Shifting Market Chronicled in HMDA Data

Describing the emergence of brokers as a “notable development” in recent years, researchers said that brokers are often the only direct contact a borrower has until closing, according to the 2006 Home Mortgage Disclosure Act data report released by the Federal Reserve Wednesday.

HMDA data was collected on 27.5 million mostly single-family applications from almost 9,000 institutions, according to the report.. Commercial banks accounted for more than 40 percent, credit unions and mortgage companies comprised 23 percent each and savings institutions, 10 percent.

Last year’s data included the loan disposition, income, sex, race or ethnicity, annual percentage rates deemed as higher-cost loans, whether the property was a manufactured home or whether the loan was subject to the protections of the Home Ownership and Equity Protection Act of 1994.

About 58 percent of 2006 mortgage originations were initiated by brokers, down from 63 percent in 2005, the report said.

“The central role played by brokers in the lending process has gained increased attention in the past year or so as delinquencies, defaults and foreclosures have increased, particularly in the subprime portion of the mortgage market,” the report stated. “A number of facets of their role have drawn increased scrutiny, including whether they provide consumers sufficient information to make sound choices in selecting a mortgage product and whether fraud has sometimes been involved in the broker’s characterization of the borrower’s creditworthiness or in the appraisal of the home being purchased.”

The report also noted that brokers and lenders originating the loan do not usually bear the credit risk of the loan but share in profits from originating the loan.

“This means that the broker or other originating party may not have the incentive to fully pass along to the loan purchasers all relevant information needed to monitor adequately the accuracy and completeness of the information used to underwrite and price the loan,” researchers said.

The denial rate for all home loans in 2006 was 29 percent, compared with 27 percent in 2005, according to the report.

Higher denial rates were due in part to factors not included in HMDA data, the fed explained. Those factors include credit histories and scores, loan-to-value and debt-to-income ratios, and varying loan programs.

In the area of high-cost loans, the 2006 data found that 30 percent of home purchase loans to African-Americans and 24 percent of purchase loans to Hispanics were high-cost, while the number for whites was 18 %.

“Once again, the HMDA data shows that racial differences in lending are getting worse, and they’re fueling increased delinquencies,” National Community Reinvestment Coalition President John Taylor said in a statement. “The Federal Government needs to make sure that the mortgage industry is properly regulated.”

The rate of serious delinquency can be linked to these higher-priced loans, according to the report.

“Delinquency and foreclosure rates have risen substantially, particularly in the higher-priced segment of the market, and lax underwriting is widely believed to have contributed to the rise in defaults,” the report said.

Only 5 percent of counties in the U.S. have a reported serious delinquency rate greater than 3 percent and more than one-third have a serious rate below 1 percent. Those hardest hit were in the Midwest, including Ohio, Indiana, Michigan, and western Pennsylvania. Other hard hit areas include sections of the south Atlantic region, the Gulf Coast area and portions of Texas, Oklahoma and Colorado, the report stated.

Researchers noted that economic and other composite factors were not conclusive predictors for loan performance but that the incidence of higher-priced lending can be a better indicator of delinquency. They suggested that increased higher-priced lending in the form of adjustable-rate products arises from the effects of the flattening of the yield curve.

“All else being equal, an increase in the incidence of higher-priced lending of one percentage point implies an increase in the rate of serious mortgage delinquency of 0.03 percentage point.”