Risky lending: new HMDA features

1. Risky lending: new HMDA features Paula Lavigne The Des Moines Register NICAR 2007 - Cleveland

2. A January 2007 story showed how the “pendulum had swung” for minority borrowers. More and more minorities have been able to secure loans, but they’re more likely to accept higher interest rates. About 34 percent of home loans taken out by minorities in 2004 and 2005 were considered high risk, compared to 17 percent for whites in the Dallas-Fort Worth area. The discrepancy remains even when adjusted for similar levels of income.

3. Indications for high-risk loans. Lenders now required to collect race and ethnicity data. New race and ethnicity tabulations. Manufactured homes. Preapprovals Lien status (1st or 2nd mortgage) Thysen Smiley says she got a 10 percent adjustable-rate loan to refinance her Forest Hill home. A loan counselor later told her she should have qualified for a lower, fixed rate. Tom Fox/DMN Home Mortgage Disclosure Act: What’s new?

4. Higher-risk loans • SPREADCH: Field that shows the difference between the annual percentage rate on the loan and the rate on Treasury securities with comparable maturity periods. Reported only if the spread exceeds a percentage specified by the Federal Reserve Board. • SPREAD: If you get HMDA from NICAR, this field is a numeric conversion of SPREADCH including two decimal places. • The benchmarks are constantly changing and lenders calculate each loan against the factors in place at that point in time. • Rate spread calculator: www.ffiec.gov/ratespread/default.aspx

5. The rate spread would be reported as 4.5.

6. If the APR doesn’t meet the threshold, SPREADCH will read NA and SPREAD will read 0.

7. HOEPA • Loans subject to the Home Ownership and Equity Protection Act. These are the really, really risky loans that fall under extra regulation. • Their trigger is a combination of the rate spread and the points and fees. • 8 pct for first-lien, 10 pct for second-lien. • Points and fees that exceed 8 percent of the loan or a set dollar amount (that changes annually) • 1 = HOEPA loan • 2 = NOT a HOEPA loan • More info: www.ffiec.gov/hmda • HOPEA loans are rare.

8. Sample query: SPSS • Using Transform > Recode into Different Variables, created a new field called “Risk” to indicate when the SPREAD field was anything other than 0. (In my case, I used ‘2’ for a high-cost loan and ‘1’ for all other loans.) • An approved loan for a single-family, home-purchase, owner-occupied dwelling, under Select Cases If. (prop_type = '1') and (occupancy = '1') and (purpose = '1') and (action = '1') . • Run a Frequency on the Risk field.

9. New race rules and formats • Lenders are now required to gather race/ethnicity information from borrowers, including those they work with over the phone. • There are now two categories for ethnicity and 10 categories for race for the applicant and co-applicant combined. • Somewhat in line with changes made for the U.S. Census to allow people to choose more than one race.

10. One method: • Define minority loan as any loan in which either the applicant or coapplicant was something other than white, non-Hispanic. • (In SPSS) Use the compute variable or recode function for two columns, one for minority applicants and one for non-minority applicants. • Several loans will fit neither category because they are either loans sold in the secondary market or applications in which race/ethnicity was unavailable or not applicable (i.e. a business taking out a loan).

11. MINORITY LOANS (app_eth = '1') or (coapp_eth = '1') or (app_race1 = '1') or (app_race1 = '2') or (app_race1 = '3') or (app_race1 = '4') or (app_race2 = '1') or (app_race2 = '2') or (app_race2 = '3') or (app_race2 = '4') or (app_race3 = '1') or (app_race3 = '2') or (app_race3 = '3') or (app_race3 = '4') or (app_race4 = '1') or (app_race4 = '2') or (app_race4 = '3') or (app_race4 = '4') or (app_race5 = '1') or (app_race5 = '2') or (app_race5 = '3') or (app_race5 = '4') or (coap_race1 = '1') or (coap_race1 = '2') or (coap_race1 = '3') or (coap_race1 = '4') or (coap_race2 = '1') or (coap_race2 = '2') or (coap_race2 = '3') or (coap_race2 = '4') or (coap_race3 = '1') or (coap_race3 = '2') or (coap_race3 = '3') or (coap_race3 = '4') or (coap_race4 = '1') or (coap_race4 = '2') or (coap_race4 = '3') or (coap_race4 = '4') or (coap_race5 = '1') or (coap_race5 = '2') or (coap_race5 = '3') or (coap_race5 = '4')

12. Race/ethnicity/sex caveats • ‘Not applicable’ can mean the borrower is not a person (i.e. a business or partnership), or for loans purchased in secondary market where reporting is optional (an ‘action’ 6). • ‘No co-applicant’ means exactly that. However, that does not indicate a person’s marital status. Only the first co-applicant’s information is included. • ‘Information not provided by mail, Internet, or telephone.’ If a borrower – in person – refuses to provide that information, the lender can enter it based on a visual assumption.

13. Income: Creating categories • Using the RECODE function, create categories for LOWER, MIDDLE, and UPPER income brackets based on dollar ranges. • Use your region’s median household income or poverty level indicators from the U.S. census to determine your thresholds. • Be sure to filter out the NA or 0 income amounts when you run a calculation. Most will relate to loans purchased in the secondary market in which income information is optional. • Measure the percentage of high-risk loans broken down by minority status and income.

14. Subprime • Subprime lenders target borrowers with less-than-perfect credit. Though subprime lenders are not identified in the HMDA data. • Get the subprime lender list at www.huduser.org/datasets/manu.html . The agency and resp_id fields in the HMDA table of lenders (the ts.dbf file), and the main HMDA Loan Application Register file (lar.dbf), correspond to the agency and lender ID fields in the subprime lender list. • Subprime lenders make up a high percentage of the high-cost loans, though prime lenders have been grabbing more of this market. • MORE: If you have questions on the subprime lender list, contact Contact: Randall M. ScheesselePhone: (202) 708-0421Email: Randall_M._Scheessele@HUD.GOV

15. Other new fields or options. • Property type (prop_type) includes single-family homes, multifamily (apartments) and manufactured housing. • Action now includes two additional categories for (7) preapproval request denied, and (8) preapproval request approved but not accepted (optional). A preapproval that resulted in an origination would be coded as (1). • Lien status includes first-lien, second-lien, no lien, and not applicable (for secondary market sales).

16. Still waiting… • Reasons for denying a loan are still optional for most lenders. • No sale price or assessed value of the property. • No indication of credit score. • This loan-to-value ratio and lack of credit score information is why some critics will deride the usefulness of the HMDA data.

17. Other story ideas • The impact of high interest rates is hot right now. Investors are starting to suffer from the high default rates caused by lenient and risky lending. Federal regulators are looking more closely at the issue. • Look at lenders who granted large numbers of high-risk loans (don’t just look at subprime lenders), and look at the institutions that purchased many of those loans. See who might get hit the hardest. • See whether there’s a concentration of high-risk loans in your community. It might be a prelude to high foreclosure rates as well. • If you already have foreclosure data, measure the prevalence of foreclosures against high-risk loans by census tract to see if there is a correlation.

18. More resources • A great report from the Federal Reserve on the incidence of higher-priced loans: www.federalreserve.gov/pubs/bulletin/2006/hmda/bull06hmda.pdf • Talk to someone at your local Federal Reserve branch. Chances are, he/she has done a similar analysis. • HMDA regulations and guidelines on the Federal Financial Institutions Examination Council’s Web site: www.ffiec.gov/hmda/