Government-Backed Loans Still Dominate Housing Market: HMDA Data

WASHINGTON — With the two political parties embroiled in a fierce debate over the size of government's economic footprint, a report Tuesday by the bank regulators indicated the mortgage market remains just as dependent on Uncle Sam as it was right after the crisis.

Despite a decline in all home loans, which fell 10% to 7.1 million loans in 2011, government-backed loans continue to represent nearly half of the mortgage market, according to the most recent data reported by banks under the Home Mortgage Disclosure Act.

"Such loans still accounted for about 43% of home-purchase lending in 2011," the Federal Reserve Board said in an analysis of the 2011 HMDA data.

Overall, new mortgages not backed by the government dropped 1.3% to 1.08 million in 2011, while government-backed mortgages fell 12% to $1.02 million.

The report also made clear how damaged the housing market remains.

The Fed said data "suggest" that lending activity declined by a higher rate compared to 2010 in neighborhoods hardest-hit by the housing crisis than less-distressed neighborhoods.

"We're not seeing some of the hardest hit markets rebounding as much as policymakers would hope, and it's glaring that refinancing isn't being used to the degree that it should be, and that's largely due to structural hurdles," said Isaac Boltansky, an analyst with Compass Point Research and Trading.

Surprisingly, the mortgage totals in the 2011 data were the lowest since institutions reported 6.2 million home loans in 1995. The Fed's analysis said refinancings fell more than loans for new purchases, although refinancing activity saw a spurt toward the end of the year with declining interest rates. In June 2011 — the time of year with the most lending activity — home purchase loans reached 254,000. That is compared to 712,000 for the same period in 2006.

While loans for new purchases declined by 5%, refinancings fell by 13% to $4.3 million. Yet that total still exceeded loans for new purchases.

Observers said the drop in refinancing activity does not reflect well on the performance of government programs — such as the Home Affordable Refinance Program — meant to help borrowers with depressed property values find better mortgages.

"This really demonstrates the limitations of the government's refinancing vehicle, HARP, which I think is going to become more a part of the broader conversation politically over the next three months, not just when we have the first [presidential] debate on Oct. 3, but really when we get to the other side of the election," Boltansky said. "This just reinforces the idea that, no matter who wins, on the other side of the election we are going to have to seriously revisit the idea of expanding mortgage refinance opportunities."

While such programs have faltered, interest in more-established federal home-lending initiatives, such as loans backed by the Federal Housing Administration and Veterans Administration, is still robust.

"It's certainly a sign of the times that there continues to be fairly significant dependence on FHA- and VA-backed loans," said Kevin Petrasic, a partner at Paul Hastings.

Even though the FHA's market share declined 5 percentage points to 31%, that was still a whopping 24 points higher than in 2007.

"Although the total number of home-purchase loans has fallen substantially since 2005, virtually all of the decline has involved conventional lending," the Fed said.

Among the reasons government-backed loans remain popular, the Fed cited "increased loan-size limits allowed under the FHA and VA lending programs and reduced access … to conventional loans, particularly those that allow the borrower to finance more than 80% of the property value."

The Fed's analysis pointed to the lending drop being more acute in areas that had the most foreclosures stemming from the housing crash. Using a point-scoring system to show distress levels established by the Department of Housing and Urban Development, the data showed declines of home-purchase lending by as much as 10 more percentage points in highly-distressed neighborhoods than in tracts that suffered less deterioration.

"The steeper decline in mortgage credit flows to highly distressed areas continues a trend that has been observed since the onset of the housing market downturn," the Fed's report said.

Like in past HMDA data releases, borrowers with lower incomes and those receiving smaller loans were more likely to receive higher-priced loans, according to the Fed's analysis. For example, borrowers with incomes less than $75,000 hold 56% of home loans overall, but account for 72% of higher-priced loans. In addition, 45% of home loans under $100,000 are higher-priced, but account for just 19% of the reported loans.

The data also continued to reflect notably higher denial rates for black and Hispanic borrowers in 2011, according to the Fed analysis. Denial rates for conventional home-purchase loans were 30.9% for blacks, 21.7% for Hispanics, 14.8% for Asians and 11.9% for non-Hispanic whites.

But some observers said diminished lending to lower-income and minority borrowers reflects a concern by institutions about suffering penalties under fair-lending laws for making loans that unfairly increase credit costs for less-advantaged homeowners.

"I think what this underscores is a keen awareness and sensitivity to fair-lending issues," Petrasic said. "Institutions are being extremely careful and cautious in terms of lending decision that could have HMDA and fair-lending implications."

He also noted the data measuring loans, credit costs and denial rates to minorities and low- and middle-income neighborhoods was relatively unchanged from the previous year.

"Clearly there was a lot of focus on this in the context of what's happening coming out of the financial crisis. Regardless of what the reaction was from industry or consumer groups, what we're seeing is relative stability and steadiness," Petrasic said.

But John Taylor, president of the National Community Reinvestment Coalition, said the numbers reflect dangerous trends about credit constriction for lower-income homeowners. He specifically cited denial rates for refinancings that were 40% higher for African-American borrowers, and 30% higher for Hispanic borrowers, than for white borrowers.

"That's outrageous," Taylor said. "You're talking about people who have already been through the gauntlet, already bought a house. Everyone has suffered from the downturn in the housing market and there you're looking at three times the difference … when you look at refinancings."

Taylor also noted that nearly 80% of African-American borrowers and more than 70% of Hispanic borrowers rely on FHA-backed loans, compared with less than 50% of white borrowers.

"What that suggests is that the private market is doing a better job in serving white borrowers than borrowers of color," he said.