Place-Based and Race-Based Exclusion from Mortgage Loans: Evidence from Three Cities in the Netherlands

ABSTRACT:

Do place and race matter in mortgage loan applications? This article 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 neighborhoods than for ethnic minorities and high-risk neighborhoods. In addition, a “national mortgage guarantee” is compulsory for loan applications in high-risk neighborhoods and thereby used as a substitute for redlining, comparable to the compulsoriness of private mortgage insurance in the United States. Some lenders also engage in direct redlining by rejecting low-risk “national mortgage guarantee” loans in high-risk neighborhoods, a practice potentially explained by transaction cost economizing. Since the high-risk neighborhoods in all three cities accommodate relatively large shares of ethnic minority groups, they are hit twice: through place-based and through race-based exclusion. In other words, place-based disparate treatment results in race-based disparate impact. The neighborhood does matter; place-based exclusion in the mortgage market has a neighborhood effect.

Notes

1 In Rotterdam-West: Spangen, Tussendijken, Bospolder, Delfshaven, Nieuwe Westen and Middelland, and to a lesser extent also Schiemond, Oude Westen and Oud Mathenesse. In Rotterdam-South: Feijenoord, Afrikaanderwijk, Bloemhof, Hillesluis and Tarwewijk, and to a lesser extent also Strevelswijk, Oud Charlois, Carnisse, Pendrecht and Beverwaard. In Rotterdam-North: to a lesser extent (Oud) Crooswijk, Oude Noorden, Liskwartier and Agniesebuurt.