Division of Environment and Urban Systems, Virginia Polytechnic Institute and State University
Journal of Urban Affairs vol:29 issue:1 pages:1-29
In most West-European countries outright ownership is the exception and most households are highly dependent on mortgage loans to be able to become and to sustain homeownership. Do place and race matter in mortgage loan applications? This paper presents evidence from mortgage markets in the Dutch cities of Arnhem, The Hague and Rotterdam, suggesting that place, and to a lesser extent also race, do matter. In general, race and place are not factors of direct exclusion, but (1) zip codes are included in credit scoring systems, and (2) both place and race are significant factors in the assessments by loan officers because applicants who do not meet all formal criteria are more often accepted (“overrides”) for indigenous Dutch and low-risk neighbourhoods than for ethnic minorities and high-risk neighbourhoods.
In addition, a “national mortgage guarantee” is compulsory for loan applications in high-risk neighbourhoods and thereby used as a substitute for redlining, comparable to the compulsoriness of private mortgage insurance in the US. Some lenders also engage in direct redlining by rejecting low-risk “national mortgage guarantee” loans in high-risk neighbourhoods, a practice potentially explained by transaction cost economizing. Since the high-risk neighbourhoods in all three cities accommodate relatively large shares of ethnic minority groups, they are hit twice: through place-based and through racebased exclusion. In other words, place-based disparate treatment results in race-based disparate impact.
The paper ends with some policy implications focusing in particular on how the state can monitor and prevent both forms of exclusion, thereby removing possible barriers to homeownership.