Why Default Rates Cannot Shed Light on Mortgage DiscriminationAbstractSome scholars argue that racial discrimination in mortgage lending can be observed in default rates. Since lenders who discriminate require higher standards for minority applicants than whites, successful minority applicants are more creditworthy and should default less often. But this conclusion requires three strong assumptions: (1) that credit characteristics not observed by the lender are uncorrelated with minority status, (2) that whites do not receive more favorable treatment than minorities in foreclosure proceedings, and (3) that the losses on minority defaults are at least equal to those for whites. If any of these assumptions is violated, higher default rates for minorities could be observed even if lenders discriminate. At best, then, default studies yield weak tests for discrimination that are inferior to traditional tests based on mortgage denial.Why Default Rates Cannot Shed Light on Mortgage Discrimination (*.pdf, 76 KB)
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