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Pricing Data Raise Unfounded Concerns on Sub-Prime Loans
The misinterpretation of Federal Reserve Board data on mortgage originations could reduce homeownership opportunities for households that are being served by the sub-prime mortgage market, according to a recent report by Professor Michael Staten of the Credit Research Center at Georgetown University.
In his paper, “The New HMDA Pricing Data: What Can They Tell Us About Pricing Fairness,” Staten notes that the creation of a sub-prime mortgage market over the last 10 years for borrowers who wouldn’t be able to qualify for a conventional or government-subsidized loan because of a blemished credit history, insufficient assets for a downpayment, unstable income or job history, or a heavy amount of debt has helped boost homeownership rates among the nation’s minority households.
However, the higher pricing of subprime loans and the high market share of subprime lenders in low-income and minority neighborhoods have elevated concerns among consumer activist groups and regulators over abusive lending tactics and excessive pricing, Staten writes.
These allegations, Staten says, rely heavily on studies that inappropriately use data on mortgage loan originations required under the Home Mortgage Disclosure Act.
The data are good at indicating the geographic and racial and ethnic patterns of mortgage loan activity, which was their original purpose, “but do not contain sufficient detail to explain why some applications are accepted and others are rejected,” according to Staten.
From studying the HMDA data it is not possible to determine if the pricing of a mortgage is based on discrimination or on the actual risks involved, he says, because there is little information on the characteristics of the loan, such as its loan-to-value ratio; whether it is fixed-rate, adjustable-rate or a hybrid; or the term of the loan.
Although the HMDA data do include information on incomes, they do not provide information on the borrower’s total indebtedness, assets, credit score or specific delinquency history — all of which are significant in assessing the risk associated with the loan and how it is priced.
In remarks in March, Fed Chairman Alan Greenspan suggested how the data should be used: “The pricing data will assist us as a screening tool to facilitate self-monitoring and enforcement activities. If screening suggests that there might be a fairness issue, additional information will need to be collected from banks’ loan files or other sources.”
Staten writes that subprime mortgage originations have increased at an annual rate of 25% from 1994 to 2003, “helping to propel homeownership rates in the United States from 64% to nearly 69%, an increase of over 9 million households.”
Minority households accounted for more than half of that gain.
Last year, subprime loan originations totaled $530 billion, accounting for 19% of all home mortgage loan originations in the U.S.
In a speech last month at the American Bankers Association Regulatory Compliance Conference, the association’s director of grassroots and community outreach, said that, “Risk-based pricing and flexible loan contracts have created more access to credit, but limiting these programs would damage the very borrowers that fair-lending statues were intended to help.”
In his paper, Staten cites Federal Reserve Board Governor Susan Schmidt Bies on the danger of jumping to unsound conclusions based on HMDA data. Unwarranted accusations against a lender for discriminatory loan pricing, she wrote, “could reduce the willingness of that lender or another to remain in, or enter, certain higher-priced segments of the market. That discouragement, in turn, could potentially reduce competition in those segments and curtail availability of credit to higher-risk borrowers.”
For more information on this issue, e-mail Michael Carrier at NAHB, or call him at 800-368-5242 x8529.
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