Credit Research Center Seminar

Ensuring Fair Lending:What Do We Know about Pricing in Mortgage Markets

and What Will the New HMDA Data Fields Tell US?

www.msb.edu/prog/crcp g

March 14, 2005

Introduction to the Enhanced HMDA DataIntroduction to the Enhanced HMDA Data

Michael Staten, DirectorMichael Staten, DirectorCredit Research CenterGeorgetown University

www.msb.edu/prog/crc

March 14, 2005

Public Policy Has Encouraged Expansion of Mortgage Credit

F th 35 d d t t• For more than 35 years, expanded access to mortgage credit has been an explicit American policy goal

• HMDA was passed to ensure that banks and other• HMDA was passed to ensure that banks and other depository institutions in inner city areas “reinvested” by making home mortgage credit available to residentsresidents.

• Subprime mortgage industry evolved as lenders developed flexible contracts and applied risk-baseddeveloped flexible contracts and applied risk based pricing to grant mortgage credit to non-prime borrowers

Subprime Mortgage Originations1994 20041994 – 2004

530

$Billions of current dollars

430

530

330

230

30

130

301994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: Mortgage Statistical Annual.

Percent Change in Homeownershipg p1994 – 2003

20%

15%

20%

10%

15%

5%

10%

0%

5%

0%Hispanic Asian Black White

Source: U.S. Census Bureau.

The Policy Debate Has ChangedThe Policy Debate Has Changed

• Expanded access to mortgage credit an American policy goal• Expanded access to mortgage credit an American policy goal• HMDA passed to ensure that banks “reinvested” by making home

mortgage credit available to residents. • Subprime mortgage industry evolved as lenders developed flexible

contracts and applied risk-based pricing to grant mortgage credit to non-prime borrowers

I t th h i li d b t h hift d• In recent years, the housing policy debate has shifted from “access to credit” to “affordability of credit”

• High cost mortgages are now viewed as impediments• High-cost mortgages are now viewed as impediments to asset- and wealth-building by low-income and minority households

Subprime Lenders are Increasingly the Target of Criticism for Excessive

Pricing, Unfair Contractual Terms• Subprime designation is being equated to

“overpriced”p

• Higher incidence of subprime loans for minority groups, relative to white borrowers, is equated to discriminatory targeting

Percent of Loans that are “Subprime”Conventional Refinance Loans in 2000 across all MSAs

by Borrower Race and Income Group

60%African-American Hispanic Asian White

50%

60%

30%

40%

10%

20%

0%

10%

Lower income Moderate Middle income Upper incomeLower income ModerateIncome

Middle income Upper income

Source: Calvin Bradford, “Risk or Race? Racial Disparities in the Subprime Refinance Market” Center for Community Change, 2002.

Prior to 2004 HMDA Data Are SilentPrior to 2004, HMDA Data Are Silent on Questions of Pricing Fairness

• Until 2004, HMDA contained no pricing information

• All past studies that analyze HMDA data to infer pricing problems are speculative, at best

• There may well be problems with overpricing to some groups in some neighborhoods, but the HMDA data can’t confirm it – and were not designed to do socan t confirm it – and were not designed to do so.

The Enhanced HMDA DataThe Enhanced HMDA Data

2004 HMDA d t ill t i l i i f ti• 2004 HMDA data will contain loan price information (APR) for the first time, for higher priced loans

• The release marks an important step forward in• The release marks an important step forward in identifying actual high-cost loans => better approximation of the nature of the subprime market

• BUT, the new data still have significant limits for addressing pricing fairness– Insufficient detail to determine why a loan has a higher APRInsufficient detail to determine why a loan has a higher APR– Many factors relevant to price determination are missing

• Some of these missing factors are known to be• Some of these missing factors are known to be correlated with race and ethnicity of borrowers

Racial/Ethnic Differences in Income and Net WorthIncome and Net Worth

$500White, Non-Hispanic Non-White or Hispanic$Thousands

$400

$500

$300

$200Net Worth

$0

$100Income

$Mean Median Mean Median

Source: Federal Reserve Board, 2001 Survey of Consumer Finances.

2003 Distribution of Credit Scores in High Minority vs Low-Minority Census TractsHigh Minority vs. Low Minority Census Tracts

70%

Low-Minority Census Tract (< 10% Minority)High-Minority Census Tract (80%+ Minority)

50%

60%

0%

40%

50%

20%

30%

0%

10%

Under 550 550 - 600 601 - 660 661 - 700 701 +

Source: Federal Reserve Bulletin, summer 2004.Credit Score

Overview of Seminar SessionsOverview of Seminar Sessions

• History and Evolution of HMDA• History and Evolution of HMDA

• Mortgage Pricing 101: Determinants of price in mortgage marketsmortgage markets

• The regulator’s view of new HMDA data; strengths, limitations and usefulness.

• Research perspective on the value of the new HMDA p pdata for assessing pricing fairness