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• U.S. Cross-Border Derivatives Data: A User's Guide
  • Highlights of the 2004 and 2005 Data
  • Loan Pricing in the Mortgage Market
  • General Findings from the 2006 HMDA Data
  • The 2006 HMDA Data on Loan Pricing
  • Differences in Lending Outcomes by Race, Ethnicity, and Sex of Borrower
  • Credit Scores by Area and Higher-Priced Lending
  • Loan Performance and the HMDA Data
  • Further Analysis Relating Higher-Priced Lending to Loan Performance
  • Appendix: Requirements of Regulation C
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The 2006 HMDA Data

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Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner, of the Board's Division of Research and Statistics, prepared this article. Rebecca Tsang and Sean M. Wallace provided research assistance.

Since 1975, the Home Mortgage Disclosure Act (HMDA) has required public disclosures from most mortgage lending institutions with offices in metropolitan areas. The release of the information, which includes the geographic location and other characteristics of the home mortgages lenders originate or purchase during a calendar year, is intended to help the public determine whether institutions are adequately serving their communities' housing finance needs; the disclosures are also intended to facilitate enforcement of the nation's fair lending laws and guide investment in both the public and private sectors. Under the 1975 act, the Federal Reserve Board implements the provisions of HMDA through regulation. The Federal Financial Institutions Examination Council (FFIEC) is responsible for facilitating public access to the HMDA data and for aggregating the data by metropolitan statistical area.¹

For a given calendar year, lenders covered by HMDA publicly release their loan data beginning on March 31 of the subsequent year; in the following September, the FFIEC releases summary tables pertaining to each lender and lending activity in each metropolitan statistical area, along with a file consolidating virtually all the reported information.² The nearly 8,900 lenders currently covered by the law account for an estimated 80 percent of all home lending nationwide. Because of its expansive coverage, the HMDA data likely provide a broadly representative picture of home lending in the United States.

After briefly summarizing previously published assessments of the 2004 and 2005 HMDA data and reviewing some prominent issues surrounding pricing in the mortgage market, this article analyzes the 2006 data.³ As in the analyses of the previous two years, this review focuses primarily on the pricing information included in the HMDA data and differences observed across lending institutions, geographic areas, and population groups. The article concludes with an assessment of factors that account for the variation in rates of serious delinquency on mortgage loans across counties as of March 31, 2007, including information drawn from the HMDA data on the incidence of higher-priced lending and from a data file of credit scores by geographic area.

Increases in market interest rates over the course of 2004 and 2005 were an important contributor to the substantial increase between those years in the reported incidence of higher-priced lending as measured by the HMDA data. For 2006, the relatively subdued increases in market interest rates contributed to a moderation in the growth of higher-priced lending for 2006. The current disturbances in the subprime sector of the mortgage market emerged primarily in the later portions of 2006. The effects of those disturbances and of the associated changes in the regulatory environment will be reflected primarily in the HMDA data for 2007 and subsequent years.

At the outset, HMDA disclosures were limited to summary totals covering loan extensions by type of loan for each census tract but included no information on loan pricing or applications for loans that were denied by the lender. Over the years, the Congress has extended the reach of the law to a broader range of institutions and expanded the types of information that must be reported and disclosed. The most sweeping of the legislative amendments to HMDA, adopted in 1989, required disclosure of the disposition of applications for home loans and the income, sex, and race or ethnicity of the individuals applying for those loans.

Analyses of the new information revealed wide disparities in the rates of approval of loan applications across racial and ethnic lines and prompted widespread public discussion about the fairness of mortgage lending decisions.⁴ With the 1989 amendments, the HMDA data thus formed a new basis for public scrutiny of the fairness of mortgage lending and became an important aspect of fair lending enforcement.

In response to significant changes in the mortgage market during the 1990s, particularly the emergence and growth of subprime lending, the Federal Reserve Board in 2002 revised its Regulation C, which implements HMDA (for details, refer to the appendix).⁵ The revision substantially increased the type and amount of public information available about home lending in HMDA reports, beginning with data for 2004. The most important change was the requirement that lenders identify and disclose information about mortgages with annual percentage rates (APRs, which encompass interest rates and fees) above designated thresholds, mortgages referred to here as "higher-priced loans."⁶ Other new disclosures included lien status of the loan (whether it is a first lien, a junior lien, or unsecured--if the latter, it is a home improvement loan), whether it is secured by a manufactured home, and whether it is subject to the protections of the Home Ownership and Equity Protection Act of 1994.

Highlights of the 2004 and 2005 Data

For both the 2004 and 2005 HMDA data, nearly 80 percent of the reporting institutions were depositories (commercial banks, savings associations, and credit unions); accounting for the rest were independent mortgage companies and mortgage companies affiliated with banking institutions or their holding companies. Although mortgage companies represented only 22 percent of the reporting institutions, they submitted information on more than 60 percent of all the reported loans and applications.

Most lenders reported relatively little home lending. The most active lenders (those providing information on at least 5,000 loans or applications) accounted for about 5 percent of the reporting institutions and nearly 90 percent of all the reported loans and applications.

A comparison of the HMDA data for 2004 and 2005 with those from earlier years documented a number of trends, including a growing share of lending to non-owner occupants, the growth of "piggyback" lending (homebuyers simultaneously obtaining two loans--one a first lien and the other a junior lien--to finance the purchase of a home), and a substantial decline in home lending insured by the Federal Housing Administration (FHA) as a share of all home lending.

Because of its importance, the new information on loan pricing was the focus of much of the analyses of the 2004 and 2005 data. The reviews found that the incidence of higher-priced lending increased from about 16 percent of all loans in 2004 to 26 percent in 2005. The substantial narrowing of the difference between short- and long-term interest rates in 2005 explained part of the increase that year in the share of reported loans that exceeded the pricing thresholds established by Regulation C.⁷ Estimates suggested that the changes in interest rates accounted for about 15 percent of the increase in reported higher-priced lending for conventional fixed-rate home-purchase loans and about 20 percent of the increase for similar loans for refinancings. Another portion of the increase in higher-priced lending was attributable to the effects of the narrowing spread between short- and long-term interest rates on adjustable-rate lending, but available data limited the ability to quantify this effect. Besides changes in market interest rates, other factors--changes in borrower credit-risk profiles and changes in lender business practices such as an increased willingness to accept higher-risk borrowers--may also have led to increased higher-priced lending from 2004 to 2005; but again, quantifying the influences was impeded by data limitations.

Analysis of the 2004 and 2005 pricing information also found that the incidence of higher-priced lending varied substantially by geography and loan characteristic and across borrower groups. The incidence was found to be elevated for borrowers residing in census tracts characterized by larger proportions of individuals with lower credit scores and lower high-school graduation rates; and in census tracts with larger proportions of lower-income households, minority households, and shares of loan applicants that were denied credit.⁸ The incidence of higher-priced lending was also elevated for smaller loans and piggyback loans, for loans made by depository institutions outside their local communities, and for loans originated by independent mortgage companies regardless of location.

Results of an analysis along racial and ethnic lines were consistent with the results by geography: Blacks and Hispanic whites were more likely, and Asians somewhat less likely, to have received higher-priced loans than non-Hispanic whites. Information included in the HMDA data on characteristics of borrowers and loans--such as income, amount borrowed, and property location--does not account fully for the variation in loan pricing across geographies and groups. However, many factors routinely used by lenders to underwrite and price loans--including loan-to-value (LTV) ratios and measures of borrower credit history (for example, a credit history score)--are not included in the HMDA data and, consequently, cannot be included in an analysis of pricing differences that relies on the HMDA data alone.

The expanded HMDA data have both raised concerns about the fairness of the lending process and created new avenues for lenders, regulators, and the public to address fairness. Lenders are responsible for their compliance with fair lending laws, and the HMDA data can both encourage and facilitate the improvement of their compliance efforts. Likewise, the regulatory agencies have been using the expanded data in their fair lending enforcement activities. The expanded data also increase transparency in the marketplace by identifying lenders active in the higher-priced segment of the market and by allowing a wide variety of analyses that more fully describe higher-priced lending.

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Loan Pricing in the Mortgage Market

Mortgage markets have changed greatly over the years. Historically, mortgage lenders offered consumers a relatively limited array of loan products. The prices (interest rates, points, and fees) at which they offered their loans varied mainly by

• loan type--for example, conventional or government-backed
• loan type characteristic--including amount borrowed, term to maturity, and LTV ratio
• loan/type of structure securing the loan--traditional "site built" home, factory-manufactured unit, or multifamily units
• ownership status--owner occupied or non-owner occupied

The prices did not, however, vary to any great degree by the creditworthiness of the borrower; effectively, borrowers either did or did not meet the underwriting criteria for a particular loan product, and the borrowers who met the criteria all paid about the same price.

In the past quarter century, advances in technology, improvements in access to the credit histories of individuals, and the emergence of a robust secondary market for loans over the full spectrum of credit risks have helped spur remarkable changes in the mortgage market. The most prominent of those developments has been the explicit risk-based pricing of credit. Over this period, more so than in the past, differences in the creditworthiness of different borrowers led to different prices for the same product.⁹ Less-creditworthy applicants, or those either unwilling or unable to document their creditworthiness or income, found it increasingly likely that they would be granted a loan but that it would be offered at a price higher than that for more-creditworthy applicants.

Explicit risk-based pricing has expanded opportunities for homeownership and allowed individuals, including those who otherwise have little access to credit, to more readily purchase homes or borrow against the equity they have accumulated in their homes. Recent developments in mortgage markets have caused some lenders to tighten underwriting and charge higher prices to compensate for perceived risk. However, risk-based pricing continues to be a feature of the mortgage market. Although risk-based pricing has broadened opportunities for many consumers, it has been accompanied by growing concerns, some of which are noted below.

Segments of the Market

Broadly, borrowers in the higher-priced mortgage market generally fall into one of two "nonprime" market segments: "subprime" and "near prime." Individuals in the subprime category pay the highest prices because they are considered to pose the greatest risk of default or prepayment.¹⁰ Such borrowers may also impose higher costs of origination, as it can be more difficult and time consuming to assess their credit profiles. Borrowers in the prime market pay the lowest prices for loans, subprime borrowers pay the highest prices, and near-prime borrowers pay prices somewhere in between. In practice, the dividing line between subprime and near prime is amorphous, as is the line between the prime and nonprime markets. The distinctions between all these market segments change over time as market interest rates move, as lenders' appetite for interest rate risk and the risks of prepayment and default changes, and as the ability to price risk more exactly changes.

Industry sources provide some data on the relative sizes of these market segments. For example, in 2006 about 20 percent of mortgages were subprime, and about 13 percent were near prime (often referred to as "alt-A" mortgages).¹¹

Nontraditional Loan Products

Over the first half of this decade, home values in many areas of the country rose sharply, as did the competitive pressures on lenders to innovate. Those forces encouraged lenders to develop loan products that were intended to hold down required monthly payments, at least for the first few years of the loan. Among those products were interest-only loans, adjustable-rate loans with discounted ("teaser") initial rates, and payment option loans, which increased the affordability of home purchases and mortgage refinancings, at least in the short term. However, these loan products sometimes are accompanied by minimal down payments (or a piggyback loan), and the limited or zero repayment of principal in the amortization schedule of many of these loan products means that mortgage payments generate little or no additional equity in the first few years. These loans also generally involve an increase in monthly payments at some point later in the life of the loan. Recent evidence indicates, however, that these so-called nontraditional loan products have elevated incidence of default and foreclosure, particularly when extended in combination with other indicators of elevated credit risk, such as a low credit score or no documentation of income. Such loan products have also drawn considerable attention from regulatory authorities, which have provided guidance to banking institutions on the risks posed by those products and the importance of providing clear disclosure of the loan terms and conditions.¹²

The Role of Brokers

Another notable development in the mortgage market was the emergence of brokers as the intermediary through which the majority of individuals obtain a mortgage.¹³ Historically, prospective borrowers visited an office of a local banking institution to apply for a loan. Today, a mortgage broker, often working as an independent entity, may take loan applications on behalf of a banking institution or other mortgage lender and may provide the only direct contact with the borrower until closing, when the loan documents are signed and the mortgage is issued. In such cases, the mortgage broker plays an important role in pricing the loan, and frequently the compensation received by the broker is based, in whole or in part, on the interest rate and fees paid by the consumer.

The large role played by brokers in the lending process gained increased attention in the past year or so as delinquencies, defaults, and foreclosures increased, particularly in the subprime portion of the mortgage market. Among the issues that have drawn increased scrutiny to brokers are whether they provide consumers with sufficient information to make sound choices in selecting a mortgage product and whether fraud has sometimes been involved in the broker's characterization of the borrower's creditworthiness or in the appraisal of the home being purchased. Also, brokers and, many times, the lenders originating the loan do not bear the credit risk of the loans they sell but share in the profits from originating the loan. As a result, the broker or other originating party may not have the incentive to fully pass along to the loan purchasers all relevant information needed to gauge the accuracy and completeness of the information used to underwrite and price the loan.¹⁴

Concerns about Loan Pricing

As price flexibility has emerged in the mortgage market, so have concerns about the fairness of pricing outcomes. Such concerns generally fall into four broad categories. First are concerns about possible discrimination based on the race or ethnicity of the borrower. Such concerns are heightened because loan prices are not always determined strictly on the basis of credit risk or cost factors but can involve elements of discretion by loan officers or loan brokers, such as seeking prices that differ from the lender's baseline price guidance typically conveyed in the form of rate sheets.

Second are concerns about whether borrowers in the higher-priced segment of the loan market are sufficiently informed and whether they are willing or able to shop effectively for the loan terms most appropriate to their circumstances. For example, it may be difficult for borrowers to determine where they fit along the credit-risk spectrum. Also, some borrowers may fail to shop or negotiate for the best available rates and terms because they need funds immediately; such borrowers tend to focus primarily on the amount they can borrow and the size of the monthly payment. Such borrowers may not fully appreciate the potential longer-run consequences of certain loan terms such as prepayment penalties, adjustable interest rates, negative amortization, and balloon payments. Such borrowers may be more easily exploited by loan officers or brokers. Also, aggressive marketing tactics may confuse such borrowers about the cost and terms of loans.

Third, concerns have been raised about whether competition is adequate to ensure that borrowers in the higher-priced segment of the loan market have access to the full range of credit opportunities. Some believe that prime-market lenders are not present or do not offer or promote their prime products sufficiently in certain geographic markets, including neighborhoods that have larger minority populations. In this view, reduced access to prime lenders and their products limits the opportunities for borrowers in affected communities to access lower-priced loans.

Finally, the elevated default and foreclosure rates currently experienced in the higher-priced portion of the loan market have raised concerns about the sustainability of homeownership, the adverse effects on neighborhoods with higher concentrations of these loans, and the hardship on borrowers who are losing their homes. Recognizing these concerns, the federal and state financial institution regulatory agencies have encouraged lenders and servicers of loans to work with mortgage borrowers facing financial difficulties.¹⁵

These various concerns about the functioning of the mortgage market raise important public policy issues that are beyond the scope of this article. Nonetheless, the expanded HMDA data provide information that has proven useful in understanding and addressing many of these issues.

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General Findings from the 2006 HMDA Data

For 2006, lenders covered by HMDA reported information on 27.5 million applications for home loans. Almost all the applications were for loans to be secured by one- to four-family (so-called single-family) houses, as follows: 10.9 million applications to purchase a home, 2.5 million to make home improvements, and 14.0 million to refinance an existing home loan. The balance (about 0.1 million) was for loans secured by multifamily dwellings--those for five or more families (table 1). These applications resulted in nearly 14 million loan extensions. Lenders also reported information on 6.2 million loans they had purchased from other institutions and on 411,000 requests for pre-approvals of home-purchase loans; the pre-approval requests either were turned down by the lender or (not shown in table) were granted but not acted on by the applicant.

The total number of reported applications and purchased loans fell 2.3 million, or 6 percent, from 2005; most of the decline was for refinancings. The number of applications for loans to refinance an existing loan fell 1.9 million, or about 12 percent; the number declined most likely because short-term interest rates increased from the end of 2005 through much of 2006 and thereby reduced the number of existing loans that could be refinanced at a lower rate. Slower house-price appreciation and, in some areas, outright declines in property values also likely diminished the attractiveness of refinancing or the borrower's ability to refinance.

For 2006, HMDA reporting requirements covered 8,886 institutions--including 3,900 commercial banks, 946 savings institutions, 2,036 credit unions, and 2,004 mortgage companies (table 2). Of the mortgage companies, two-thirds were independent entities--that is, they were neither subsidiaries of depository institutions nor affiliates of bank holding companies (data derived from table). The total number of reporting institutions was about the same as that in 2005, as was the distribution of reporters by type of institution.

Activity and Size of Lender

As in earlier years, most of the institutions reporting HMDA data are small whether measured by asset size or by some indicator of lending activity such as the number of reported applications or loans (table 3). For 2006, 60 percent of the reporting institutions, each of which provided information on fewer than 250 loans or applications, accounted for just 1.7 percent of all the reported data. At the other extreme, 5 percent of reporting institutions, each of which provided information on 5,000 or more loans or applications, accounted for 87 percent of all the reported data.

Many HMDA reporters are affiliated with each other. If individual HMDA reporters are aggregated to their highest level of corporate organization (such as a holding company), the concentration of mortgage lending nationwide is evident. The twenty-five organizations reporting the largest number of applications and loans accounted for 54 percent of the 2006 data, roughly the same proportions as in the 2004 and 2005 HMDA data (data not shown in tables).

Disposition of Applications, Loan Types, and HOEPA-Related Activities

For purposes of analysis, loan applications and loans can be grouped in many ways; here the analysis focuses on twenty-five distinct product categories characterized by loan and property type, purpose of the loan, and lien and owner-occupancy status. Each product category contains information on the number of total and pre-approval applications, application denials, originated loans, loans with prices above the thresholds, loans covered by the Home Ownership and Equity Protection Act of 1994 (HOEPA), and the mean and median APR spreads for loans priced above the designated reporting thresholds (tables 4 and 5).¹⁶

Disposition of Applications

HMDA data are the only publicly available source of information on the disposition of individual applications for home loans. The data include information on the race, ethnicity, and sex of applicants as well as the type and purpose of the loan and the location of the property, so the disposition of applications can be assessed along many dimensions.