Expanded HMDA data on residential lending: one year later - Home Mortgage Disclosure Act - includes related article on lender education

Federal Reserve Bulletin, Nov, 1992 by Glenn B. Canner

Nationally, the proportion of applications for conventional home loans denied by lenders was somewhat higher for 1991 than for 1990 (18.9 percent compared with 16.1 percent). Several factors may account for this change. First, in light of increasing delinquencies on mortgage loans associated with the recession and weak housing markets in many areas of the country, lenders may have tightened their standards for loan underwriting or applied standards more conservatively in 1991.(8) Some evidence for such tightening can be found from the "Senior Loan Officer Opinion Survey on Banks' Lending Practices" conducted by the Federal Reserve. These quarterly surveys indicate that much larger proportions of mortgage lenders were tightening credit standards in late 1990 through the middle of 1991 than were easing them. Most frequently these lenders reported requiring a higher percentage of down payment; the next most frequently used methods for tightening that they mentioned were higher requirements for income and more stringent requirements for mortgage insurance.

Second, the higher loan denial rate shown for 1991 may reflect an increased tendency of loan originators to sell mortgages into the secondary market. To do so, lenders must adhere to the underwriting guidelines of the various secondary market institutions and thus frequently follow these guidelines in assessing loan applicants. Lenders may also approve nonconforming loans for their own portfolios, however. Sometimes they originate these loans under special lending programs that apply highly flexible underwriting standards; at other times, the lender's familiarity with the prospective borrower allows an extension of credit when a strict application of the underwriting guidelines might suggest otherwise. Some evidence that lenders are selling more loans to the secondary market comes from the HMDA data. In 1990, lenders covered by HMDA reported selling 46 percent of the conventional home purchase loans they originated; in 1991, they reported selling 51 percent. The proportion of loans for refinancing that were sold to the secondary market increased even more significantly, from 39 percent in 1990 to 51 percent in 1991.

Third, the increase in the loan denial rate from 1990 to 1991 may have resulted from a deterioration in the financial circumstances of loan applicants. With the recession, a larger portion of applicants in 1991 than in 1990 may have had less stable incomes or weaker credit histories. Also, weak housing markets may have led to more instances in which property appraisals that did not support contract sales prices resulted in loan denials.

Comparisons between the 1990 and the 1991 HMDA data suggest that, nationwide, the pool of applicants for conventional home loans in 1991 may have been somewhat less qualified (based on differences in income, at least) than the pool in 1990. Whereas high-income applicants accounted for 61.2 percent of all applicants for conventional home loans in 1990, they accounted for 53.6 percent in 1991. (For purposes of comparison, applicants in both 1990 and 1991 were categorized using the median family income figures for each MSA as estimated by HUD.) This change results from both a decline in the number of high-income applicants and an increase in the number of low-income applicants. The larger number of low-income applicants may be due to enhanced marketing and outreach efforts by lending institutions and the implementation of innovative lending programs by the secondary market (see the discussion on the secondary market below). The growth at the lower-income end of the market is consistent with data from other sources that indicate a greater proportion of first-time homebuyers in 1991 than in 1990. Such homebuyers likely have lower incomes than current owners buying new homes. Finally, the growth at the lower-income end of the conventional market may reflect a shift in preferences among some home purchasers away from FHA-insured loans toward conventional loans. In July 1991, the FHA loan program was modified in several ways that made these loans relatively less desirable to prospective mortgage borrowers (for instance, only 57 percent of closing costs instead of 100 percent could be financed).