Fed Reports Mortgage Lending Down in 2007, One in Three Borrowers Denied
Wednesday, September 17, 2008
The Federal Reserve released its comprehensive report on banks' 2007 lending practices last week, showing that overall mortgage lending dropped sharply. The number of loan applications fell, and on top of that decline, lending institutions denied nearly one in three applicants in response to one of the worst housing and mortgage contractions ever seen. A total of 10.4 million mortgages were originated in 2007, down 25 percent from 2006.
According to the Fed's report, both primary and secondary mortgage markets experienced considerable stress in 2007, a condition that has continued into 2008. Deteriorating loan performance and widespread declines in home values led to a sharp contraction in the willingness of lenders to offer loans to higher-risk borrowers in 2007. Mortgages with high interest rates, particularly subprime loans, made up 18.3 percent of total mortgages in 2007, down from 28.7 percent in 2006. The Federal Reserve expects the decline in subprime loans to be even greater in 2008 due to the fact that many lenders did not begin to pull back on these types of loans until late in 2007.
Analyzing borrower demographics, the Federal Reserve found that minorities were hardest hit by the withdrawal of credit. The number of mortgages made to Hispanic borrowers fell 49 percent, and the number to African-American borrowers dropped 35 percent. Mortgages made to white borrowers also declined, but by only 22 percent. Denial rates increased more for Hispanics and African-Americans, 5.3 and 3.3 percentage points respectively, while remaining flat for white borrowers.
To the extent that credit was still available, the Federal Reserve reported, loan prices rose sharply in 2007, largely because of concerns about repayment prospects. In addition, many lenders whose business models relied on a robust secondary market to purchase the loans they originated were forced to cease or curtail operations, as they could no longer obtain funds to operate or find investors willing to purchase their loan originations.
Although historically, the share of loans backed by the Federal Housing Administration (FHA) have declined – falling from 16 percent in 2000 to less than three percent in 2006, The number of FHA-backed first-lien loans used to purchase homes or refinance a home loan increased nearly 20 percent from 2006, and the FHA’s share of all home lending increased to 4.6 percent in 2007. According to the Federal Reserve, this increase in likely to continue through 2008, largely due to the sharp curtailment of credit availability in the subprime portion of the market, recent steps to increase the maximum loan values that are eligible for FHA loan insurance, and new FHA provisions of the recently enacted foreclosure prevention law.
The Federal Reserve's findings were based on information collected from mortgage lending institutions under the Home Mortgage Disclosure Act of 1975 (HMDA). The information includes characteristics of the home mortgages that lenders originated or purchased during the 2007 calendar year, the geographic location of the properties related to these loans, and demographic and other information about borrowers. The disclosures are intended not only to help the public determine whether institutions are adequately serving their communities’ housing finance needs, but also to facilitate enforcement of the nation’s fair lending laws and investment in both the public and private sectors, the Federal Reserve said.
To view the Federal Reserve's full article outlining its findings on 2007 lending practices, including data break-downs by loan type, geographical regions, and borrower demographics, click here.
According to the Fed's report, both primary and secondary mortgage markets experienced considerable stress in 2007, a condition that has continued into 2008. Deteriorating loan performance and widespread declines in home values led to a sharp contraction in the willingness of lenders to offer loans to higher-risk borrowers in 2007. Mortgages with high interest rates, particularly subprime loans, made up 18.3 percent of total mortgages in 2007, down from 28.7 percent in 2006. The Federal Reserve expects the decline in subprime loans to be even greater in 2008 due to the fact that many lenders did not begin to pull back on these types of loans until late in 2007.
Analyzing borrower demographics, the Federal Reserve found that minorities were hardest hit by the withdrawal of credit. The number of mortgages made to Hispanic borrowers fell 49 percent, and the number to African-American borrowers dropped 35 percent. Mortgages made to white borrowers also declined, but by only 22 percent. Denial rates increased more for Hispanics and African-Americans, 5.3 and 3.3 percentage points respectively, while remaining flat for white borrowers.
To the extent that credit was still available, the Federal Reserve reported, loan prices rose sharply in 2007, largely because of concerns about repayment prospects. In addition, many lenders whose business models relied on a robust secondary market to purchase the loans they originated were forced to cease or curtail operations, as they could no longer obtain funds to operate or find investors willing to purchase their loan originations.
Although historically, the share of loans backed by the Federal Housing Administration (FHA) have declined – falling from 16 percent in 2000 to less than three percent in 2006, The number of FHA-backed first-lien loans used to purchase homes or refinance a home loan increased nearly 20 percent from 2006, and the FHA’s share of all home lending increased to 4.6 percent in 2007. According to the Federal Reserve, this increase in likely to continue through 2008, largely due to the sharp curtailment of credit availability in the subprime portion of the market, recent steps to increase the maximum loan values that are eligible for FHA loan insurance, and new FHA provisions of the recently enacted foreclosure prevention law.
The Federal Reserve's findings were based on information collected from mortgage lending institutions under the Home Mortgage Disclosure Act of 1975 (HMDA). The information includes characteristics of the home mortgages that lenders originated or purchased during the 2007 calendar year, the geographic location of the properties related to these loans, and demographic and other information about borrowers. The disclosures are intended not only to help the public determine whether institutions are adequately serving their communities’ housing finance needs, but also to facilitate enforcement of the nation’s fair lending laws and investment in both the public and private sectors, the Federal Reserve said.
To view the Federal Reserve's full article outlining its findings on 2007 lending practices, including data break-downs by loan type, geographical regions, and borrower demographics, click here.
