat equally qualified minority borrowers differently than white borrowers. The paper shows that these effects are primarily driven by lenders whose loans tended to have very high default rates during the crisis.
In this work, Professor Ross discusses the surprising findings that school quality has only a quite modest effect on property values, and that much of the early work on this question confounded the effects of neighborhood quality with the effects of school quality. He also discusses the contradiction between these findings and evidence that school choice actually has substantial effects on school quality, suggesting that the reason for the large effects is because school choice affects where people live and so change neighborhood quality, which as noted has large effects on housing prices.
In the article, Professor Ross and his co-authors discuss recent research on the mechanisms behind the neighborhood concentration of crime. They focus on their recent NBER and HCEO working paper, in which they show that social relationships at school play a very important role in mediating neighborhood effects in youth crime.
This paper examines racial and ethnic differences in high cost mortgage lending in seven diverse metropolitan areas from 2004-2007. Even after controlling for credit score and other key risk factors, African-American and Hispanic home buyers are 105 and 78 percent more likely to have high cost mortgages for home purchases.
The increased incidence of high cost mortgages is attributable both to sorting across lenders (60-65 percent) and to differential treatment of equally qualified borrowers by lenders (35-40 percent). The vast majority of the racial and ethnic differences across lenders can be explained by a single measure of the lender’s foreclosure risk, and most of the within-lender differences are concentrated at high-risk lenders.
Thus, differential exposure to high-risk lenders combined with the differential treatment by these lenders explains almost all of the racial and ethnic differences in high cost mortgage borrowing.
The research, with coauthors Dave Deming and Steve Billings, examines youth crime in Charlotte, NC, and finds that having more kids of similar age, gender and race nearby raises the likelihood of arrest, but only if those kids attend the same school. Further, these kids are more likely to be arrested together as criminal partners if they live very nearby and attend the same school.
These effects are largest when these youth have been in the same neighborhood for a longer time and if they attended the same elementary school. These findings suggest that neighborhood spillovers in criminal activity are likely caused by social interactions that arise within schools, and that school level interventions may be effective in mitigating neighborhood level clusters of crime.
Professor Steve Ross’s paper “The Vulnerability of Minority Homeowners in the Housing Boom and Bust” with Patrick Bayer and Fernando Ferreira was the lead article in the February issue of the American Economic Journal: Economic Policy.
In this paper, they find that African-American and Hispanic borrowers have substantially higher delinquency and foreclosure rates during the financial crisis even after controlling for detailed borrower and loan risk factors. These differences are concentrated heavily among homebuyers who purchased their home very near the peak of the market, even after controlling for negative equity associated with the timing of the purchase. For refinance mortgages, they find a similar pattern linked to when the home was purchased, rather than the date of the refinance mortgage.
They argue that the findings are consistent with higher risk borrowers, especially higher risk minority borrowers, being drawn into the market during the housing market expansion.
Professor Ross gave the opening address at the Dallas Federal Reserve conference on “Intent vs. Impact: Evaluating Individual- and Community-Based Programs” on November 16th and 17th.
He summarized much of his research on race, neighborhood and mortgage lending over the last few years. Professor Ross argued that systematic unexplained racial differences in high cost lending and foreclosure exist and that those differences are associated with the concentration of minority borrowers and loans from low income and minority neighborhoods at high cost/high risk lenders. However, Professor Ross also argued that lending to vulnerable, low income and minority borrowers had little to do with severity of the foreclosure crisis itself given that the majority of foreclosure differences were explained by risk factors rather than income or neighborhood, and the dollar volume of foreclosures nationally was primarily driven by middle and upper income borrowers living in suburban neighborhoods. His presentation slides can be found at