Residential lending to low-income and minority families: evidence from the 1992 HMDA data - Home Mortgage Disclosure Act - includes related articles on access to the data, how data is collected and educational material on fair lending

Federal Reserve Bulletin, Feb, 1994 by Glenn B. Canner, Wayne Passmore, Dolores S. Smith

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.