THE IMPACT OF HIGH-LEVERAGE HOME LOANS ON RACIAL/ETHNIC SEGREGATION AMONG HOMEBUYERS IN THE MORTGAGE BOOM A Dissertation Presented to The Academic Faculty by Yun Sang Lee In Partial Fulfillment of the Requirements for the degree Doctor of Philosophy in the School of City and Regional Planning Georgia Institute of Technology May, 2013 THE IMPACT OF HIGH-LEVERAGE HOME LOANS ON RACIAL/ETHNIC SEGREGATION AMONG HOMEBUYERS IN THE MORTGAGE BOOM Approved by: Dr. Dan Immergluck, Advisor Dr. Bruce Stiftel School of City and Regional Planning School of City and Regional Planning Georgia Institute of Technology Georgia Institute of Technology Dr. William J. Drummond Dr. Jennifer J. Clark School of City and Regional Planning School of Public Policy Georgia Institute of Technology Georgia Institute of Technology Dr. Casey J. Dawkins Date Approved: March 29, 2013 School of Architecture, Planning & Preservation University of Maryland ACKNOWLEDGEMENTS I am very thankful to Dan Immergluck, my mentor and advisor. He has shared his time and attention with me so generously. His rapid responses to my questions and problems kept me going through many challenging times in my Ph.D. studies. In addition to his great academic advising, he and his wife, Lilly Immergluck, often invited me to dinner and helped me in my studies away from my home country with warm and grateful feelings. I greatly appreciate the timely and keen comments and questions of my dissertation committee members, Dan Immergluck, Bruce Stiftel, Bill Drummond, Jennifer Clark, and Casey Dawkins. I am thankful to the supervisors of my graduate research and teaching assistance work. Dan Immergluck provided many opportunities to learn how to develop good ideas into concrete papers and to work with various datasets. Catherine Ross and David Jung- Hwi Lee at the Center for Quality Growth and Regional Development provided me with excellent opportunities to do transportation research. Working as a teaching assistant for Dan Immergluck, Bill Drummond, and Harley Etienne helped me to learn various teaching styles and strategies. Lilly Immergluck provided me with opportunities to link GIS work with epidemiology. Their financial support was important to the completion of my Ph.D. work and I deeply appreciate that support. I also appreciate the excellent administrative work of Malinda Williams and Dracy Blackwell. I am thankful to my friends in the College of Architecture. They helped me to study and cope with stress. Friends in my church group helped me to get through all the challenging times with their prayers and encouragement. I am grateful for my mom and iii dad's great patience and trust in me. Lastly and most importantly, I thank God. I became more dependent on Him and came to enjoy that dependence more. iv TABLE OF CONTENTS ACKNOWLEDGEMENTS ............................................................................................... iii LIST OF TABLES ............................................................................................................ vii LIST OF FIGURES ............................................................................................................ x LIST OF ABBREVIATIONS ............................................................................................ xi SUMMARY ..................................................................................................................... xiii CHAPTER 1 INTRODUCTION ....................................................................................... 1 CHAPTER 2 HOMEBUYERS' SEGREGATION SINCE THE 1990S ............................ 8 Changes in the Mortgage Market in the 1990s ............................................................. 10 Patterns of Segregated Home Buying in the 1990s ....................................................... 14 Changes in Segregated Patterns of Home Buying ........................................................ 15 Racial Differences in Market Shares by Mortgage Products ........................................ 20 Different Effects on Segregation by Mortgage Products .............................................. 24 Changes in Mortgage Markets in the 2000s .................................................................. 26 Expected Impacts of High-Leverage Loans on Neighborhood Location ...................... 28 Expected Impacts of High-Leverage Loans on Racial Segregation .............................. 31 CHAPTER 3 HIGH-LEVERAGE LOANS AND RACIAL/ETHNIC SEGREGATION 34 Research Question ......................................................................................................... 34 Conceptual Model and Hypotheses ............................................................................... 36 CHAPTER 4 IMPACT OF HIGH-LEVERAGE LOANS ON HOME VALUE AND NEIGHBORHOOD QUALITY........................................................................................ 45 v Methodology ................................................................................................................. 45 Results ........................................................................................................................... 49 Summary of Results ...................................................................................................... 77 CHAPTER 5 IMPACT OF HIGH-LEVERAGE HOME LENDING ON RACIAL/ETHNIC SEGREGATION ............................................................................... 79 Methodology ................................................................................................................. 79 Results of the 2005-2006 Cross Sectional Data Analysis ............................................. 93 Results of 2005-2007 Panel Data Analysis ................................................................. 107 Comparison of Cross-Sectional and Panel Analyses Results and Discussion ............ 115 CHAPTER 6 SUMMARY OF RESULTS AND POLICY IMPLICATIONS ............... 117 Summary of Results .................................................................................................... 117 Policy Implications ...................................................................................................... 121 Appendix A Estimation Results of Logit Models on Neighborhood Qualities ............. 128 REFERENCES ............................................................................................................... 142 vi LIST OF TABLES Table 1 Major Regulatory Changes Influencing Mortgage Markets in the 1990s ........... 13 Table 2 Studies on Home Buying Segregation in the 1990s ........................................... 16 Table 3 Descriptive Statistics............................................................................................ 50 Table 4 Means of CLTV and PTI over Time .................................................................... 52 Table 5 Proportions of PTI over Time .............................................................................. 52 Table 6 Proportions of CLTV over Time ......................................................................... 52 Table 7 Loan's Risk Characteristics by Race and Ethnicity ............................................. 52 Table 8 Descriptive Statistics of Neighborhood Quality Variables .................................. 58 Table 9 Results of Housing Demand Regressions ............................................................ 61 Table 10 Logit Coefficients of the Log of Income, High-CLTV, and PTI Variables ...... 66 Table 11 Logit Coefficients of the Log of Income and High-CLTV (Without PTI Variable) ........................................................................................................................... 67 Table 12 Logit Coefficients of Explanatory Variables (1) ............................................... 72 Table 13 Logit Coefficients of Explanatory Variables (2) ............................................... 73 Table 14 Logit Coefficients of Explanatory Variables (3) ............................................... 74 Table 15 Marginal Effects of Income and Down Payment............................................... 75 Table 16 Marginal Effects of PTI ratio and CLTV Ratio Dummies ................................ 76 Table 17 The Comparison of Levels of Segregation over Three Periods ......................... 94 Table 18 Comparison of Segregation Level among All Loans and among Non-High- leverage Loans Only ......................................................................................................... 97 Table 19 Descriptive Statistics for Blacks Models ........................................................... 98 Table 20 Descriptive Statistics for Hispanic Models ........................................................ 98 vii Table 21 Estimation Results of First Stage Regression of the Proportion of High- Leverage Loans for Blacks, 2005-2006 Cross Section ................................................... 100 Table 22 Estimation Results of First Stage Regression of the Proportion of High- Leverage Loans for Blacks, 2005-2006 Cross Section ................................................... 100 Table 23 Regression Results for NHW-Black Dissimilarity Index Model ..................... 101 Table 24 Regression Results for Black Isolation Index Model ...................................... 102 Table 25 Regression Results for NHW-Hispanic Dissimilarity Index Model ................ 103 Table 26 Regression Results for Hispanic Isolation Index Model ................................. 104 Table 27 Descriptive Statistics