In this paper, we empirically examine differences in subprime borrower default decisions by Census tract characteristics in order to clarify how the subprime foreclosure crisis played out in minority areas. An innovation in our modeling approach is that we do not constrain the impact of neighborhood composition to be identical across diverse decision-making settings. Rather, we focus on variation in decision-making when the option to default is more likely to be in the money. Carefully controlling for dynamic loan balances and home values, as well as other loan characteristics and economic conditions, we find that borrowers in minority neighborhoods, delineated by Census tracts, were less likely to default at high contemporaneous, combined loan to value ratios (CLTV) than those in neighborhoods with fewer minorities. Borrowers in tracts with a greater share of recent immigrants where overall mobility is greater are more likely to default at high CLTVs, however. Our finding that subprime borrowers in minority neighborhoods have a lower propensity to default at high CLTV stands in contrast to assertions that households in these neighborhoods may have been more willing to strategically default, that is, to default when equity turned negative regardless of their ability to repay. By contrast, our findings show that borrowers in white neighborhoods were more likely to default when they had relatively higher negative equity.
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