Mortgage Banking & Consumer Credit Alert
October 2008
Authors:
Paul F. Hancock
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paul.hancock@klgates.com
Melanie Hibbs Brody
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melanie.brody@klgates.com
Elena Grigera
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elena.grigera@klgates.com
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The 2007 HMDA Data: Market Turmoil But
Little Change in Racial and Ethnic Disparities
In many respects the 2007 HMDA data is unremarkable. Racial and ethnic disparities in
higher-priced lending remain pretty much the same. Denial rates crept up a bit, but not as
much as many had expected. The crisis in the housing market caused a dramatic decline in
loan applications and originations, and minorities experienced the greatest decline. The data
confirms the demise of a significant number of independent mortgage companies during
the year, and it seems that these now defunct companies disproportionately served racial
and ethnic minorities in the higher-priced segment of the market. Thus, the data states a
significant decline in the overall incidence of higher-priced lending, and that depository
institutions actually originated the largest number of higher priced loans. But the actual
decline in 2007 in non-depository higher-priced lending may be overstated because of the
non-inclusion of the loans by the defunct companies. We summarize the conclusions that
can be reached from the data as described by the Federal Reserve Board economists in
their recently released article.
Impact on 2007 HMDA Data of Lenders that Ceased Operations
The HMDA data for 2007 consists of information reported by approximately 8,600 home
mortgage lenders. These lenders account for an estimated 80 percent of mortgage lending
nationwide and thus the data provide a broad representation of most mortgage lending in
the United States.
The Board identifies 169 institutions that previously reported HMDA data but ceased
operations in 2007 and did not file a HMDA report even though they originated loans
during part of the year. These lenders – all but two of which were independent mortgage
companies – did not merge and were not acquired by another entity. While it is difficult to
quantify the affect this non-reporting had on the comprehensiveness of the 2007 data, the
impact was no doubt significant as a result of the sheer number of lenders that extended
mortgages but did not report data on those loans.
A comparison of the lending by these same institutions in 2006 provides some guidance
as to the impact non-reporting may have had on the 2007 data. In the aggregate, the 169
institutions accounted for about 7% of all loan and application records included in the
2006 HMDA data. These lenders were more focused on the higher-priced segment of the
mortgage market and on lending to minority borrowers.
The most notable difference between the lending activities of these 169 institutions in
2006 and the other HMDA reporters is the higher incidence of higher-priced lending by
these 169 institutions. Also striking is the high incidence of such loans among minorities.
For example, the 169 non-reporting institutions had a very high incidence of higherpriced lending in 2006 to Blacks (74 percent) and Hispanics (63 percent). As compared to
other HMDA reporters in 2006, these 169 lenders also extended nearly double the share
of piggyback loans and a higher share of loans to borrowers in census tracts with larger
numbers of minorities or lower-income individuals.
Mortgage Banking & Consumer Credit Alert
Decline in Loan Applications and
Originations
The HMDA data for 2007 shows a substantial decline
in overall mortgage lending activity from 2006. This
alleged drop is obviously overstated as a result of the
169 institutions that originated loans in 2007 but did not
file a HMDA report. The 2007 data reveals a reduction
in loan applications and originations, particularly in the
higher-priced segment of the market. The total number
of applications fell about 6.0 million, or 22 percent,
while the total number of originations fell 3.5 million,
or 25 percent. While all borrowers and census-tract
groups experienced a decline in the number of loan
originations, the largest decline is seen among Hispanic
and Black borrowers. For example, the percentage
decline in home-purchase loan originations fell 49
percent for Hispanics and 35 percent for Blacks.1 Such
loans to White borrowers, in contrast, dropped 22
percent over the same time period.
The overall reduction in loan originations in 2007
appears to be driven by declines in the number of
applications, as opposed to an increase in the number
of loans denied. While the modest increase in denial
rates did account for a portion of the decrease in loan
volume, it is largely the drop in applications that
affected originations.
When comparing denial rates from the second half
of 2006 to the second half of 2007, the denial rate
increased 3.8% for Hispanics, 1.9% for Blacks and
0.1% for Whites. While many expected the HMDA
data to show a substantial increase in denial rates as
a result of more stringent underwriting standards, the
increase was surprisingly fairly small. Perhaps higher
rates of denied applications across population groups
will be revealed in the 2008 HMDA data.
The Board points to various factors that contributed
to the reduction in lending including slower house
price appreciation or decline in home values, tighter
underwriting guidelines, an increase in interest rates
and the elimination of loan products normally used
to stretch affordability. As expected, the metropolitan
statistical areas (MSA) that experienced both the
sharpest declines in recent house prices and the
largest increase in house prices in preceding years
experienced the largest decline in lending activity. The
decline in lending was also greater in MSAs with high
delinquency rates.
1
To reduce the uncertain effects of the non-reporting lenders, changes in the number
of loan applications, originations, denials and lower-and-higher-priced originations
by borrower characteristic are revealed by comparing data from the first half of 2006
to the second half of 2007.
Decline in Higher-Priced Lending
The 2007 data reveals a significant drop in the incidence
of higher-priced lending from 28.7 percent in 2006
to 18.3 percent in 2007. This decline is in no doubt
impacted by the 169 non-reporting institutions. The
fact that these lenders did not report loans they made
in 2007 means that the actual incidence of higherpriced lending is artificially understated in the data.
For example, the number of higher-priced refinance
loans originated by independent mortgage companies
reportedly fell 85 percent. There are other reasons for
the decline in higher-priced lending including changes
in the yield curve as short term rates decreased more
than long term rates from 2006 to 2007; as a result,
more higher-risk adjustable rate mortgages may have
fallen below the HMDA price-reporting thresholds.
There were also notable changes in lender and investor
risk tolerance for higher-priced lending.
It is important to point out that most lenders covered
by HMDA do little or no higher-priced lending. In fact,
“specialists” – institutions that have a large share of
their lending in the higher-priced segment – account
for 3 percent of all reporting institutions and nearly 40
percent of higher-priced lending in 2007. The decreased
presence of independent mortgage companies in the
2007 data resulted in depository institutions taking the
lead as providers of higher-priced loans. The increased
role of depository institutions in this segment of the
mortgage market does not reflect more higher-priced
lending but instead reflects the large contraction in
such lending by other institutions. As a side note,
it should be mentioned that depository institutions
did experience an increase in their volume of lowerpriced home-purchase lending to Black borrowers and
a corresponding decrease to White borrowers in their
assessment areas.
While the incidence of higher-priced lending declined
in 2007, the data continues to reveal disparities
correlated with race and national origin. A comparison
of the incidence of higher-priced lending across
borrower groups in 2007 reveals that Blacks and
Hispanics are more likely than Whites to receive
loans above the HMDA price-reporting thresholds. For
example, 29.5 percent of Blacks and 24.3 percent of
Hispanics obtained higher-priced conventional homepurchase loans. In contrast, only 9.2 percent of Whites
obtained such loans. However, while the HMDA data
shows differences across racial and ethnic lines in
the incidence of higher-priced lending, these gross
October 2008 | 2
Mortgage Banking & Consumer Credit Alert
differences are substantially reduced after controlling
for borrower and lender related factors. For example,
the difference in the incidence of higher-priced lending
between Blacks and Whites is reduced from 20.3
percentage points to 11.1 when borrower and lender
related factors available in the HMDA data are taken
into account. The gap between Hispanics and Whites
is similarly reduced from 15.1 percentage points to
6.2. These gaps are not much different from those
seen in the 2006 data. While borrower and lender
factors account for much of the difference seen in the
incidence of higher-priced lending between population
groups, it is also important to recognize that differences
in loan pricing between groups is often times further
explained by factors not found in the HMDA data.
mortgage market is the incidence of investment and
second-home buyers in the market. The share of nonowner-occupant lending among first-lien loans to
purchase one-to-four family homes has risen in every
year between 1996, when it was 6.4 percent, and 2005,
when it reached a peak of 17.3 percent. However,
the share fell in 2006 to 16.5 percent and dropped
even further in 2007 to 14.9 percent. The decline in
non-owner-occupant lending in the last two years is
likely the result of less interest in such properties with
the weakening of home values nationwide as well as
reduced access to credit as lenders have tightened
underwriting standards. It would not be surprising
to see a further decline in such lending in the 2008
HMDA data.
Decline in Piggyback Lending
Increase in FHA-Insured Lending
Another consequence of recent housing market
conditions is the decline in piggyback lending. Despite
the appeal of such loans in prior years, piggyback
lending dropped 45 percent from 2006. Piggyback
loans are used for a number of purposes, however, and
not all loan types experienced decline. For example, the
number of piggyback loans used to keep the first-lien
loan within conforming loan limits, and thus saleable to
Fannie Mae and Freddie Mac, increased by 63 percent.
In contrast, borrowers were much less likely in 2007 to
use piggyback loans as a substitute for private mortgage
insurance. There was also a decrease of 87 percent in
the use of piggyback lending for higher-price non-GSE
eligible purposes.
While non-government-backed conventional loans
continue to account for the vast majority of all
loans originated in 2007, there has been an increase
of 4.6 percent in the number of Federal Housing
Administration (“FHA”) loans extended in this most
recent reporting cycle. As a consequence of narrowing
product availability and stricter underwriting standards
in the higher-priced segment of the conventional
mortgage market, FHA loans have become more
attractive to certain borrowers. For example, lowerand middle-income borrowers seeking a mortgage of a
smaller amount – the mean size of an FHA loan in 2007
was $142,000 – have increasingly turned to FHA loans.
The creation of FHASecure, a new lending program
designed to help qualified individuals with higherpriced conventional loans refinance into an FHA loan,
also contributed to the spike in the number of FHA
originations. The Board reported an increase of nearly
20 percent from 2006 in the number of FHA-backed
first-lien loans used to purchase or refinance a home.
The increase in FHA lending is likely to continue in 2008.
Another explanation for the decline in piggyback
lending is that independent mortgage companies were
a significant source of such lending until 2007. The exit
of many of these entities from the mortgage market
contributes to the overall decline in piggyback lending.
In turn, depository institutions accounted for a much
larger share of the piggyback loans that were reported
in 2007. The HMDA data also reveals a much higher
incidence of piggyback loan holding by depository
institutions. A depository’s holding both loans in
portfolio may be helpful in the event that future loan
modifications become necessary.
Decline in Non-Owner Occupant Lending
One of the many characteristics of a loan captured
by the HMDA data is whether the borrower intends
to use the property as her principal dwelling or as a
“non-owner occupied” property such as an investment
or second home. An indicator of a strongly performing
Conclusion
The 2007 HMDA data reveals a transformation in the
mortgage market from one characterized by a high
incidence of higher-priced lending to a substantially
lower incidence of higher-priced lending, with only
modest increases in rejection rates. Although virtually
all numbers are lower, the racial and ethnic disparities
that have been revealed in recent years continue to
persist. Regulators and enforcement agencies likely will
continue to focus on these disparities in examinations
and investigations.
October 2008 | 3
Mortgage Banking & Consumer Credit Alert
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Mortgage Banking & Consumer Credit Alert
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