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Residential lending to low-income and minority families: evidence from the 1992 HMDA data.

Since 1976, the Home Mortgage Disclosure Act (HMDA) has required most depository institutions with offices in metropolitan areas to provide data on the geographic location of the home purchase and home improvement loans they originate or buy. In recent years, as more information about mortgage lending has become available under HMDA, the access of lower-income and minority households to mortgage credit has drawn considerable attention and has stimulated initiatives in the private and public sectors to increase availability.

The expanded data have come about as the result of legislative amendments in 1989 and 1991 that increased the scope of the information that lenders must collect and the coverage of lenders required to report.(1) Under HMDA, lenders now disclose information on the disposition of home loan applications and on the race or national origin, gender, and annual income of loan applicants and borrowers. They also disclose the type of secondary market purchaser for loans that are originated or bought by the lender in the same year as the sale. Independent mortgage companies (firms not affiliated with a depository institution) now are among the lenders covered by the act; many of them are active lenders, often extending credit in dozens of metropolitan areas.

This article uses the HMDA data to study developments in the mortgage market and continues the analyses published in two previous Bulletin articles.(2) It uses the 1992 data to analyze patterns of loan applications and their disposition by the income, race, or ethnicity of the applicant and by the location of the property involved in the loan. It examines lending in different types of neighborhoods, including those in central city and in noncentral city locations, and describes the role of mortgage originators and of institutions that purchase mortgages. Finally, it reviews the use of HMDA data to monitor the way institutions comply with laws pertaining to fair lending, community reinvestment, and affordable housing.

SUMMARY OF THE FINDINGS FOR 1992

The HMDA data show that by far the most common type of home loan requested by consumers during 1992 was for refinancing, which accounted for more than half of all home loan applications. Among loans used to purchase homes, the share of loans insured by the Federal Housing Administration (FHA) dropped sharply from the previous year. The drop probably resulted from the recent increases in the costs to homebuyers of using FHA-insured loans and from the greater availability of conventional loan products designed to reach low-and moderate-income homebuyers.

Most applications in 1992 for home loans were approved, particularly those to buy homes or to refinance existing loans. The rates of denial varied among applicants grouped by their income and racial or ethnic characteristics (see the box "Denial Rates for Home Loans, by Racial or Ethnic Characteristics of Applicants"). Differences in the distribution of applicants by income accounted for some of the differences in loan disposition rates among racial or ethnic groups, but other factors also seemed to be important because white applicants in all income groups had lower rates of denial than black or Hispanic applicants. These disparities raise the possibility of unlawful discrimination against some minority applicants.

The HMDA data provide little information about other factors that might explain differences in denial rates among racial or ethnic groups. For example, the data do not include derailed information about the financial circumstances of loan applicants or the characteristics of the properties that applicants sought to purchase, refinance, or improve. When used in conjunction with other information, however, the HMDA data facilitate assessment by government agencies of lenders' compliance with the fair lending laws.

The HMDA data show that the 1992 rates of loan approval rose and rates of denial fell from those of the previous year for black and for white applicants for government-backed and for conventional home purchase loans. They show a large increase in the number of conventional home purchase loans extended to low-income and to black families. The types and quantities of home loans extended in 1992 varied considerably across neighborhoods grouped by median family income, racial or ethnic composition, and location (that is, whether central city or noncentral city); differences in the socioeconomic and housing characteristics of neighborhoods offer possible explanations for these lending patterns.

The HMDA data also shed light on the secondary market for mortgages. Institutions in the secondary mortgage market play a prominent role in the U.S. housing market. Secondary market participants generally do not originate loans, but they do specify the underwriting guidelines that loans must meet to be eligible for purchase or securitization. Two government-sponsored enterprises dominate secondary market purchases in conventional mortgage loans--the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac ). Recent legislation directs both agencies to meet loan-purchase targets for low-income and for central city borrowers. The HMDA data have limitations for measuring Fannie Mae's and Freddie Mac's performance in helping to meet these affordable housing goals. However, the data suggest that the mortgages purchased by other secondary market institutions in 1992 generally included higher proportions of conventional home loans extended to lower-income families and to families living in central cities relative to the purchases by Fannie Mae and Freddie Mac.

A BRIEF DESCRIPTION OF THE 1992 HMDA DATA

In 1992, 9,073 home lenders submitted HMDA data, including 5,468 commercial banks, 1,395 savings associations, 1,706 credit unions, and 504 mortgage companies, of which 224 were independent entities (table 1).(3) The number of creditors disclosing lending data fell about 3 percent from 1991, a decrease reflecting the effects of acquisitions, mergers, and failures.(4) Nonetheless, total reported loan applications and purchased loans increased more than 50 percent, from 7.9 million to 12.0 million. (For information on how members of the public can receive HMDA data, see the box "Public Access to HMDA Data.")

In 1992, lenders covered by HMDA acted on roughly 10.0 million home loan applications and reported information on nearly 2.0 million loans they purchased from other institutions. Of the 3.5 million applications for home purchase loans, 2.8 million (more than three-fourths) were for conventional mortgage loans (table 2). The remainder were for government-backed credit--loans insured or guaranteed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the Farmers Home Administration (FmHA). (See the box "How HMDA Data Are Collected and Distributed.")

Lending institutions specialize in different types of loans (table 3). In 1992, depository institutions originated about 60 percent of home loans of all types; independent mortgage companies or the mortgage company affiliates of depository institutions originated the rest. Home purchase loan originations of all types were about evenly divided between depositories and mortgage companies, whereas almost three-fourths of the government-backed home purchase loans were originated by mortgage companies (including those affiliated with depositories). Depository institutions, excluding their mortgage company affiliates, were the dominant source of home improvement and multi-family loans, with commercial banks providing most of the home improvement loans and savings associations providing the majority of multifamily loans.

APPLICATIONS FOR HOME LOANS

In 1992, by far the most common type of home loan requested by consumers was for refinancing a mortgage. Applications for refinancing grew almost 150 percent from the previous year, causing the total number of home loan applications to increase markedly. The substantial increase in refinancing applications reflected lower mortgage rates, the greater availability of no-fee loans, and the more efficient processing of applications.(5)

In 1992, a decline in FHA activity from 1991 resulted in an increase in the conventional mortgage share of home purchase loan applications. Applications for FHA-insured loans accounted for 15.7 percent of all applications for home purchase loans compared with 20.4 percent in 1991. Concurrently, the share of all home purchase loan originations insured by the FHA fell from 20.5 percent to 16.3 percent. Increases in the cost to homebuyers of using FHA-insured loans, along with the greater availability of conventional loan products for low-and moderate-income homebuyers, may have encouraged the shift. Still, tens of thousands of households--particularly first-time homebuyers-- used the program to buy homes.(6)

Homeowners infrequently use the FHA program, compared with conventional loans, to refinance an existing mortgage. In 1992, applications for FHA loans accounted for only 3.8 percent of the applications for refinancing loans. The small share of refinancings insured by the FHA is not surprising because households that refinance often have sufficient equity in their homes and have accumulated enough other assets to cover the larger downpayment typically required for a conventional mortgage.

In general, households with lower incomes are more likely than households with higher incomes to use government-sponsored home loan programs, particularly those of the FHA and the FmHA. In 1992, one-third of applicants for home purchase loans with incomes below the median family income for their metropolitan statistical area (MSA) applied for government-backed loans; in contrast, only 13 percent of applicants with incomes greater than 120 percent of the median family income for their MSA applied for such loans (table 4).

The greater reliance of lower-income households on government-backed loans reflects several factors. The limits on the amount of FHA loan insurance make these loans unavailable to households seeking to buy more expensive properties, and the low downpayment requirements make them particularly attractive to lower-income households and to first-time homebuyers, who are likely to have fewer financial resources for downpayments and closing costs.

Among racial groups, applicants who are black are more likely than other applicant groups to seek government-backed home purchase loans. In 1992, about 41 percent of the black applicants who applied for a home purchase loan sought a government-backed mortgage; the comparable figures for Hispanics, whites, and Asians were 31 percent, 21 percent, and 11 percent respectively.

As in previous years, the differences in the use of government-backed home purchase loan programs by various racial groups reflected more than differences in income. For instance, among low-income loan applicants, 53 percent of black applicants sought FHA or VA loans compared with 40 percent of Hispanic applicants, 31 percent of whim applicants, and 22 percent of Asian applicants. One possible explanation for this relatively greater reliance of black applicants on government-backed programs is that black households, on average, have smaller holdings of liquid assets compared with those of other low-income households.(7)

The patterns of applications for refinancings by the income and race or ethnic characteristics of the applicants differed from those for home purchase loans. Higher-income households accounted for 62 percent of all refinancing applications and for 47 percent (calculated from table 4) of all applications for home purchase loans. Also, white applicants accounted for a higher proportion of refinancing applications than of home purchase loan applications, reflecting the fact that, among homeowners with mortgages, most are white.

As noted earlier, lower-income and minority applicants were more likely to request government-backed mortgages. Consistent with this pattern, applicants who were seeking homes in low-or moderate-income neighborhoods requested government-backed mortgage programs more often than those seeking homes in upper-income neighborhoods. Requests for government-backed loans also accounted for a higher share of all home purchase loan applications in neighborhoods with higher proportions of minority residents.

THE DISPOSITION OF HOME LOAN APPLICATIONS

The HMDA data show that lenders approve most home loan applications (table 5).(8) In 1992, lenders approved nearly three-quarters of the applications for home purchase loans and about 78 percent of the applications for refinancings. A lower proportion, about two-thirds, of the applications for home improvement and multifamily loans were approved. Applications that were not approved may have been denied by the lender or withdrawn or left incomplete by the applicant. (Applicants who were denied at one institution but later accepted by another institution in the same year appear as both a denial and an approval in the HMDA data.) In general, relatively small proportions of the applications for home purchase and refinancing loans are denied.

The high rates of approval for home purchase loans are to be expected. Before filing an application, potential homebuyers often obtain information about the size of loan for which they are likely to qualify. This information comes from several sources, including real estate agents, who are involved in most home purchase transactions, and loan officers, who are often asked to prequalify prospective homebuyers. Many applicants also know from experience their likelihood of obtaining a home loan and tailor their search for a home with that information in mind. Finally, prospective borrowers have an incentive to learn about prevailing standards for credit and to postpone an application until they are likely to qualify because they usually incur some upfront costs in filing an application--to cover, at a minimum, a property appraisal and a credit bureau report. These forms of prescreening are not as prevalent for home improvement applications, and the result is a higher rate of loan denials.

Disposition Rates for Applicants Grouped by Income, Race, or Ethnicity

Although most applications for home loans are approved, the rates of approval and denial vary among applicants grouped by their income and racial or ethnic characteristics (table 6).

In 1992, about 81 percent of the applicants for conventional home purchase loans whose incomes placed them in the highest income group were approved for loans, compared with 69 percent for the lowest income group. A similar relation between approval rates and applicant income has been found for other types of home loans, including government-backed home purchase loans, refinancings, and home improvement loans.

Income can be expected to affect an applicant's ability to qualify for a home purchase loan, but it is just one element that lenders consider when evaluating creditworthiness. Other factors include the amount of the loan requested, nonhousing debt, assets available for downpayment and closing costs, employment experience, and credit history. On average, low-income households have fewer assets and lower net worth and experience more frequent employment disruptions than high-income households; these factors combined with a low income often result in higher loan denial rates.

Compared with Asian and white applicants, greater proportions of black and Hispanic loan applicants were turned down for mortgage credit in 1992. For conventional home purchase loans, about 36 percent of black applicants, 27 percent of Hispanic applicants, 15 percent of Asian applicants, and 16 percent of white applicants were denied credit. Consistent with these findings, the HMDA data indicate that the rate of denial for conventional home purchase loans generally increases as the proportion of minority residents in a neighborhood increases (table 7).

Differences in denial rates for applicants grouped by race or ethnicity reflect a variety of factors, including differences in the proportion of each group with relatively low income. In 1992, 21 percent of the white applicants who applied for conventional home purchase loans had incomes that were less than 80 percent of the median family income for their MSA (data not shown in tables).

The comparable percentages were roughly 37 percent for blacks, 28 percent for Hispanics, and 16 percent for Asians. Differences in the distribution of applicants by income account for some, but clearly not all, of the differences in denial rates among these groups. Within each income group, white applicants for conventional home purchase loans had lower rates of denial than black or Hispanic applicants (table 8).

The differences in denial rates between white and black or Hispanic applicants have led some to conclude that widespread racial discrimination characterizes home lending. Although these disparities raise questions, the reasons for the differences in denial rates are difficult to determine from the HMDA data. The HMDA data provide little information about the characteristics of the properties that applicants seek to purchase, refinance, or improve or of loan applicants' financial circumstances--their levels of debt, debt repayment records, employment experience, and other factors pertinent to an assessment of credit risk-- and no information about the specific underwriting standards used to evaluate each application(.)9 Thus, the data are not a solid basis on which to assess the fairness of the loan process. When used in conjunction with other information by government agencies, however, the HMDA data are valuable in helping the agencies assess lenders' compliance with the fair lending laws.

Differences in Disposition Rates for Home Purchase Loans between 1991 and 1992

Denial rates for home purchase loan applications, both conventional and government-backed, were lower in 1992 than in 1991 (table 9).(10) In 1992, mortgage rates fell and home values were stable; these and other developments contributed to the decline.

Some lenders began making greater use of affordable home loan programs sponsored by secondary market institutions. Lenders also initiated special conventional mortgage lending programs to help low- and moderate-income households, and those seeking to buy homes in low- and moderate-income neighborhoods, qualify for credit. These programs have often targeted prospective homebuyers with sufficient income to purchase a home but with inadequate savings to make substantial downpayments and pay closing costs.(11) In some programs, the traditional loan underwriting guidelines have been made more flexible. For example, under the affordable housing programs sponsored by Fannie Mae and Freddie Mac, the proportion of the downpayment and closing costs that must come from the applicant's own savings has been reduced, and lenders may consider rent and utility payment records in lieu of other credit history information.(12)

Evaluating the effect of these targeted loan programs on homeownership by low- and moderate-income households is difficult because many of the programs have been operating only a short time. Still, the HMDA data may indicate that these programs are having a positive effect. In particular, the number of conventional home purchase loans extended to applicants with incomes below the median family income for their respective MSA increased 27 percent from 1991 to 1992 (table 9, memo item), compared with an increase of 10 percent for borrowers with incomes greater than 120 percent of the median family income.

From 1991 to 1992, the number of conventional home loans extended to black borrowers increased 26 percent, whereas those to white borrowers increased 21 percent and those to Hispanic and Asian borrowers rose 8 percent and 6 percent respectively. Within each racial or ethnic group, the changes were largest among lower-income borrowers. For black borrowers whose incomes were below the median, the increase was 34 percent; for whites, 28 percent; for Hispanics, 25 percent; and for Asians, 42 percent (data not shown in tables).

During the same period, rates of loan approval rose and rates of loan denial fell for black and for white applicants for both government-backed and conventional home purchase loans. For example, the denial rates nationwide for conventional home purchase loans were 37.4 percent for blacks and 17.3 percent for whites in 1991, compared with 35.9 percent and 15.9 percent respectively in 1992. In contrast, changes in the approval and denial rates for Hispanic and Asian applicants were mixed.

For low-income applicants, the approval rates rose sharply and the denial rates fell for applications for both government-backed and conventional home purchase loans. For other income groups, changes in the disposition rates of loan applications were more modest.

LENDING ACTIVITY IN NEIGHBORHOODS WITH DIFFERENT CHARACTERISTICS

Using the HMDA data, one can compare lending activity across neighborhoods (that is, census tracts) in MSAs grouped by their residents' median family income and by racial or ethnic composition. Comparisons of lending among neighborhoods in the central city and noncentral city portions of MSAs are also possible.(13) Considerable caution should be exercised in making comparisons. Although the Bureau of the Census draws the boundaries of census tracts to include relatively homogenous populations, the residents of a given census tract can and sometimes do differ considerably. Diversity across and within neighborhoods influences the volume and types of lending that flow to different communities. Once these variations are taken into account, analyses suggest that neighborhood income and racial or ethnic characteristics are often not important factors in determining the risk or profitability of loans.(14)

Lending in Neighborhoods with Different Median Incomes

The 1992 HMDA data reveal that the types and quantifies of home loans extended by lenders vary considerably across neighborhoods grouped by their median family income, racial or ethnic composition, and central city or noncentral city location. The 1990 census information described in the appendix provides possible explanations for these variations.

Overall, roughly 10 percent of the home loans extended by lenders covered by HMDA in 1992 went to borrowers in low- or moderate-income neighborhoods; nearly half the loans went to borrowers in middle-income neighborhoods; and the rest went to borrowers in upper-income neighborhoods (table 10). These differences closely match the distribution of the home loan applications received by lenders (data not shown in table). The distribution of the dollar value of home loans and of applications is more heavily skewed than the number of home loans and applications toward upper-income neighborhoods, reflecting factors that include the higher average home values in these neighborhoods.

The HMDA data also indicate that borrowers who buy, refinance, or improve their homes tend to have incomes that are higher than the incomes of other residents of their neighborhoods (compare table 10 with table A.1).(15) For example, in 1992 borrowers in low- and moderate-income neighborhoods had incomes equal to 101 percent of the median family income of their MSA, whereas the average income for all residents of these neighborhoods was 58 percent.

When all neighborhoods are grouped by income, there are fewer low- and moderate-income neighborhoods than middle- or upper-income neighborhoods, and those low-income neighborhoods contain only about 26 percent of the housing units and a similar percentage of the population residing in metropolitan areas. Lower levels of lending in lowand moderate-income neighborhoods result partly from the existence of fewer homes and people. Also, the relatively small proportion of home loans in these neighborhoods likely reflects the lower incomes of residents and the smaller proportion of owner-occupied housing units relative to other neighborhoods.

Differences in the types of loans extended are also apparent across neighborhoods. Home improvement loans are relatively more common in low- and moderate-income neighborhoods, where the housing units are, on average, older and probably in greater need of repair or modernization. FHA-insured home purchase loans are also more common, reflecting the low downpayment requirements, the relatively higher debt-to-income ratios permitted by FHA underwriting standards, and the limits placed on the size of loan that may be insured. Home purchase loans extended to non-occupant owners (frequently landlords) are also more common, a finding consistent with the high proportion of rental properties in low- and moderate-income neighborhoods.

Median loan amounts across neighborhoods reflect large differences in home values and the different proportions of home improvement loans. For example, in 1992 the median home loan in low- and moderate-income neighborhoods equaled $63,600, compared with $124,000 in upper-income neighborhoods.(16) The median 1990 home values in these neighborhoods were $69,000 and $179,000 respectively (table 10). The high loan amounts relative to housing values in low- and moderateincome neighborhoods, particularly given the prevalence of home improvement loans, may reflect a lack of wealth among borrowers purchasing homes in these neighborhoods and thus relatively smaller downpayments on home purchase loans.

The distribution of borrowers by racial or ethnic group also differs by neighborhood income groups. Asian borrowers, like Asian residents, are more uniformly spread across neighborhoods; both black and Hispanic borrowers, like black and Hispanic residents, are more concentrated in low- and moderate-income neighborhoods. Regardless of neighborhood income, however, lenders have higher proportions of Asian borrowers relative to the Asian population in the neighborhood groups and lower proportions of black and Hispanic borrowers compared with the proportions of black and Hispanic residents. These differences probably reflect the relatively higher incomes of Asian residents.

Lending in Neighborhoods with Different Racial or Ethnic Compositions

Overall, the 1992 HMDA data indicate that 8 percent of the home loans extended by lenders covered by HMDA were granted to borrowers in predominantly minority neighborhoods (table 11). Residents of predominantly white neighborhoods received 54 percent of the home loans granted, and residents of neighborhoods whose minority population was between 10 and 50 percent of the total population received the rest. The distribution of the dollar value of home loans across neighborhoods grouped by racial or ethnic composition is similar to the distribution of the number of loans.

Predominantly minority neighborhoods contain 18 percent of the housing units and 20 percent of the population in metropolitan areas; these relatively small proportions partly account for the low percentage of all home loans extended in these neighborhoods (compare tables 11 and A.2). The relatively low proportion of home loans also reflects the lower income of residents and the composition of the housing stock, which contains a markedly higher proportion of rental units.

In neighborhoods grouped by racial or ethnic composition, as in neighborhoods grouped by income, borrowers who buy, refinance, or improve their homes tend to have higher incomes than the incomes of the other residents of their neighborhoods. For example, borrowers in predominantly white neighborhoods had incomes equal to 136 percent of the median family income of their MSA, compared with 115 percent for all residents of these neighborhoods. Borrowers in predominantly minority neighborhoods typically had incomes equal to 112 percent of the median family MSA income, compared with 66 percent for all residents of these neighborhoods.

Matching the patterns found in low- and moderate-income neighborhoods, the proportion of home improvement loans granted is slightly higher, and the proportion of home purchase loans slightly lower, in predominantly minority neighborhoods. Also, borrowers tend to rely more on FHA-insured loans, and loans to nonoccupant-owners are more common in predominantly minority neighborhoods.

Lending in Central City and Noncentral City Locations

Of loans made to borrowers residing in MSAs, roughly 38 percent were extended to borrowers in central city locations and the rest to borrowers in noncentral city locations (table 12). This lending pattern closely matches the pattern of applications received by lenders (data not shown in table). Roughly half of the housing units in MSAs are located in central cities, but the proportion of loans extended in central cities is smaller. This difference probably reflects the relatively higher proportions of low-income families, unemployed individuals, and renters in central cities.

The mix of loans used by borrowers in central city locations is similar to that used by borrowers in noncentral city locations with a couple of exceptions. Twenty percent of home purchase loans granted in central cities were FHA-insured compared with 15 percent in noncentral cities. Also the proportion of multifamily loans is higher in central cities (data not shown in table), and partly reflects these areas' higher proportion of multifamily and rental houses.

Borrowers in central cities have relative incomes that are similar to those of borrowers in noncentral city areas. In contrast, residents in central cities have relative incomes that are lower than those of residents in noncentral city areas.

ORIGINATORS OF HOME LOANS FOR LOW-INCOME AND MINORITY BORROWERS

Depository institutions and their mortgage company affiliates extend proportionally more conventional home purchase loans to low-income borrowers than do independent mortgage companies (table 13). Twenty percent of the families receiving conventional home purchase loans through depositories have low incomes, compared with 15 percent of families receiving them from independent mortgage companies. The higher proportion may reflect the use by depositories of more flexible underwriting standards. Generally, independent mortgage companies follow the underwriting guidelines set by secondary market institutions because they sell most of their loans. Mortgage company affiliates of depositories focus on selling loans in the secondary market, but they sell to their affiliated depository institutions as well. Depository institutions also sell loans, but they often choose to hold them in portfolio, which gives depositories and their mortgage company affiliates greater flexibility in underwriting standards.

On the other hand, depositories provide a smaller proportion of home purchase and refinancing loans to minorities than do independent mortgage companies. The higher origination by independent mortgage companies reflects in part a greater proportion of loans to "joint" borrowers--that is, households with one minority applicant and one white applicant--and to Asian borrowers-- possibly a reflection of the fact that the independent mortgage companies reporting 1992 HMDA data were more likely than depositories to have originated loans in California, a state with a large Asian population.

Somewhat surprisingly, government-backed loans extended by depositories and those extended by independent mortgage companies have distributions across income groups that are similar to the distributions for conventional loans. About 38 percent of the government-backed loans originated by depositories and their affiliates are to low-income borrowers, compared with 32 percent of the loans originated by independent mortgage companies. One would have expected the distribution of FHA and VA loans across income groups to be similar for all lenders because the underwriting standards are determined by the FHA or VA, not by the originator. The greater proportion of low-income borrowers among the government-backed home purchase loans extended by depositories may reflect other factors, such as the location of bank branches in low-income communities or the effect of depositories' being subject to the Community Reinvestment Act (CRA).

HMDA DATA AND THE SUPERVISION OF DEPOSITORY INSTITUTIONS

Although the HMDA data alone are not sufficient for assessing the fairness of the mortgage lending process or determining whether institutions have violated the fair lending laws, they are a valuable tool used extensively by the Federal Reserve and other federal agencies in the enforcement of fair lending laws. Because these agencies have access to lenders' files on loan applications and to information about applicable credit standards, they can overcome many of the limitations of the HMDA data regarding the assessment of applicant credit-worthiness and of property characteristics.

The Federal Reserve's program for enforcing fair lending, like that of the other agencies, focuses on examining for compliance with fair lending laws and more broadly on ensuring that credit is made available to low- and moderate-income areas, including areas with substantial minority populations. It involves an aggressive approach to investigating consumer complaints. It also extends to providing consumer and creditor education and gaining insight into the mortgage markets through research (see the box "Educational Material on Fair Lending").

Fair Lending Enforcement

The Federal Reserve System's program of consumer compliance examinations began in 1977. These examinations, carried out by specially trained examiners, emphasize identifying potential discrimination of the kind prohibited by the Equal Credit Opportunity and Fair Housing acts. On average, the Reserve Banks examine about two-thirds of all state member banks each year.

Procedures for fair lending enforcement focus primarily on comparing the treatment of members of a minority or protected class with other loan applicants. Starting with a review of loan policies and procedures and interviews with lending personnel, an examiner seeks to determine, among other things, the bank's credit standards. Then, using a sample of actual loan applicants, the examiner judges whether bank personnel apply those standards uniformly in evaluating loan applications from minorities, women, and others whom the fair lending laws were designed to protect.

The examiner attempts to look at the same information the bank used to make its credit decision, including credit history, income stability, and total debt burden. If it appears that credit standards were not followed or were not applied consistently, these findings are discussed with bank management and a more intensive investigation is undertaken. Violations discovered through any of these techniques will result in correction by the institution, notification of the applicant, and referral of the matter to the Department of Justice or HUD when appropriate.

Examiners also meet with members of the bank's community, including private citizens and local government officials who may have knowledge about the credit concerns of their community. Examiners thus can learn about public perceptions of credit availability for minorities and low- and moderate-income persons. These meetings may suggest additional scrutiny of particular areas and may provide insight into the way a bank is serving its local community.

The Federal Reserve's consumer complaint program is another component of the enforcement of the fair lending laws. Consumer complaints that allege loan discrimination are investigated and may prompt onsite review. Mortgage complaints may also be referred to the Department of Housing and Urban Development. As with the examinations program, considerable attention is given to ensuring personal contact with complainants and making the public aware of agency procedures.

A New Fair Lending Examination Tool

Because determining whether lenders are complying with fair lending laws is difficult for examiners, even with these procedures, the Federal Reserve has searched for better tools. In recent months, it has been testing a computerized statistical model for use in bank examinations and has shared it with the other financial regulators.

The new tool identifies potential problems through statistical techniques but relies on examiner judgment for determinations of whether discrimination has actually taken place. It automates the approach of onsite fair lending exams. First, the examiners use HMDA data to identify institutions that may require a more intensive review of their mortgage lending decisions. This initial analysis is done with a multivariate model of the institution's decisions to accept or reject loan applicants based on the limited information available from HMDA, including the applicant's income, the amount of the loan requested, the applicant's race and gender, and the disposition of the application.

When the results of this evaluation show measurable differences among racial or ethnic groups or between males and females that are not explained by differences in income or the amount of the loan requested, the system automatically selects a sample of applications to be reviewed more extensively. Examiners gather additional information from loan application files, including data on the value of the property being purchased and on the applicant's credit history, debts, and employment history. These data are analyzed in a more comprehensive multivariate statistical model to determine whether they appear to explain the differences in denial rates by race, ethnicity, or gender observed in the initial analysis. The new system then pairs a given applicant with one or several other applicants (of different races or ethnic groups, for instance) who have similar financial characteristics but who experienced different outcomes on their loan requests. After reviewing the loan files of the selected pairings to determine what, if any, important factors were omitted in the statistical analysis, examiners can discuss with bank management the applications for which the credit decisions are suspect. If the bank appears to have discriminated, various enforcement actions are possible, including asking the Department of Justice to investigate further.

Besides this "micro" use of the HMDA data, the Federal Reserve analyzes the data with a computerized system that is also accessible to the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. The system allows the data to be segmented by applicant and borrower characteristics, such as race, gender, and income, or by geographic boundaries. Examiners can thus quickly sort through vast quantities of data, focus on data for specific lending markets, and draw comparisons, for example, of an individual HMDA reporter's performance against that of all lenders in the area. Through these analyses, examiners can more readily determine whether a bank is serving all segments of its community.

The Federal Reserve has also developed the ability to map by computer the geographic location of a bank's loans and to integrate demographic information for the bank's local community. This type of analysis and presentation increases an examiner's ability to assess a bank's performance in helping to meet the credit needs of its community.

PURCHASES OF HOME LOANS: THE ROLE OF THE SECONDARY MORTGAGE MARKETS

Institutions in the secondary mortgage market buy and sell billions of dollars of mortgage loans or securities backed by mortgage loans each year. Some participants also guarantee payments on pass-through securities issued against pools of residential mortgage loans. The secondary mortgage market enables mortgage originators to raise new funds. The originators sell assets that are otherwise relatively illiquid and can then extend new loans or use the funds for other purposes.

Secondary market participants generally do not originate loans, but they do specify the underwriting guidelines that loans must meet to be eligible for purchase or securitization. These guidelines and related limitations on loan-size purchases vary among secondary market participants; thus, for the loans that these institutions purchase or securitize, the characteristics of the borrowers and neighborhoods in which their properties are located can be expected to differ.

The 1989 amendments to HMDA require lenders in the primary market to report home loans that they sell to secondary market purchasers if they originated or purchased the loans during the same year. The HMDA data are the only publicly available source of information on the characteristics of borrowers whose loans are purchased by secondary market institutions and of the neighborhoods in which these borrowers reside.

Government-sponsored Enterprises

Three government-sponsored enterprises (GSEs) dominate the secondary mortgage market--Fannie Mae, Freddie Mac, and the Government National Mortgage Association (Ginnie Mae). Fannie Mae and Freddie Mac are publicly chartered private entities; Ginnie Mae is a government agency. In 1992, the GSEs accounted for 74 percent of the roughly 5.4 million loans sold in the secondary market by lenders covered under HMDA (calculated from table 14). Other types of institutions-- such as pension funds, insurance companies, mortgage companies, and depository institutions--are active secondary market participants. They buy the same types of loans purchased by the GSEs and provide an outlet for so-called jumbo loans-- conventional loans that exceed in size the maximum single-family mortgage that may be purchased by Fannie Mae or Freddie Mac (in 1992, $202,300).(17) These non-GSE institutions sometimes purchase other loans such as mobile home loans, adjustable-rate mortgages, and loans that do not conform to GSE standards or that the GSEs are prohibited from purchasing.

Fannie Mae and Freddie Mac buy mainly conventional mortgage loans, convert them into securities, and sell the securities to investors such as pension and mutual funds. But they also hold some loans in portfolio.(18) Ginnie Mae does not purchase loans but guarantees the timely payment of principal and interest for privately issued securities backed by FHA, FmHA, and VA loans.

Basic underwriting guidelines (for instance, those applying to monthly debt-to-income and maximum loan-to-value ratios) differ among the secondary market participants. Fannie Mae and Freddie Mac follow essentially the same guidelines, which they themselves set for the conventional loans they purchase. For Ginnie Mae, the underwriting standards are established by HUD for FHA-insured loans and by the VA for VA-guaranteed loans.(19)

FHA and VA borrowers differ from conventional loan borrowers because HUD and the VA generally allow borrowers to have more debt relative to income and to make smaller downpayments than do conventional lenders. Also, HUD and the VA have restrictions on the maximum size of loans they will back and, on average, insure or guarantee a higher proportion of smaller loans relative to loans made by conventional lenders. In general, borrowers whose loans are securitized by Ginnie Mae have lower incomes, are more likely to be from a minority group, and are more likely to reside in a low- or moderate-income or minority neighborhood than are borrowers whose loans are sold to, or securitized by, Fannie Mae or Freddie Mac. For example, in 1992 about half the loans backed by Ginnie Mae were made to borrowers with incomes less than the median family income for their MSA, compared with about a quarter of the loans backed by Fannie Mae and Freddie Mac (table 14).

The underwriting standards used by purchasers of mortgages other than the GSEs vary considerably.(20) In general, these institutions purchase a larger proportion of mortgages extended to borrowers with incomes below the median for their MSAs than do Fannie Mae and Freddie Mac. The exceptions are life insurance companies, whose purchases include only 22 percent of mortgages from families with incomes below the median family income for their MSAs, and affiliates of institutions whose purchases include about the same share of mortgages to families with below-median incomes as do Fannie Mae and Freddie Mac.

Using HMDA Data To Measure GSE Achievements in Affordable Housing

One objective in the charters of Fannie Mae and Freddie Mac is to promote the availability of mortgage credit to low- and moderate-income families. HUD also sets annual goals for Fannie Mae and Freddie Mac, as required by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.(21) The goals specify that a certain proportion of their purchases be mortgages extended to low-and moderate-income families and to families residing in central cities. Furthermore, the two GSEs must purchase a set dollar amount of mortgages extended to families who reside in low-income areas or who have very low incomes.(22)

As provided by the GSE legislation, HUD set interim goals for 1993 and 1994; final goals will go into effect after 1994. In 1993, 30 percent of the dwelling units financed by mortgages purchased by Fannie Mae had to be occupied by low- or moderate-income families, and 28 percent of the units financed had to be secured by properties in central cities. For Freddie Mac, the respective goals were 28 percent and 26 percent. In 1994, both of these goals are set at 30 percent for the two companies.

In assessing Fannie Mae's and Freddie Mac's performance in meeting affordable housing goals, HUD will use information collected by these companies on the mortgages they purchase. This information will provide much greater detail than the HMDA data for the loans purchased; however, the HMDA data provide information on both the primary and the secondary mortgage markets in metropolitan areas and thus will allow comparisons that can be used to evaluate the difficulties and opportunities that the GSEs encounter in attaining these goals.

The HMDA data can be used to derive only rough estimates of how close the GSEs are to meeting the low-income and central city goals because of substantial deficiencies in the data when used for this purpose. Specifically, HMDA does not require lenders to record the specific number of dwelling units financed by a loan, and for some mortgages it does not provide reliable data on the income of the occupants of the property. For example, the HMDA data on mortgages extended for rental properties do not include information about the income of tenants. HUD will use estimates of the income of tenants or the rents they pay to calculate Fannie Mae's and Freddie Mac's performance. HMDA also excludes thousands of depository institutions that make mortgages but that have no offices within an MSA; in 1992, it still excluded independent mortgage companies that had less than $10 million in assets. Finally, with regard to mortgages originated in central cities, HMDA classifies all mortgages from a particular census tract as being within the central city, even if only a portion of the census tract is part of the central city. For purposes of the GSEs' central city goal, HUD counts only loans on properties that are in the central city portions of census tracts.

According to calculations using only HMDA data on owner-occupied properties, roughly 24 percent of the conventional home purchase and refinancing loans purchased by Fannie Mae and Freddie Mac were extended to borrowers with incomes smaller than the median family income for their MSA (table 15).(23) In the primary market, 27 percent of the conventional home purchase loans and refinancings for amounts less than $202,300 were extended to borrowers with such incomes.

Refinancings significantly influence the calculation of these 1992 market shares. Compared with borrowers in the home purchase loan market, many of whom are first-time homebuyers, a larger proportion of borrowers who refinance have high incomes. First-time homebuyers generally have lower incomes than homeowners who refinance an existing mortgage. Excluding refinancings, roughly 28 percent of Fannie Mae's and Freddie Mac's purchases were mortgages extended to owner-occupant homebuyers with below-median incomes. Borrowers with below-median incomes accounted for about 33 percent of the conventional home purchase loans made in the primary market.(24)

In 1992, because of the large volume of refinancings, Fannie Mae and Freddie Mac would have had difficulty in meeting a low-income goal of 30 percent solely by purchasing single-family mortgages. But even in "normal" years for refinancings, they may have difficulty meeting the goal by purchasing mostly single-family mortgages. The GSEs can limit the influence of refinancings either by restricting their purchases of such loans or by expanding the purchase of other loans.

In the future, to increase their share of loans extended to borrowers with below-median incomes, Fannie Mae and Freddie Mac could follow several strategies. Among these are acquiring a larger share of new conventional loans extended to these borrowers, purchasing seasoned loans to low-income borrowers from portfolio lenders, and expanding new mortgage programs with liberalized underwriting guidelines to compete with government-backed and with depositories' portfolio loan programs. They could also focus more on loans that finance rental properties. Relatively more loans for rental properties are in lower-income neighborhoods, where there are more renters (see table A.1 and table 10). For 1992, roughly 4 percentage points would have been added to Fannie Mae's and Freddie Mac's low-income ratios had loans for rental properties been included in the calculation.(25) If, however, the GSEs pursue more extensive involvement in rental properties to meet their goals, they may be undertaking greater risks because this area of real estate lending is prone to higher, and more difficult to predict, levels of credit losses compared with mortgages secured by single-family, owner-occupied properties.

Unlike the low-income goals, the central city goals appear to be met by Fannie Mae and Freddie Mac, according to the HMDA data. In 1992, Fannie Mae's proportion of central city purchases of conventional home purchase loans and refinancings was about 34 percent and Freddie Mac's proportion was about 35 percent--both approximating the primary market's proportion of about 35 percent (table 15).

Refinancings influence the overall proportion of central city purchases somewhat because refinancings are disproportionately from borrowers in noncentral city locations. Excluding refinancings, Fannie Mac's share would have been about 36 percent and Freddie Mac's about 37 percent, shares similar to those in the primary market.

Although Fannie Mac and Freddie Mac appear to easily meet their central city goals, other factors suggest that these estimates may be too high. As mentioned earlier, the HMDA data overstate the share of all mortgages originated in central cities. HMDA classifies all loans originated in a census tract that is partially in a central city as a central city loan. If all of these loans were instead classified as noncentral city loans, the ratios would drop 6-7 percentage points. Of course, the actual decline would not be this extreme because some of the loans from these "split" census tracts are in the central cities and some are not.

HMDA's coverage of loans made in nonmetropolitan areas is limited, even though some institutions located in metropolitan areas make and report nonmetropolitan loans, because it excludes most institutions located in rural areas. Roughly 1420 percent of all mortgage originations are from rural areas, suggesting that including these loans in the central city calculations would lower the share of central city loans 4-6 percentage points.(26) Also, small mortgage companies that are not required to report under HMDA may be more heavily concentrated in suburban or semirural areas.(27) The effect of omitting these companies' data from HMDA is difficult to estimate, but including these purchases would probably lower the estimates of the proportion of central city loans purchased by Fanie Mae and Freddie Mac.

For the reasons cited earlier, the HMDA data are not adequate when used for measuring Fannie Mae's and Freddie Mac's performance in meeting their goals. However, the comparison of their performance relative to that of other secondary market institutions, as measured by the HMDA data, may be informative because the limitations highlighted above influence the calculations for all institutions. The HMDA data suggest that secondary market institutions other than Fannie Mae and Freddie Mac generally have a somewhat higher proportion of loans extended to lower-income families and to families living in the central cities (table 15). This relationship is most evident in the home purchase loan market. Only life insurance companies seem to finance a lower proportion of loans extended to lower-income families, although they purchase a higher proportion of loans from the central cities.

APPENDIX: CHARACTERISTICS OF DIFFERENT GROUPS OF NEIGHBORHOODS

In 1992, lenders were required for the first time, when identifying the location of the properties involved in the loan or loan application, to use the 1990 census tract boundaries in place of the 1980 tract boundaries. As a consequence, the loan and application data may be matched with relatively up-to-date census information on neighborhood characteristics.(28) The switch to the 1990 census boundaries makes it difficult, however, to compare the 1992 HMDA data with the lending information reported for preceding years.

Neighborhoods with Different Incomes

A comparison of neighborhoods grouped by their median family incomes reveals differences in population, housing, and employment characteristics. To demonstrate these relationships, census tracts in MSAs have been divided into three broad income categories--low or moderate, middle, and upper income based on the relationship between the median family income of a census tract and the median family income of the MSA in which it is located. (29)

Nationwide, the low- or moderate-income neighborhoods have median family incomes that are, on average, only 58.2 percent of the median family income for their respective MSA (table A.1). Although these neighborhoods exhibit some diversity in the incomes of their residents, on average they have a high concentration of relatively poor families and have relatively few families at the highest income levels. Overall, 56 percent of the families residing in low- or moderate-income neighborhoods had 1989 incomes below $25,000, and nearly 35 percent had 1989 incomes below $15,000. These low levels of income are reflected both in elevated poverty rates and in higher unemployment--28 percent of the residents of these neighborhoods had incomes that placed them below the poverty level, and nationwide their average unemployment rate was more than three times the rate for residents of upper-income neighborhoods.

The differences in the income and employment circumstances of households across groups of neighborhoods partly account for the variation in owner-occupancy rates. In low- or moderate-income neighborhoods, 53 percent of the housing units in 1990 were rentals, a share nearly two and one-half times that in upper-income neighborhoods. This difference is reflected in the composition of the housing stock: Whereas 69 percent of the housing units in upper-income neighborhoods were in structures housing one to four families, only 36 percent of the units in low- or moderate-income neighborhoods were in such structures. Low- or moderate-income neighborhoods, on average, had not only low owner-occupancy rates but also high concentrations of residential properties with relatively low market values. For example, nearly 35 percent of the owner-occupied homes in low- or moderate-income neighborhoods in 1990 were valued at less than $40,000, compared with only 2 percent of the owner-occupied homes in upper-income neighborhoods. (30)

Vacancy rates, the median age of housing units, and the proportion of boarded-up units provide insight into the condition of residential properties. Vacancy rates in low- or moderate-income neighborhoods were, on average, nearly double those in upper-income neighborhoods. The median age of housing units also was substantially higher than in upper-income neighborhoods. Finally, the proportion of housing units that were boarded up (a sign of deterioration) was greater than that in either moderate- or upper-income neighborhoods.

Besides the income, employment, housing, and property condition characteristics identified thus far, population characteristics differ across neighborhoods grouped by median family income. The residents of low- or moderate-income neighborhoods in 1990 were, on average, more than 50 percent black or Hispanic. These minority groups together accounted for only 9 percent of the population in upper-income neighborhoods. Asians, in contrast, were relatively equally distributed across neighborhoods, accounting for approximately 3--4 percent of the residents of both low- or moderate- and upper-income neighborhoods.

Neighborhoods with Different Racial or Ethnic Compositions

As with neighborhood income, comparisons among neighborhoods grouped by minority population reveal differences in socioeconomic and demographic status (table A.2). The residents of predominantly minority neighborhoods (defined here as census tracts in which the minority population exceeds half of the total population) typically have lower relative incomes than the residents of other neighborhoods. On average, roughly one-third of the families in predominantly minority neighborhoods had 1989 incomes below $15,000, and 28 percent of the residents had incomes below the poverty level. In contrast, about one-tenth of the families in predominantly white neighborhoods had incomes below $15,000, and only 7 percent of the residents had incomes below the poverty level. This pattern is reversed at the opposite end of the income scale: About 17 percent of the families in predominantly minority neighborhoods had incomes above $50,000, compared with 38 percent of the families in predominantly white neighborhoods.

Neighborhoods with large proportions of minority residents are also characterized by high unemployment rates. At the time of the 1990 census, the average unemployment rate of residents of predominantly minority neighborhoods was 14 percent compared with 5 percent for residents of predominantly white neighborhoods. Predominantly minority neighborhoods typically have lower owner-occupancy rates, higher vacancy rates, more boarded-up properties, older homes, and a higher proportion of lower-valued, owner-occupied homes. These characteristics are most evident in minority neighborhoods with large proportions of black residents.

Central City Neighborhoods Compared with Other Neighborhoods

The 1990 Census provides information that can be used to describe the population, housing, and employment characteristics of residents of MSAs categorized by whether they reside in neighborhoods in the central city or in the noncentral city portions. In turn, the 1992 HMDA data provide information on the characteristics of the borrowers and types of loans extended to households in central and in noncentral city locations.

The reader is cautioned that population and economic characteristics often vary greatly within the neighborhoods of any particular central city or noncentral city location. Moreover, central cities differ in characteristics from each other, depending, for instance, on the region of the country.

Central and noncentral city areas are nearly identical in total numbers of housing units. As of 1990, central cities had 38.1 million housing units, and noncentral city neighborhoods had 38.7 million units (table A.3). Nonetheless, census information reveals significant differences, on average, in the characteristics of central city and noncentral city populations. The residents of central city areas had median family incomes that averaged 91 percent of the median family incomes of the MSAs in which they are located. The residents of neighborhoods in noncentral city areas, in contrast, had significantly higher incomes on average. Both poverty and unemployment rates reflect these differences: On average, the poverty rate in central city areas was 18.7 percent in 1990, and the unemployment rate was 8.9 percent; in contrast, for noncentral city areas, these rates were 8.1 percent and 5.3 percent.

The housing characteristics of central city and noncentral city areas also reflect the income and employment circumstances of households. In central city areas, on average, 43.9 percent of the units in 1990 were rentals, a rate nearly 70 percent higher than that in noncentral city areas. Central city neighborhoods also typically had higher vacancy rates, older homes, and greater proportions of boarded-up units.

Finally, central city and noncentral city areas are substantially different in their racial or ethnic composition. In 1992, blacks and Hispanics accounted for 32.9 percent of central city residents but only 14 percent of noncentral city residents.

[TABULAR DATA OMITTED]

(1.) The Financial Institutions Reform, Recovery and Enforcement Act of 1989 contains the 1989 amendments to HMDA; the Federal Deposit Insurance Corporation Improvement Act of 1991 contains the 1991 amendments.

(2.) See Glenn B. Canner and Dolores S. Smith, "Home Mortgage Disclosure Act: Expanded Data on Residential Lending," Federal Reserve Bulletin, vol. 77 (November 1991), pp. 859-81; and Glenn B. Canner and Dolores S. Smith, "Expanded HMDA Data on Residential Lending: One Year Later," Federal Reserve Bulletin, vol. 78 (November 1992), pp. 801-24.

(3.) The commercial bank total includes some savings banks whose primary federal regulator is the Federal Deposit Insurance Corporation, and the savings association total comprises only institutions regulated by the Office of Thrift Supervision.

(4.) For 1992 and previous years, only mortgage companies with $10 million or more in assets were required to report under the HMDA. Since 1993, mortgage companies that make 100 or more home purchase loans or refinancings of home purchase loans are required to report, regardless of asset size.

(5.) With a no-fee loan, the borrower incurs no out-of-pocket expenses for either closing costs or discount points on the loan. Such loans are often written with a higher interest rate to compensate the lender, and closing costs are frequently added to the outstanding mortgage balance.

(6.) In 1992, approximately 49 percent of those who used section 203Co) FHA loans (the principal type of FHA single-family loan program) were first-time homebuyers. The proportion was even higher in 1991, when 57 percent of the borrowers were first-time homebuyers. See U.S. Department of Housing and Urban Development, Characteristics of FHA Single-Family Mortgages: Selected Sections of the National Housing Act, 1991 and 1992.

(7.) Board of Governors of the Federal Reserve System, Survey of Consumer Finances (Board of Governors, various years).

(8.) The approval rate is the sum of the proportion of loans originated from the pool of applications and the proportion of loans approved but not accepted by the applicant. Applicants who do not accept an approved loan may have decided not to complete the transaction or may have applied for and accepted a loan from another lender.

(9.) Under HMDA, lenders may report the reasons for credit denials: Lenders most frequently cited applicants' credit history problems and excessive debt levels relative to income.

(10.) Denial rates for refinancings dropped significantly, from 15.9 percent to 12.4 percent (data not shown in tables).

(11.) Some programs established by lenders also target households with few financial assets but keep the monthly payment obligations within the borrower' s reach by waiving the requirement that private mortgage insurance be obtained for these low downpayment loans.

(12.) Other changes in the underwriting guidelines pertain to the treatment of nontaxable income and income from seasonal parttime or second jobs, income continuity and job stability, debt-to-income ratios, the appraiser's neighborhood and home improvement analyses, and the condition of the property.

(13.) For both census and HMDA dam, if any portion of a census tract falls within a central city boundary, the entire census tract is considered to be located in a central city.

(14.) Board of Governors of the Federal Reserve System, "Report to the Congress on Community Development Lending by Depository Institutions" (Board of Governors, 1993).

(15.) For more detail on the distributions discussed in this section, see the "Report to the Congress on Community Development Lending."

(16.) To calculate the median value of home loans for a category of neighborhoods, a median value was determined for each census tract, and then the median values for census tracts in a group were averaged. For home purchase loans in low- and moderate-income neighborhoods, the median value was $60,100, and for high-income neighborhoods it was $115, 200. Because these numbers are similar to the median values for all loans, dropping home improvement loans and refinancings does not significantly affect the median loan amount in a census tract.

(17.) The loan limit varies by the number of units in the property and by geographic location. In 1992 the maximum loan limits for single-family mortgages on properties with one to four units ranged from $202,300 to $388,800 except in Alaska, Guam, and Hawaii, where these limits were 50 percent higher.

(18.) Their annual reports for calendar year 1992 indicate that Fannie Mae's mortgage portfolio equaled 26 percent of its outstanding mortgage securities and mortgage holdings whereas Freddie Mac's portfolio equaled 8 percent. However, Freddie Mac is currently expanding its portfolio at a faster rate than Fannie Mae.

(19.) Ginnie Mae also securitizes loans backed by the FmHA. Because it is relatively small and few lenders covered by HMDA report such loans, the FmHA program is not discussed here.

(20.) The underwriting standards of these institutions are heavily influenced by the credit-rating agencies that rate their securities. The credit-rating agencies determine how much credit enhancement is required to earn an investment-grade rating; the level of the required credit enhancement directly influences the cost to the originator.

(21.) The goals are described in detail in Department of Housing and Urban Development, Office of the Secretary, "Interim Housing Goals for the Federal Home Loan Mortgage Corporation" and "Interim Housing Goals for the Federal National Mortgage Association" (September 16, 1993).

(22.) The last goal is referred to as the special affordable housing goal. The performance of the GSEs in meeting the special affordable housing goal cannot be evaluated because the HMDA data do not include many of the mortgages purchased by Fannie Mae and Freddie Mac and because the special affordable housing goals are stated in dollar amounts.

(23.) These calculations excluded loans purchased by lenders in the primary market, government-backed loans (which do not count toward the goals), loans above the conforming, single-family loan limits, loans to nonoccupant owners, home improvement loans (which may not count toward the goals), conventional loans below $5,000 (such loans are likely to be home improvement loans, second mortgages, or home equity loans), and loans for which the ratio of the loan amount to the borrower's income exceeded four, In addition, HMDA data does not distinguish between first and second homes; HUD considers only first homes in calculating the affordable housing goals. Including the second home mortgages in these calculations may slightly understate the proportions of low-income housing financed.

(24.) The home purchase loan market also includes mobile home loans. Lower-income families are more likely to seek such loans, suggesting one explanation for the share of low-income loans purchased by the GSEs being less than the share of such loans in the primary home purchase loan market. However, the importance of the mobile home loan market is difficult to determine. Fannie Mae and Freddie Mac can purchase only mobile home loans that are secured by real property as determined under state law.

(25.) We estimated the number of rental units by taking the number of loans secured by a rental property and multiplying it by the number of units financed per loan. We used both two and three units financed per loan secured by nonowner-occupied one- to four-family properties; and for multifamily properties, we calculated the number of units by assuming that each unit required $50,000 of financing and that HMDA covers only one-half of Fannie Mae's and Freddie Mac's multifamily units. We then estimated the number of low-income borrowers by assuming that the number equaled the proportion of loans secured by rental properties in low- or moderate-income census tracts plus the proportion secured in middle-income census tracts.

(26.) The estimated range of the proportion of rural mortgage originations is calculated from data in U.S. Department of Commerce, Economics and Statistics Administration, Bureau of the Census and U.S. Department of Housing and Urban Development, Office of Policy Development and Research, American Housing Survey in the United States (Government Printing Office, biennually). The lower bound reflects the distribution of occupied housing units across metropolitan and rural areas, whereas the upper bound reflects the distribution of mortgage originations of all types in 1990 and part of 1991. An additional source of information suggests that the share of conventional home purchase loan originations in rural areas is roughly 14 percent. See Federal Housing Finance Board, "Effect of Federal Home Loan Bank System District Banks on the Housing Finance System in Rural Areas" (FHFB, April 23, 1993).

(27.) As mentioned earlier, institutions with less than $10 million in assets were not required to report in 1992 or in earlier years. Beginning in 1993, any nondepository institution that originated more than 100 home purchase loans was required to report, and this requirement may substantially increase the number of mortgage companies reporting HMDA data.

(28.) The 1990 U.S. Census of Population and Housing reflects circumstances at the time the survey was conducted in the spring of 1990, except for income information, which is based on 1989 year-end dam, This section draws on material in the "Report to the Congress on Community Development Lending."

(29.) Census tracts were classified in the following manner: Low-or moderate-income census tracts are those in which median family income is less than 80 percent of the median family income for the MSA in which the tract is located; middle-income census tracts are those in which median family income is 80 to 120 percent of the MSA median family income; and upper-income census tracts are those in which median family income exceeds 120 percent of the MSA median. Census tracts in each small county (total population of 30,000 or less) are aggregated to create a small county total to be consistent with the way HMDA data are reported. In all, eighty-six small counties are included in the analysis shown in tables 10, 11, and 12.

(30.) Median monthly rents also reflect differences in the value of residential properties across neighborhoods. The median rent in low- or moderate-income neighborhoods in 1990 was $397, whereas the median rent in high-income neighborhoods was $643.

Denial Rates for Home Loans, by Racial or Ethnic Characteristics of Applicants

The 1992 HMDA data show that rates of loan application denial vary by racial and ethnic characteristics. For example, for conventional home purchase loans, about 36 percent of black applicants, 27 percent of Hispanic applicants, 16 percent of white applicants, and 15 percent of Asian applicants were denied credit. As discussed in detail in the text, many factors may account for these differences.

Proportion of home loan applications denied, by purpose of loan and characteristics of applicant, 1992.

[TABULAR DATA OMITTED]

Public Access to HMDA Data

To make public access to HMDA data easier, the Federal Financial Institutions Examination Council (FFIEC) makes the data available for purchase in several media. Facsimiles of disclosure reports for the individual institutions and the aggregate reports for each metropolitan statistical area (MSA) are available in hard copy and on microfiche. The HMDA Loan/Application Register (HMDA-LAR) records and selected census data for each census tract in each MSA are available on PC diskette, and those for the entire nation are available on computer tape. In the near future, disclosure statements and HMDA-LAR records will be available on CD-ROM. The sociodemographic data used to prepare the HMDA disclosure reports include data from the 1980 and the 1990 decennial Census of Population and Housing and annual estimates of the median four-person family income for each MSA from the Department of Housing and Urban Development; these data can also be obtained from the FFIEC.

The FFIEC also makes available a series of reports drawn from the HMDA data analysis system that has been developed by the regulatory agencies to enhance their fair lending enforcement and Community Reinvestment Act assessment efforts. These reports provide information about the lending activity of individual institutions in forms different from the standard tables used for the disclosure statements. For instance, one report provides information about the number and dollar amount of loan applications and their disposition by census tract; it also displays a variety of socioeconomic data for each census tract.

For information about the availability of data or to request data from the FFIEC, contact the HMDA Operations Unit, Mail Stop 502, Board of Governors of the Federal Reserve System, Washington DC 20551. A copy of the HMDA data order form may be obtained by calling the HMDA Assistance Line (202) 452-2016.

How HMDA Data Are Collected and Distributed

Under the provisions of the Federal Reserve Board's Regulation C (Home Mortgage Disclosure), each institution covered by HMDA completes and submits a HMDA Loan/Application Register (HMDA-LAR). The HMDA-LAR is a report form used to record data for each loan application acted on and for each loan purchased. It includes information on the race or national origin, gender, and annual income of the applicants or borrowers; the size of the loan; the geographic location of the property; and the identity of the secondary market purchaser if the loan was sold. Lenders send this report form to their respective federal supervisory agency, which then forwards the data to the Board for processing. (institutions supervised by the National Credit Union Administration, the Comptroller of the Currency, or the Federal Deposit Insurance Corporation submit data -- beginning with HMDA data for 1993--directly to the Federal Reserve Board.) The Board, acting on behalf of the Federal Financial Institutions Examination Council (FFIEC) and the Department of Housing and Urban Development (HUD) produces, for each covered lender, a HMDA disclosure statement that includes a report about the lender's activities for each metropolitan statistical area (MSA) in which the lender has an office. For 1992, disclosure statements consisted of nearly 28,782 reports, an increase from the 25,934 prepared for 1991 (table 1). The Board also produces aggregate reports describing overall lending activity by covered institutions in each MSA.

The public can obtain a copy of an individual lender's disclosure statement from a central data depository (typically a library or an office of a local government agency) located in the MSA where the lender has offices or from the lender itself. The central data depositories also make the aggregate MSA reports available to the public.

Educational Material on Fair Lending

As part of its consumer education program, the Board distributes a brochure published by the FFIEC entitled "Home Mortgage Lending and Equal Treatment." This brochure identifies lending standards and practices that may produce unintended discriminatory effects, and it cautions lenders about their use. It focuses on race and includes examples of subtle forms of discrimination, such as unduly conservative appraisal practices in changing neighborhoods; property standards like size and age that may exclude homes in older neighborhoods; and unrealistically high minimum-loan amounts. The Board has published a pamphlet entitled "Home Mortgages: Understanding the Process and Your Right to Fair Lending." This pamphlet informs consumers about the mortgage application process and their rights under fair lending and consumer protection laws.

The Federal Reserve Bank of Boston has published a booklet entitled Closing the Gap: A Guide to Equal Opportunity Lending. It addresses lending discrimination and challenges lenders to reconsider every aspect of their lending operations--from the hiring of loan officers to the treatment and evaluation of applicants--to ensure that loan decisions are not made on the basis of race or ethnicity.

Through its Community Affairs program, the Federal Reserve provides outreach services and educational and technical assistance to help financial institutions and the public understand and address community development and reinvestment issues. Community Affairs officials at the Reserve Banks respond to requests for information and assistance on the CRA, fair lending, and community development. Efforts extend to working with banking institutions and associations, governmental entities, businesses, and community groups to develop programs that promote community development. Overall, efforts of the Reserve Banks in Community Affairs involve about a hundred programs a year with thousands of participants as a way of encouraging economic development and ensuring fair lending.

To request copies of these publications, please contact the following: for "Home Mortgage Lending and Equal Treatment," the Division of Consumer and Community Affairs, Mail Stop 198, Board of Governors of the Federal Reserve System, Washington, DC 20551; for "Home Mortgages: Understanding the Process and Your Right to Fair Lending," Publications Services, Mall Stop 127, Board of Governors; for Closing the Gap: A Guide to Equal Opportunity Lending, Publications, Federal Reserve Bank of Boston, P.O. Box 2076, Boston, MA 02106-2076.

Glenn B. Canner and Wayne Passmore, of the Board's Division of Research and Statistics, and Dolores S. Smith, of the Division of Consumer and Community Affairs, prepared this article. Kim Koenig, of the Division of Research and Statistics, and Cyndi Johnson, Jeffrey Phipps, and Marilyn Rhyne, of the Division of Information Resources Management, provided assistance.
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Title Annotation:includes related articles on access to the data, how data is collected and educational material on fair lending; Home Mortgage Disclosure Act
Author:Smith, Dolores S.
Publication:Federal Reserve Bulletin
Date:Feb 1, 1994
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Previous Article:Minutes of the Federal Open Market Committee Meeting of September 21, 1993.
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