As part of the series of the „Finance Research Seminar“, VGSF welcomes Gregor Matvos from Kellogg School of Management, Northwestern University to present his research paper.
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Paper
Minority Specialized Lenders
We study the equilibrium consequences of differences in mortgage shopping behavior between majority and minority borrowers. Race predicts lender choice as much as a three standard deviation difference in income. 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, are more likely to employ minority employees, and have higher market shares in areas with more non-English speakers. Minority borrowers are willing to travel farther to access these lenders and are also less likely to withdraw mortgage applications from them. These facts suggest that the high prices at minority-specialized lenders partially reflect market power, and valuable minority-specialized services, rather than discrimination. 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 Our novel identification strategy uses withdrawn mortgage applications to separately identify borrower consideration sets and preferences.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 rationalizes specialized lenders‘ higher prices as a combination of both higher costs and higher markups. The model also matches differences in consideration set size across groups as well as actual cost data from specialized lenders. Minority-specialized lending attracts minorities both by providing services valued by minorities and by lowering search frictions. In absence of fair lending laws, minorities would 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.
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