The Economics of Low-Income Mortgage Lending

The presumption that mortgage markets for low-income borrowers and neighborhoods are underserved by lenders has led to a variety of increased government interventions on the supply side of the housing market. Although many studies of low-income lending at the neighborhood level have been published, none is from the firm's perspective. We adopt such a framework to test the twin propositions that the low-income mortgage market is no different from the non-low-income mortgage market and that the low-income mortgage market is underserved. We examine empirically whether the operating costs including credit losses, revenues, and profits of savings and loan institutions engaged in more low-income lending differ systematically from those that do less low income lending. We find that firms engaged in more low-income mortgage lending have higher costs than those engaged in less low-income lending, which is consistent with higher credit risk for low-income loans. Nevertheless, these firms are no more profitable than those that do less low-income lending, which is inconsistent with a market for low-income mortgage lending that is currently underserved