The Effect of Income, Ethnicity/Race and Institutional Factors on Mortgage Borrower Behavior

Studies examining mortgage choice behavior generally assume a frictionless mortgage market in which borrower decisions are influenced only by economic variables. This study explores the interface between demographic and institutional factors inherent in mortgage market logistics and the information flow that affects borrower behavior. The efficiency of these processes is particularly important when studying inner city real estate markets, since these markets are disproportionately represented by low income and minority households. The effect of institutional factors was examined by conducting a survey of borrower behavior in metropolitan Washington, DC. The secondary data findings indicate that ethnicity /race and income are jointly sensitive to borrower decision, confirming the clientele effect. The primary data findings also indicate that institutional factors influence mortgage choice. Similarly, borrowers are influenced by the channel chosen to evaluate market information. However, income was not found to be a significant determinant of borrower behavior.