Borrower Activity Insights from Home Mortgage Disclosure Act Data

November 2, 2015
By Kelly D. Edmiston, Senior Economist


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Data from reports generated by the 2014 Home Mortgage Disclosure Act (HMDA) and released in September 2015 show mortgage lending in 2014 declined almost 30 percent from 2013.

Mortgage lenders originated $1.242 trillion in loans for the purchase of single-family homes and to refinance existing loans, down 29.5 percent from $1.762 trillion in 2013.[1] The sharp drop resulted from a 53-percent decline in refinancing.

Conventional home-purchase originations increased 8.2 percent, from $511 billion to $554 billion. Federal Housing Administration (FHA), Farm Service Agency/Rural Housing Service (FSA/RHS) and Veterans Affairs (VA) purchase-loans increased modestly from $189 billion to $193 billion, or about 1.9 percent.[2]

Volatility in refinancing mostly arose from the sensitivity to mortgage rates. When mortgage rates decline, especially if the decline is sharp, refinance originations typically surge. In the fourth quarter of 2012, when the national average contract mortgage rate was at a low of 3.5 percent, refinance originations totaled $453 billion.[3] By the fourth quarter of 2013, the average contract mortgage rate had increased to 4.5 percent, and refinance originations declined more than 66 percent to $153 billion.

Mortgages originated for purchase generally are much less volatile. Survey research suggests borrowers are more sensitive to down-payment requirements and recent changes in household wealth than they are to mortgage interest rates.[4] Housing market conditions also drive the origination of purchase mortgages.

Mortgage originations to low- and moderate-income (LMI) borrowers (those with less than 80 percent of area median income) were $149 billion in 2014, compared to $215 billion in 2013, declining at about the same rate as total mortgage originations. As with total mortgages, the decline in LMI originations was entirely due to a sharp decline in refinancing, from $117 billion to $53 billion. LMI home-purchase originations increased 3.5 percent. The difference in origination volume between LMI households and higher-income households largely was due to loan size. LMI borrowers accounted for 21.8 percent of loans originated in 2014, but only 12 percent of dollar volume.

The composition of originations also varied significantly by income. While the refinance share by income was roughly the same in 2014, 32 percent of mortgage originations for LMI borrowers were backed by the government (such as FHA or VA), compared to about 16 percent for all borrowers.[5] The government-backed share of total originations increased from 11 percent in 2013, with the share of LMI borrowers securing government-backed loans increasing from 23 percent.

Mortgage loan applications in 2014 declined sharply from 2013, consistent with originations, and in particular, for refinancing. The application denial rate changed little. Loan denials are much more common for LMI borrowers. In 2014, about 25 percent of mortgage loan applications from LMI borrowers were denied (23.4 percent in 2013), compared to about 19 percent for all applications (14.5 percent in 2013). Loans are approved or denied for many reasons, including ratios of mortgage payment/income, total debt payments/income and credit standing. LMI applicants typically have lower credit scores than higher income applicants for reasons related to (but not limited to) having less stable income, difficulty managing bills and a lack of access to or limited history with traditional credit.

Mortgage origination activity is reported by a number of organizations throughout the year, but HMDA provides the authoritative tally of mortgage originations and reveals the distribution of lending across segments of society. This tally provides important insight into the functioning of mortgage and housing markets, providing a foundation for policy considerations, especially in the distribution of public investments. These investments can be essential for LMI communities. 

References

[1] Federal Financial Institutions Examination Council, Home Mortgage Disclosure Act, National Aggregate Reports, available here. Here “single-family” is used for one-family to four-family and manufactured home dwellings. Smaller lenders are exempt from HMDA reporting. Including those lenders, 2014 mortgage originations would likely total closer to $1.3 trillion (see “HMDA Data Reveal 2014 Origination Volume Stronger Than Previously Estimated, More Applications Denied,” Inside Mortgage Finance, vol. 2015, no. 36, Sept. 24, 2015).

[2] A full discussion of loan type is outside the scope of this report. Explanations of federal home loan programs, including requirements, is available here.

[3] These data are from the Mortgage Bankers Association (MBA) and are not directly comparable to originations reported to meet HMDA requirements. For 2014, MBA originations data significantly underestimated originations as reported in the September 2015 HMDA data release. Interest rate data are from the Federal Housing Finance Agency and exclude government-guaranteed loans such as FHA and VA.

[4] Andreas Fuster and Basit Zafar, “The Sensitivity of Housing Demand to Financing Conditions: Evidence from a Survey,” Federal Reserve Bank of New York, Staff Report No. 702, August 2015 (revised), available here.

[5] FHA, VA and RHS loans are largely targeted to LMI borrowers and have strict income limits.