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Volume 32, Number 3, 2010

Neighborhood Subprime Lending and the Performance of Community Reinvestment Mortgages
 

Lei Ding
Department of Urban Studies and Planning
Wayne State University
Detroit, MI 48202

Email: lei_ding@wayne.edu

Roberto G. Quercia
Department of City and Regional Planning
University of North Carolina
Chapel Hill, NC 27599

Email: Quercia@email.unc.edu

Janneke Ratcliffe
Center for Community Capital
University of North Carolina
Chapel Hill, NC 27599

Email: Janneke_Ratcliffe@unc.edu

Abstract:

This study analyzes the spillover effect of the spatial concentration of subprime lending on the performance of recently originated community reinvestment mortgages targeting low- to moderate-income borrowers. The level of subprime lending in a census tract is found to be a significant predictor of the default and prepayment probability of the community reinvestment loans in the same neighborhoods. The results suggest that the concentration of subprime lending and the resulting clusters of foreclosed properties reduce neighborhood property values and increase price volatility. The lowered property values and the increased volatility increase the default probability of borrowers holding any loan product, including community reinvestment mortgages. This study provides new evidence concerning the negative impacts of the concentration of subprime lending in certain neighborhoods.

 


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