Credit Research Center Seminar

            Ensuring Fair Lending:
What Do We Know about Pricing in Mortgage Markets
 and ...
Introduction to the Enhanced HMDA Data

          Michael Staten, Director
          Credit Research Center
          Geor...
Public Policy Has Encouraged
        Expansion of Mortgage Credit
• F more than 35 years, expanded access to mortgage
  Fo...
Subprime Mortgage Originations
                    1994 – 2004
 $Billions of
current dollars
 530

 430

 330

 230

 130
...
Percent Change in Homeownership
                  g                 p
                         1994 – 2003

20%


15%


10...
The Policy Debate Has Changed

•   Expanded access to mortgage credit an American policy goal
•   HMDA passed to ensure th...
Subprime Lenders are Increasingly
    the Target of Criticism for Excessive
      Pricing, Unfair Contractual Terms
• Subp...
Percent of Loans that are “Subprime”
  Conventional Refinance Loans in 2000 across all MSAs
          by Borrower Race and...
Prior to 2004 HMDA Data Are Silent
             2004,
     on Questions of Pricing Fairness

• Until 2004, HMDA contained ...
The Enhanced HMDA Data

• 2004 HMDA d t will contain l
              data ill       t i loan price information
           ...
Racial/Ethnic Differences in
               Income and Net Worth
$Thousands     White, Non-Hispanic      Non-White or Hisp...
2003 Distribution of Credit Scores in
High Minority vs Low-Minority Census Tracts
              vs. Low Minority
         ...
Overview of Seminar Sessions

• History and Evolution of HMDA

• Mortgage Pricing 101: Determinants of price in
  mortgage...
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Ensuring Fair Lending Credit Research Center Seminar

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

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Ensuring Fair Lending Credit Research Center Seminar

  1. 1. 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/crc p g March 14, 2005
  2. 2. Introduction to the Enhanced HMDA Data Michael Staten, Director Credit Research Center Georgetown University www.msb.edu/prog/crc March 14, 2005
  3. 3. Public Policy Has Encouraged Expansion of Mortgage Credit • F more than 35 years, expanded access to mortgage For th d d t t credit has been an explicit American policy goal • HMDA was passed to ensure that banks and other depository institutions in inner city areas “reinvested” by making home mortgage credit available to residents. residents • Subprime mortgage industry evolved as lenders developed flexible contracts and applied risk-based risk based pricing to grant mortgage credit to non-prime borrowers
  4. 4. Subprime Mortgage Originations 1994 – 2004 $Billions of current dollars 530 430 330 230 130 30 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Mortgage Statistical Annual.
  5. 5. Percent Change in Homeownership g p 1994 – 2003 20% 15% 10% 5% 0% Hispanic Asian Black White Source: U.S. Census Bureau.
  6. 6. The Policy Debate Has Changed • 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 In t th h • I recent years, the housing policy debate has shifted i li d b t h hift d from “access to credit” to “affordability of credit” • High cost mortgages are now viewed as impediments High-cost to asset- and wealth-building by low-income and minority households
  7. 7. 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
  8. 8. Percent of Loans that are “Subprime” Conventional Refinance Loans in 2000 across all MSAs by Borrower Race and Income Group African-American Hispanic Asian White 60% 50% 40% 30% 20% 10% 0% Lower income Moderate Middle income Upper income Income Source: Calvin Bradford, “Risk or Race? Racial Disparities in the Subprime Refinance Market” Center for Community Change, 2002.
  9. 9. Prior to 2004 HMDA Data Are Silent 2004, 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 can’t confirm it – and were not designed to do so. so
  10. 10. The Enhanced HMDA Data • 2004 HMDA d t will contain l data ill t i loan price information i i f ti (APR) for the first time, for higher priced loans • 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 APR – Many factors relevant to price determination are missing • Some of these missing factors are known to be correlated with race and ethnicity of borrowers
  11. 11. Racial/Ethnic Differences in Income and Net Worth $Thousands White, Non-Hispanic Non-White or Hispanic $500 $400 $300 $200 Net Worth $100 Income $ $0 Mean Median Mean Median Source: Federal Reserve Board, 2001 Survey of Consumer Finances.
  12. 12. 2003 Distribution of Credit Scores in High Minority vs Low-Minority Census Tracts vs. Low Minority Low-Minority Census Tract (< 10% Minority) High-Minority Census Tract (80%+ Minority) 70% 0% 60% 50% 40% 30% 20% 10% 0% Under 550 550 - 600 601 - 660 661 - 700 701 + Credit Score Source: Federal Reserve Bulletin, summer 2004.
  13. 13. Overview of Seminar Sessions • History and Evolution of HMDA • Mortgage Pricing 101: Determinants of price in mortgage markets • The regulator’s view of new HMDA data; strengths, limitations and usefulness. • Research perspective on the value of the new HMDA p p data for assessing pricing fairness
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