Federal Reserve Data: Minorities More Likely to Get High-Cost Mortgages
WASHINGTON (MarketWatch) -- Preliminary data that mortgage lenders are required to file with the Federal Reserve show that blacks and Hispanics are more likely to end up in the high-cost subprime market than whites. But more information is needed before any claims of discrimination can be supported, Fed Governor Edward Gramlich said Friday.
Under new rules for the Home Mortgage Disclosure Act, lenders in 2004 were required to report pricing information for subprime loans for the first time. But those figures, which are reported as an annual percentage rate that includes the interest rate and upfront fees paid by the borrower, don't give a complete picture of mortgage lending to minorities, Gramlich said.
"The HMDA data alone do not prove discrimination," Gramlich told a meeting of the National Association of Real Estate Editors. "Instead, the data will be used as a screen to identify any aspects of the higher-priced end of the mortgage market that warrant closer scrutiny."
"The new HMDA data are clearly limited: they do not include credit scores, loan-to-value ratio, or consumer debt-to-income ratio -- all factors relevant to the cost of credit. Because these important determinants of price are missing, one cannot draw definitive conclusions about whether particular lenders discriminate unlawfully or take unfair advantage of consumers based solely on a review of the HMDA data," he said.
Gramlich noted that the HMDA data, which individual lenders have had to make available since March 31, has already been analyzed by community groups who have made charges of discrimination. But he cautioned that "there is a fair amount of data missing" even in the APR calculations that could change preliminary conclusions.
One thing that is evident from the data: The subprime mortgage market has exploded in the last decade. In 1994, the $35 billion in subprime lending accounted for just 5% of all mortgage originations. In 2004, the market was $530 billion, representing 19% of home lending.
And while blacks and Hispanics are more likely to find themselves in that market, when they get there they are not paying any more for their mortgages than whites who are also subprime borrowers, Gramlich said.
"The actual price paid for those taking out high-priced loans is the same," he said the early data show.
The Fed considers a loan to be subprime if it exceeds a threshold above comparable-maturity Treasury securities. For a first-lien mortgage to be considered subprime it would have to be at least three percentage points above its benchmark; second-lien mortgages, such as home-equity loans, have to be 5 percentage points or more higher.
Overall, the HMDA data show that the 8,800 lenders required to report to the Fed took in 37 million mortgage applications in 2004. The loan volume was down from 42 million applications in 2003 although the number of institutions reporting was up from 8,100.
The decline in loan applications reflects significant declines in mortgage refinancings from 2003's record pace. The increase in the number of lenders reflects, in part, Fed requirements that have expanded the number of lenders who must report and also an increase in competition in the mortgage industry, Gramlich said.
The Fed will release all the HMDA data in September.
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