Decreased Access to Mortgage Credit in Rochester's Underserved Neighborhoods

May 14, 2010

Author: Barbara van Kerkhove

National news stories recount how lenders have tightened credit standards, resulting in borrowers finding it much harder to obtain a loan to purchase a home or to refinance their current mortgage. This drying-up of credit, however, has not affected all communities equally. According to housing and community advocates across the country, communities of color and lower income neighborhoods, those very communities devastated by subprime lending and foreclosures,1 are now finding it harder to access responsible mortgage credit to either  refinance into a more affordable loan or to buy a home.2This article summarizes a soon-to-be published report by Empire Justice Center exploring the reduced access to mortgage credit in the Rochester, NY area. It was this type of analysis that researchers at Empire Justice and its predecessors first focused on in the early-mid1990s. Then, as advocates began noticing an increase in subprime lending in the late 1990s, we changed our analysis to highlight subprime lending (later higher cost lending) in our mortgage lending reports. More recently, higher cost lending has substantially declined, but so has the number of loan originations.3  Therefore, we are again shifting our focus to where lending is, and is not, happening, and the nature of that lending.

In its report, Empire Justice attempts to answer:

• How has the flow of mortgage credit to Rochester’s underserved communities changed?
• At the national level, FHA lending has increased.4Has this happened in Rochester, and to which communities are FHA loans going?
• How have higher-cost and prime lending changed?
• Overall, which Rochester area neighborhoods have suffered the most from the decline in mortgage credit?

The report compares how mortgage lending across different geographic communities changed between 2006 and 2008.  The communities are categorized in two different ways: 1. By the percentage of residents of color, and 2. By the median income level of the neighborhood.

Why compare lending geographically by income and race/ethnicity? The federal Community Reinvestment Act (CRA), enacted in 1977 and strengthened in 1995, encourages depositories to meet the credit needs of the communities in which they do business, including low and moderate income neighborhoods.5 The act does not cover people of color or minority neighborhoods.  Consumer and CRA advocates, however, have been showing for years the lack of lending in neighborhoods of color.6  And, despite the fact that low and moderate income communities are covered by the Community Reinvestment Act, our years of analysis indicates that lending in low and moderate income neighborhoods is lower than among low and moderate income households. 

Neighborhoods of color, also called minority neighborhoods, are defined here as census tracts in which 50 percent or more of the residents are people of color (anyone other than non-Latino whites) and majority white neighborhoods are census tracts in which less than 50 percent of the residents are people of color.  Low income neighborhoods are census tracts in which the median family income (MFI) is less than 50 percent of the area median income (AMI); moderate income neighborhoods are those in which the MFI is 50-79 percent of the AMI; middle income neighborhoods are those in which the MFI is 80-119 percent of the AMI; upper income neighborhoods are those in which the MFI is 120 percent or more of the AMI.

Using the publicly available annual Home Mortgage Disclosure Act (HMDA) data, the report examines conventional, FHA, and higher-cost home purchase and refinance mortgage loan originations on owner-occupied, one-to-four family site built units.

Rochester Area Mortgage Lending Decreased Between 2006 and 2008

In 2008, 9,334 home purchase loans were made in the Rochester NY MSA, 23 percent fewer than in 2006. As seen by the table below, refinance lending declined as well—from 6,569 originations in 2006 to 4,700 originations in 2008, a decline of 29 percent.

Home Purchase Lending

The table above also shows that, overall, home purchase lending declined by about 2,800 loans or 23 percent between 2006 and 2008. Conventional home purchase lending declined by 38 percent, from 9,740 loans in 2006 to 6,047 loans in 2008. In comparison FHA lending increased by 39 percent, from 813 loans in 2006 to 2,901 loans in 2008. Due to the increase in FHA lending in this declining market, almost 1 in 3 home purchase loans in 2008 were FHA loans, a substantial increase from FHA’s 17 percent share in 2006.

Refinance Lending

As seen in the above table, refinance lending declined as well, by almost 1,900 loans or 29 percent between 2006 and 2008. Conventional refinance lending declined by 41 percent to 3,580 loans in 2008, while FHA refinance lending increased by a dramatic 150 percent to 1,102 loans. In 2006, FHA loans made up less than 7 percent of the refinance market. However, by 2008, almost 1 in 4 refinance loans were FHA loans.

These changes in home purchase and refinance lending suggest that underwriting standards have tightened and the secondary market, where lenders usually sell their loans, has dried up.7 Rochester area lenders used FHA loans as a channel in which to continue lending. If it were not for FHA lending, the downturns in home purchase and refinance lending would have been worse.

As shown in the full report and summarized here, however, not all Rochester area neighborhoods had the same experience with respect to the changing mortgage lending market.

The Tightening of Prime Mortgage Credit in Rochester’s Underserved Neighborhoods

Empire Justice’s analysis of mortgage lending indicates that while access to mortgage credit tightened across the entire Rochester area, traditionally underserved communities, namely low and moderate income neighborhoods and neighborhoods of color, were hit much harder than middle and upper income and predominantly white communities.

Between 2006 and 2008:

• Conventional lending declined more steeply in lower income neighborhoods and communities of color than in middle and upper income and majority white areas
• The growth in FHA lending was generally smaller in lower income areas and communities of color than in middle and upper income and majority white neighborhoods
• Subprime lending declined at greater rates in upper income and majority white neighborhoods than in low income areas and communities of color.

This suggests that there were greater declines in access to prime mortgage loans in lower income neighborhoods and communities of color than in upper and middle income and majority white areas.

Decreased Access to Prime Credit in Communities of Color

Between 2006 and 2008, access to prime lending, particularly prime refinance lending, was substantially reduced in communities of color.

As seen by the chart below, prime lending declined at greater rates as the percentage of residents of color increased. Prime home purchase lending declined by 32 percent in neighborhoods with 80% or more residents of color, twice the rate of the 15 percent home purchase lending decline in neighborhoods with less than 10% residents of color.  The disparity is much greater with respect to the decline in prime refinance lending. Between 2006 and 2008, prime refinance lending declined by 59 percent in neighborhoods with 80% or more residents of color, seven times the 8 percent decline in neighborhoods with less than 10% residents of color.

Decreased Access to Prime Credit in Lower Income Neighborhoods

Between 2006 and 2008, access to prime loans shrunk more in low income neighborhoods than in middle and upper income communities.

The chart below shows that prime home purchase lending declined in low income neighborhoods by 38 percent, twice the rate of the 17 percent decline in upper income areas. With respect to refinance lending, the rate of decline in low income neighborhoods was almost 20 times that in upper income communities—49 percent v. 2.5 percent respectively.

Summary

While mortgage lending was substantially lower in 2008 than in 2006 throughout the Rochester area, neighborhoods of color and low income communities were hit the hardest. Compared to majority white and more affluent neighborhoods, these traditionally underserved communities:

• Saw the largest declines in overall lending and in conventional home purchase and refinance lending.
• Gained only a small proportion of the area’s increase in FHA lending.
• Still had higher cost loans more often, despite the overall decline in higher cost lending.
• Had dramatically less access to prime refinance lending in 2008 than in 2006.

Recommendations

To improve the level and quality of lending in low and moderate income communities and communities of color we recommend the following:

Expand the Community Reinvestment Act (CRA)

• To include communities and people of color. This will encourage financial institutions to lend and invest in our nation’s communities of color, as they do now in low and moderate income communities.
• To cover non-bank lenders and mortgage companies. As shown in numerous reports, the majority of higher cost lending was done by lenders not covered by CRA.8   Including these lenders under the purview of CRA will reduce higher cost lending in the future and help ensure that subprime lending is responsible subprime lending.
• To include geographies where financial institutions have a significant lending market share. This will encourage banks to be responsible lenders and investors in most places where they do business, not just where they take deposits.

Ensure consumers are protected with respect to financial products

As this article is being written, comprehensive financial regulatory reform legislation is moving quickly through the Senate, so our recommendations on consumer protection with respect to financial products may be moot. Still, we recommend that any financial reform package include a consumer financial protection agency (CFPA) that:

• Is independent. This includes an independent budget and director, as well as the ability to make and enforce rules that are not subject to a veto by industry and/or prudential regulators.
• Has broad rule-making authority. The CFPA should have the power to promulgate consumer protection rules over a wide range of financial services and products, not just services related to banking and mortgage lending, including non-bank credit and debit cards, rent-to-own services, check cashing and pay-day lending, refund anticipation loans, foreclosure rescue services and automobile financing.
• Has strong enforcement authority. This includes the ability to:
• Conduct independent exams in collaboration with prudential regulators of all financial institutions that sell financial services and products.
• Independently enforce consumer protection rules of all non-bank entities that have financial services or products as a significant part of their business.
• Does not prevent states from protecting their consumers. States with stronger consumer financial protections should not be preempted by the CFPA or federal prudential regulators from enforcement.

Expand the federal Home Mortgage Disclosure Act (HMDA)

The Home Mortgage Disclosure Act (HMDA), enacted in 1975 and implemented by Regulation C, requires the public disclosure of mortgage lending data. It’s key to giving communities and policy makers information about how well banks and other mortgage lenders are serving communities under CRA. Despite new reporting requirements added in 2002, the foreclosure crisis highlights the limitations on the current data. Therefore, we recommend that HMDA data be expanded to include:

• The term and annual percentage rate (APR) of loans.
• Credit scores of loan applicants.
• Risky loan features such as adjustable rates, negative amortization, interest-only payments, prepayment penalties, yield spread premiums, and no income documentation.
• Data on loan performance.

To see the complete report when it is released, go to: www.empirejustice.org.

Footnotes

1  See reports by California Reinvestment Coalition, Community Reinvestment Association of North Carolina, Empire Justice Center, Massachusetts Affordable Housing Alliance, Neighborhood Economic Development Advocacy Project, Ohio Fair Lending Coalition and Woodstock Institute, “Paying More for the American Dream: A Multi-State Analysis of Higher Cost Home Purchase Lending,” March 2007 and “Paying More for the American Dream II: The subprime Shakeout and Its Impact on Lower Income and Minority Communities,” March 2008; and a report by Empire Justice Center, “Curbing the Mortgage Meltdown: The Impact of Foreclosures on New York’s Economy and Communities,” Revised August 5, 2008. These reports can be found at: www.empirejustice.org/publications/.
2  See a recent report by the California Reinvestment Coalition, “From Foreclosure to Re-Redlining: How America’s largest financial institutions devastated California communities,” February 2010, as found at: http://www.calreinvest.org/news-room/2010-02-08.
3  See the Federal Reserve’s analysis of national 2008 mortgage lending by Avery, Robert B., Bhutta, Neil, Brevoort, Kenneth P., Canner, Glenn B. and Gibbs, Christa N., The 2008 HMDA Data: The Mortgage Market During a Turbulent Year (September 30, 2009). Federal Reserve Bulletin. Available at SSRN: http://ssrn.com/abstract=1480830.
4  Ibid.
5  See 12 U.S.C. 2901 and its regulations, 12 CFR parts 25, 228, 345, and 563e.
6  See “Paying More for the American Dream” reports in footnote 1.
7  Before 2008, when loans were made they were bundled into mortgage backed securities and sold on Wall Street on the “secondary market.” As banks loosened their underwriting standards, these bundled securities ended up including larger percentages of non-performing loans. In the current climate of declining property values and high unemployment, investors are only willing to purchase mortgage backed securities that include loans of very credit-worthy borrowers.
8  See California Reinvestment Coalition, Community Reinvestment Association of North Carolina, Empire Justice Center, Massachusetts Affordable Housing Alliance, Neighborhood Economic Development Advocacy Project, Ohio Fair Lending Coalition and Woodstock Institute, “Paying More for the American Dream III: Promoting Responsible Lending to Lower-Income Communities and Communities of Color,” April 2009, as found at: http://www.empirejustice.org/publications/ for such an analysis and for other reports.