THE ECONOMICS OF LOW-INCOME MORTGAGE LENDING

The presumption that mortgage markets for low-income borrowers and nei ghborhoods are underserved by lenders has led to a variety of increase d government interventions on the supply side of the housing market. A lthough many studies of low-income lending at the neighborhood level h ave been published, none is from the firm's perspective. We adopt such a framework to test the twin propositions that the low-income mortgag e market is no different from the non-low-income mortgage market and t hat the low-income mortgage market is underserved. We examine empirica lly whether the operating costs including credit losses, revenues, and profits of savings and loan institutions engaged in more low-income l ending differ systematically from those that do less low-income lendin g. 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.