This study conducts a cross-sectional analysis of U.S. metropolitan counties to inquire into the factors affecting white and minority mortgage loan approval rates during 1990–1991. In particular, evidence is sought on whether minority loan applicants are denied credit more frequently than white applicants because of information externalities. Within each county, all predominantly minority, low- or moderate-income census tracts are groupted together, and then regression equations are estimated across counties and tract groupings. Separate approval rate equations are estimated for conventional and federally insured (FHA or VA) home purchase loans. In addition, a regression equation for the percentage of applicants applying for federally insured loans is estimated.
Both approval rate regressions indicate that across white tract groupings, the depth of the housing market (the number of sales of owner-occupied units during 1989) has a positive and statistically significant effect on the loan approval rate, consistent with the view that information externalities affect mortgage loan evaluations. However, this relationship appears not to hold across minority tract groupings.