Redlining in Montana

Abstract

Redlining is the practice of using the attributes of geographic location of a mortgage loan as the basis for differential and typically adverse treatment of an application. This is a particularly important social problem in the home mortgage market due to benefits which have been shown to be correlated with home ownership. Minority and low income applicants may find redlining to be a major barrier to obtaining home ownership and the benefits associated with being a home owner. This thesis uses a data set collected under the Home Mortgage Disclosure Act to examine the mortgage market in Montana. A major focus is the effects of redlining on Montana's American Indian populations many of whom face substantial housing problems. A theoretical model is developed as a framework for the empirical section of this thesis. The empirical results of this study indicate variables that directly affect the expected return of a loan are relevant to the lending decision. Other variables that do not directly affect the expected return of loan are also found to be important to the lending decision, suggesting that either economic or taste-based discrimination may be occurring. In particular, other things being equal, American Indians are approximately 8 to 10 percent more likely to have a mortgage application denied than are non-American Indians. In addition, regardless of ethnicity, applicants located on reservations are approximately 4 percent more likely to have their mortgage applications denied. These results indicate that American Indians may be subject to economic discrimination in which their ethnic profile is used as an indicator of the expected return for a mortgage loan. Further, the study provides some evidence that property rights in tribal reservations are less well defined than elsewhere, partly because of the vagaries of tribal courts under which these rights are adjudicated and enforced.