PolicyMap, Federal Financial Institutions Examination Council (FFIEC): Home Mortgage Disclosure Act (HMDA) Summaries

Description:

The Home Mortgage Disclosure Act (HMDA), enacted by Congress in 1975, requires most mortgage lenders located in metropolitan areas to collect, report, and disseminate data about their housing-related lending activity. The public database of lending activity is called the Loan/ Application Register (LAR). PolicyMap aggregated data on home loans from the LAR into indicators useful to policymakers and descriptive of neighborhoods and housing markets into its Home Mortgage Data indicators.

PolicyMap’s Home Mortgage Data is restricted to loans for owner-occupied 1-4 unit homes. The indicators include data on all home loans, which includes both home purchase loans and home refinance loans, and indicators specific to either home purchase loans or refinance loans. PolicyMap aggregated data on the number of home loans that were originated and loan applications that were denied. When performing aggregations and calculations on the LAR data, medians were not calculated where the count of loan events of that type was less than five. Percentages were not calculated where the denominator was less than five. These places are identified on the map as having Insufficient Data.

High-Cost Loans

PolicyMap classifies loans as “high cost” if they had a reported rate spread. The rate spread on a loan is the difference between the Annual Percentage Rate (APR) of the loan and the estimated average prime offer rate (APOR). The APR of a loan is the amount that a lender charges the borrower each year expressed as a percentage of the loan amount. The APOR is a benchmark established by the FFIEC based on a national survey of home loan offer prices, published weekly at https://ffiec.cfpb.gov/tools/rate-spread. Rate spreads are only reported by financial institutions if the APR is more than 1.5 percentage points higher than the APOR for a first lien loan, or more than 3.5 percentage points higher for a second lien loan. A rate spread of 1.5 or more suggests that a loan is of notably higher price than a typical loan, indicating that it is to be classified as high cost.

PolicyMap previously denoted high-cost loans as “subprime,” but changed the terminology with the release of the 2008 data to reflect language used by the Federal Reserve. The “high-cost” designation is not to be confused with “HOEPA”. HOEPA loans are a subset of the high-cost loan category.

Prime Loans

Prime loans are defined as loans with no reported rate spread. PolicyMap assumes for the purpose of its calculations that a loan without a reported rate spread is of a “typical” APR and most likely prime.

HMDA’s 2009 rule change

In the fourth quarter of 2009, HMDA changed its rules for reporting rate spreads to more accurately capture the current high-cost lending activity. In order to accurately display the data according to the rule adjustments, PolicyMap divided the 2009 data into 2009Q1-2009Q3 and 2009Q4. Change calculations between previous years and 2009 to present should not be made due to the change in HMDA’s definition of “high cost.” In the 2009 data, due to the high incidence of error notations in the manufactured home loan data in 2009, medians are shown as “N/A” wherever error notations were present.

Before the rule change in the fourth quarter of 2009, the rate spread on a loan was calculated as the difference between the Annual Percentage Rate (APR) and the treasury security yields as of the date of the loan’s origination. The treasury security yield is the percentage of interest that the U.S. government pays out to those who invest in treasury bonds or other securities. Rate spreads were only reported by financial institutions if the APR was 3 or more percentage points higher than the treasury security yields for a first lien loan, or 5 or more percentage points higher for a second lien loan. A rate spread of 3 or more suggested that a loan was of notably higher price than a typical loan, indicating that it could be classified as high cost.

Multiple mortgage transactions

PolicyMap’s Home Mortgage Data includes information on multiple mortgage transactions, also termed “80-20 loans,” or “piggyback loans.” A multiple mortgage transaction is when a buyer obtains at least two loans in order to purchase a home. The second loan finances that part of the purchase price not being financed by the first loan. Multiple mortgage transactions have been used to avoid underwriting standards held by most lenders that require private mortgage insurance (PMI) when less than a 20% down payment is made by the buyer. Studies suggest that these transactions have a higher risk of default and foreclosure as the homebuyers have little or no equity at risk. HMDA data does not explicitly identify 80-20 or piggyback loans. PolicyMap created an algorithm for estimating transactions involving multiple loans to purchase a property. First- and second-position loans in the same census tract, from the same lender, and to applicants with the same race, ethnicity, gender, and income were flagged as multiple loans for the same property. These loans were then combined into one record and the loan amounts were summed, thus reflecting the total loan for the property transaction.

Government-Insured Loans

The federal government has several entities through which it insures or guarantees consumer home loans, including the Federal Housing Administration (FHA), Department of Veteran Affairs (VA), and the USDA’s Farm Service Agency (FSA). Although often referred to as government insurance, a government guarantee on a loan does not take the place of private mortgage insurance (PMI). Rather, the government guarantees the value of the property to the bank that originates the loans. In the case of default on the loan or foreclosure on the property, the government entity that guaranteed the loan repays the debt to the bank in full and takes over ownership of the property. The programs that the federal government uses to guarantee loans have varied target populations, but generally are committed to expanding the opportunities for home ownership to buyers who might not otherwise qualify for a loan with favorable terms. Government-guaranteed loans generally also require banks to commitment to negotiation with the homeowner in the event of loan default, beyond what is required of banks for non-government-insured home loans.

The Federal Housing Administration (FHA) is one entity through which the government guarantees consumer loans. There are several FHA programs with missions that include helping moderate income first-time homebuyers, buyers of properties that need significant rehabilitation, and the elderly. For more on FHA-insured lending, see https://www.hud.gov/buying/loans.

The Department of Veterans Affairs (VA) is another entity through which the government guarantees consumer loans. The VA home loan program helps veterans finance the purchase of homes with favorable loans terms and interest rates. For more on VA-insured lending, see https://www.benefits.va.gov/homeloans/.

In HMDA, loans guaranteed by the USDA Farm Service Agency (FSA) and those guaranteed by the USDA Rural Housing Service (RHS) are counted in the same category. FSA loans are intended for farmers who cannot qualify for conventional loans due to insufficient financial resources and farmers who have suffered financial setbacks due to natural disasters. RHS guarantees mostly apply to loans for essential community facilities in rural areas. For more on FSA-insured lending, see https://www.fsa.usda.gov/programs-and-services/farm-loan-programs/.

Loan to Income, or Leverage Ratios

PolicyMap used the reported applicant income from the LAR to calculate “leverage ratios,” or the ratio of the applicant’s income to the amount of the originated loan.

Census Places

Loan applications reported to HMDA do not contain Census Places identifiers. PolicyMap aggregated HMDA data to the Place level by creating a correspondence between Census tracts and Places. A tract was considered part of a Place if it was completely contained by the Place. In the event a tract was divided in two or more sections, the tract was considered to belong to the Place where the largest section of the tract was located.

Racial and ethnic categories

The LAR reports basic demographic information on the applicant and co-applicant including race and ethnicity. The FFIEC follows the conventions used by the Census Bureau, by considering Hispanic or Latino status as an ethnicity distinct from race. Additionally, the LAR classifies race according to five categories—American Indian or Alaska Native, Asian, Black or African American, Native Hawaiian or Pacific Islander, and White. PolicyMap has provided aggregations for the largest racial groups in the United States—White, Black, and Asian—regardless of ethnicity. Because of lower coverage, PolicyMap did not tabulate indicators for American Indian or Alaska Native, or Native Hawaiian or Pacific Islander racial categories. PolicyMap also provides indicators on the Hispanic or Latino ethnicity, and on race and ethnicity together. For the combined race and ethnicity indicators, PolicyMap grouped Asian, American Indian or Alaska Native, and Native Hawaiian or Pacific Islander, and those who either did not provide information or provided inapplicable information together under the category of “another race.” The loan applications were categorized according to the ethnicity and first reported race of the primary applicant.

FSA Loans

In HMDA, loans guaranteed by the USDA Farm Service Agency (FSA) and those guaranteed by the USDA Rural Housing Service (RHS) are counted in the same category. FSA loans are intended for farmers who cannot qualify for conventional loans due to insufficient financial resources and farmers who have suffered financial setbacks due to natural disasters. RHS guarantees mostly apply to loans for essential community facilities in rural areas. For more on FSA-insured lending, see http://www.fsa.usda.gov/FSA/webapp?area=home&subject=fmlp&topic=landing.