Cornered Borrowers: Lender Segmentation in the Provision of Minority Mortgages (With Gregor Matvos and Amit Seru, Draft Coming Soon!)
We study the equilibrium consequences of differences in mortgage shopping behavior between majority and minority borrowers. We identify minority-specialized lenders, who disproportionately lend to minority borrowers and originate one-fifth of minority mortgages. These smaller lenders charge high mortgage rates and borrowing from them is partially responsible for the minority interest rate gap. Minority-specialized lenders are more likely to employ minority employees and have higher market shares in areas with more non-English speakers. Borrowers are also less likely to withdraw mortgage applications from these lenders. These facts suggests that minority-specialized lenders provide costly minority-specialized services, rather than discriminate against these borrowers. To quantify the effect of minority-specialized service provision in equilibrium, we estimate a model in which minority specialized lenders compete with mainstream lenders, and majority and minority borrowers differ in loan demand as well as the types of lenders they consider. Our novel identification strategy uses withdrawn mortgage applications to separately identify borrower consideration sets and preferences. The estimated model can rationalize the minority gap in rates as well as consideration set size across groups. Minority-specialized lending attracts minorities by providing services valued by minorities, and by lowering search frictions. Minorities gain from a broader diffusion of minority-specialized lending, and these gains are large relative to potential gains from eliminating residual racial discrimination in interest rates. Our model suggests fair lending laws can disincentivize mainstream lenders' investments in minority-specialization, reducing competition and welfare for minority borrowers.
Work in Progress
Lending to Lemons (with Joseph Hall)
Minority Lenders and Monetary Policy Passthrough (with Gregor Matvos, Amit Seru, and Francesco Spizzuoco)
What Explains Fee Dispersion in Private Equity? (with Juliane Begenau, Claudia Robles-Garcia, and Emil Siriwardane)