Higher-Priced Home Lending

and the 2005 HMDA Data

(Table 8 revised September 18, 2006)

Robert B. Avery, Kenneth P. Brevoort, and Glenn B.

Canner, of the Division of Research and Statistics,

prepared this article. Caitlin G. Coslett and Sean M.

Wallace provided research assistance.

Since 1975, the Home Mortgage Disclosure Act

(HMDA) has required most mortgage lending institutions with offices in metropolitan areas to disclose to

the public information about the geographic location

and other characteristics of the home loans they

originate or purchase during each calendar year.

Disclosure of home-lending activity is intended to

help the public determine whether institutions are

adequately serving their communities’ housing finance needs, to facilitate enforcement of the nation’s

fair lending laws, and to guide public- and privatesector investment activities. Although the act is

intended to help achieve important public policy

goals, the law itself does not include mandates or

restrictions on lending—that is, it does not direct

lenders to make loans to particular areas or persons,

nor does it direct them to make certain kinds of loans

or to refrain from certain loan terms or practices.

Taken together, the nearly 8,850 lenders currently

covered by the law account for an estimated 80 percent of home lending nationwide. Consequently,

HMDA data likely provide a representative picture of

most home lending in the United States. The information thus provided is rich, but it is limited: The data

reveal a great deal about what the lending patterns are

but relatively little about what causes the patterns.

Nonetheless, by drawing attention to these patterns,

the data promote further analysis and discussion that

can deepen understanding of their causes and encourage marketplace efficiency by fostering competition.

The Congress has amended HMDA on several

occasions to extend the reach of the law to more

institutions and to expand the types of information

that must be disclosed. The most sweeping legislative

amendments occurred in 1989; they required the

disclosure of application and loan-level information

for home loans, including the disposition of applications and the income, sex, and race or ethnicity of the

individuals applying for credit. Analysis of this information has prompted widespread public discussion

about the fairness of mortgage lending decisions, as

the disclosures revealed wide disparities in the rates

of approval of loan applications across racial and

ethnic lines. The disclosures triggered debate about

the proper interpretation of the data and about the

meaningfulness of the disparities in the disposition of

loan applications and in lending patterns.1 The disclosures also led many lenders to strengthen their fair

lending compliance programs and to expand their

outreach to underserved communities.

Periodically, the Federal Reserve Board reviews

each of the regulations that it promulgates, including

Regulation C, which implements HMDA.2 As a result

of the Board’s most recent review of Regulation C, a

number of important changes were made to the

reporting requirements, changes that substantially

increase the types and the amount of information

made available about home lending (for details, refer

to the appendix).3 The Board stated that the revisions

were intended to keep the regulation in step with

recent developments in mortgage markets and with

the revised standards of classification for the collection of information on race and ethnicity as established by the Office of Management and Budget

(OMB).4

The 2004 HMDA data, the first to reflect the recent

revisions to Regulation C, were released to the public

by individual lending institutions in the spring of

2005. In September 2005, the Federal Financial Institutions Examination Council (FFIEC) made publicly

available various summary reports (statistical tables)

pertaining to each lender and lending activity in each

1. Refer, for example, to John Goering and Ron Wienk, eds. (1996),

Mortgage Lending, Racial Discrimination, and Federal Policy (Washington: Urban Institute Press).

2. Refer to Home Mortgage Disclosure Act (12 U.S.C. §§ 2801-11),

Regulation C (12 C.F.R. pt. 203), and the staff commentary accompanying Regulation C (12 C.F.R. pt. 203, Supp. I).

3. The final revisions to Regulation C were issued on February 15,

2002, and June 27, 2002.

4. Since 2003, HMDA data have used the newly established OMB

standards for defining metropolitan and micropolitan statistical areas.

Refer to OMB (2000), ‘‘Standards for Defining Metropolitan and

Micropolitan Statistical Areas,’’ notice of decision, Federal Register,

vol. 65 (December 27), pp. 82228–38.

A123
metropolitan statistical area, along with a comprehensive data file that included all the reported information (except the dates of loan applications and of

credit decisions).5 At that time, the staff of the Federal

Reserve Board prepared the first comprehensive

assessment of the expanded data, which was published as an article in the Federal Reserve Bulletin.

6

The most important change made to Regulation C

is the requirement that lenders disclose pricing information for loans with prices above designated thresholds; such loans are referred to here as ‘‘higher-priced

loans.’’ The new pricing data allow a better understanding of lending activity in the higher-priced segment of the mortgage market, a market segment that

has grown substantially over the past decade or so in

response to improvements in information processing

technology and in the ability of lenders to measure

and price for credit risk.

Greater understanding of the market and an improved ability to monitor the activities of individual

lenders in the higher-priced market segment are

important because the expansion of such lending,

though affording some consumers greater access to

credit, has been accompanied by a variety of concerns. The concerns relate to the appropriateness of

loan terms and lending practices, constraints on consumer shopping and on access to the full range of

credit opportunities, the competitiveness of the higherpriced market, and the potential for unequal treatment

of borrowers on the basis of race, ethnicity, or some

other characteristic protected by law.

A review of the 2004 HMDA data found that, in the

aggregate, less than one-fifth of borrowers took out

higher-priced loans. However, the data also showed

that the incidence (measured as the proportion of

borrowers) of higher-priced lending varied substantially across racial and ethnic lines: Blacks and Hispanic whites were more likely, and Asians less likely,

to have received higher-priced loans than nonHispanic whites. Information included in the HMDA

data on borrower or loan characteristics, such as

income and amount borrowed, was insufficient to

account fully for the variation in loan pricing across

groups. Many factors routinely used by lenders to

underwrite and price loans—including loan-to-value

(LTV) ratios, debt-to-income (DTI) ratios, and measures of borrower credit history (for example, a credit

history score)—are not included in the HMDA data

and, consequently, cannot be accounted for in an

analysis of pricing differences that relies on these data

alone.

Differences in loan-pricing outcomes, such as those

revealed in the HMDA data, have increased concern

about the fairness of the lending process. Lenders are

responsible for ensuring compliance with fair lending

laws, and the expanded HMDA data may both encourage and facilitate improved compliance efforts. The

regulatory agencies charged with enforcement of the

fair lending laws also use the expanded data to

facilitate enforcement activities.

This article reviews the 2005 HMDA data, which

have just been released to the public. The 2004 article

covered a wide range of topics, including ways in

which the expanded data might be used to aid fair

lending enforcement, but this article is more limited:

The focus here is primarily on the loan-pricing aspects

of the data, including those that permit an assessment

of the effects of the changing interest rate situation in

2004 and 2005 on the disclosure of higher-priced

lending. To identify the effects on lending patterns of

changing interest rates, the analysis presented here

uses adjusted sets of the 2004 and 2005 HMDA data

in an attempt to distinguish the loans that exceeded

the pricing thresholds solely because of a changed

interest rate situation from other higher-priced loans.

This section of the analysis relies on monthly surveys

of loan terms and pricing conducted by Freddie Mac

and the Federal Housing Finance Board to help gauge

the effects of changing interest rates over the period.

The analysis indicates that the substantial narrowing of the difference between short- and long-term

interest rates in 2005 compared with 2004 not only

increased the overall share of reported loans that

exceeded the pricing thresholds established by Regulation C but also affected to some degree the gap in

loan-pricing outcomes among groups of borrowers

sorted by their race or ethnicity.

The analysis further reveals that changes in interest

rates substantially affected the types and the proportions of loans that exceeded the price-reporting

thresholds. Because of a combination of (1) the

procedure specified in Regulation C for determining

which loans are higher priced and (2) the rules

governing how annual percentage rates (APRs) are

calculated for adjustable-rate loans, adjustable-rate

loans were much more likely than fixed-rate loans

with similar risk profiles to be below the HMDA

price-reporting thresholds in 2004 but were about as

5. Individual lenders covered by HMDA are required to make their

own data available to the public beginning on March 31 of the year

after the calendar year for which the data apply. However, the data

made available at that time have not been systematically checked by

the supervisory agencies for errors or omissions, as have the HMDA

data released by the FFIEC in September each year.

6. Refer to Robert B. Avery, Glenn B. Canner, and Robert E. Cook

(2005), ‘‘New Information Reported under HMDA and Its Application

in Fair Lending Enforcement,’’ Federal Reserve Bulletin, vol. 91

(Summer), pp. 344–94.

A124 Federal Reserve Bulletin h 2006
likely as fixed-rate loans to be above the threshold by

the end of 2005. One consequence of this changed

relationship is that certain populations—such as those

residing in the western part of the country—that used

adjustable-rate loans relatively more often than fixedrate loans likely witnessed a relatively larger increase

in reported higher-priced lending in 2005.

LOAN PRICING IN THE MORTGAGE MARKET

Over the past decade or so, the mortgage market has

changed markedly. Before that, mortgage lenders

offered consumers a relatively limited array of loan

products at prices (interest rates, points, and fees) that

varied not by the creditworthiness of the borrower but

by loan type (for example, conventional or

government-backed), loan characteristic (for example, amount borrowed, term to maturity, or LTV

ratio), type of structure securing the loan (for example, traditional ‘‘site built’’ home or factorymanufactured unit), and ownership status (owneroccupied or nonowner-occupied). Effectively,

borrowers either did or did not meet the underwriting

criteria for a particular product. Those who met the

criteria paid about the same price; those who did not

were denied credit.

Advances in technology, better access to information on the credit histories of individuals, increased

competition, and the maturation of a robust secondary

market for loans representing the full spectrum of

credit risks have helped spur remarkable changes in

the mortgage market. Most prominent has been credit

pricing based explicitly on risk. Today, much more so

than in the past, differences in the creditworthiness of

different borrowers can lead to different prices for the

same product.7 Applicants who are less creditworthy

or who are unwilling or unable to document their

creditworthiness or income are increasingly less

likely to be turned down for a loan; rather, they are

offered credit at higher prices.8 Explicit risk-based

pricing has expanded opportunities for homeownership and has allowed individuals, including those who

are otherwise credit constrained, to more readily

purchase homes or to borrow against the equity they

have accumulated in their homes.

Borrowers in the higher-priced market generally

fall into one of two market segments—‘‘subprime’’ or

‘‘near prime.’’ Individuals in the subprime category

typically pay the highest prices because they pose

greater credit or prepayment risk or are otherwise

more costly to serve. In practice, the dividing line

between these two ‘‘nonprime’’ market segments can

be somewhat amorphous, as can the line between the

prime and nonprime markets. Moreover, the thresholds that separate these market segments can change

as market interest rates move, as lenders’ appetites for

interest rate or credit risk change, and as technological improvements allow for more-precise risk assessment.

Estimates of the annual volume of nonprime lending vary, but all sources agree that the nonprime

market segment has grown substantially in recent

years. One source estimates that from 1994 to 2005,

the dollar volume of subprime loans increased from

about $35 billion to more than $600 billion. Further,

subprime lending is no longer a minor portion of the

mortgage market. Subprime loans are estimated to

have accounted for 20 percent of all mortgage originations in 2005, up from less than 5 percent in 1994.9

Concerns about Loan Pricing

As price flexibility has emerged in the mortgage

market, so have concerns about the fairness of pricing

outcomes. Such considerations generally fall into

three broad categories: In the first category are concerns about possible discrimination based on the race

or ethnicity of the borrower. These concerns are

heightened because, for some loans, prices are determined on an individual basis and not strictly according to credit risk, cost factors, or competitive conditions.

In the second category are concerns about whether

borrowers in the higher-priced segment of the loan

market have sufficient resources (for example, time,

information, and financial experience) to shop effectively for the loan terms most appropriate to their

circumstances. These concerns relate to both borrower and lender behavior. For example, some borrowers may not shop or negotiate for the best available rates and terms because they need funds

immediately and are focused primarily on the amount

they can borrow and the size of the monthly payment,

not on the interest rate, fees, or other loan features.

7. Refer to Souphala Chomsisengphet and Anthony PenningtonCross (2006), ‘‘The Evolution of the Subprime Mortgage Market,’’

Federal Reserve Bank of St. Louis, Review, vol. 88 (January/

February), pp. 31–56.

8. Refer, for example, to Darryl E. Getter (2006), ‘‘Consumer Credit

Risk and Pricing,’’ Journal of Consumer Affairs, vol. 40 (Summer),

pp. 41–63.

9. Estimates pertain to mortgages backed by one- to four-family

homes. Estimates are based on information from Inside Mortgage

Finance Publications (2005 and earlier years), Mortgage Market

Statistical Annual (Bethesda, Md.: IMFP), www.imfpubs.com; and

on information from LoanPerformance, www.loanperformance.com,

a subsidiary of First American Real Estate Solutions,

www.firstamres.com/jsp/index.jsp.

Higher-Priced Home Lending and the 2005 HMDA Data A125
And some lenders may engage in aggressive ‘‘push’’

marketing that may confuse borrowers about the cost

and terms of loans.

Finally, concerns have been raised about whether

competition is adequate to ensure that borrowers in

the higher-priced segment of the loan market are

provided with the full range of credit opportunities.

Some believe that prime-market lenders are not

present, or do not offer or promote their prime

products sufficiently, in certain geographic markets,

including neighborhoods that have larger minority

populations. In this view, limited access to prime

lenders and the products they offer diminishes the

opportunities for borrowers in affected communities

to obtain lower-priced loans. These concerns are

extraordinarily complex and beyond the scope of this

article. The Federal Reserve Board’s recent hearings

on home equity lending sought to collect more information about these and other concerns raised by the

rapid growth of the higher-priced segment of the

market.10

Determining What Pricing Information Is

Reported

In 2002, the Federal Reserve Board amended Regulation C to require the disclosure of pricing information

for higher-priced loans. In establishing the loanpricing disclosure rule, the Board sought to select

thresholds that would limit regulatory burdens by

focusing data reporting on only those loans in the

higher-priced segment of the market.11

Specifically, for loans with spreads above designated thresholds, revised Regulation C requires the

reporting of the spread between the APR on a loan

and the rate on Treasury securities of comparable

maturity. The thresholds for reporting differ by lien

status: 3 percentage points for first liens and 5 percentage points for junior, or subordinate, liens.12 The

different thresholds for first and junior liens are

intended to reflect differences in the credit risk and

other features of the loans in these two different

markets. To better interpret the reported pricing information, the Board has also required institutions to

report the lien status for each loan.

In limiting the reporting of price information to

only the higher-priced segment of the market, the

Board weighed the costs and benefits of moreexpansive data collection and reporting and determined not to adopt more-expansive reporting requirements. The Board also chose to refer to loans with

prices that exceed the reporting threshold as ‘‘higherpriced loans’’ rather than as ‘‘subprime loans.’’ The

correspondence between subprime loans and loans

with prices exceeding the threshold is not precise.

The Board’s regulation sets the price-reporting thresholds in such a way that the number or proportion of

loans reported as higher priced can vary from year to

year even if the size and the share of the subprime

market have stayed the same.

Reasons for Loan-Price Variation

Mortgage pricing is complex and reflects a wide

range of factors. Many of these factors are easily

quantifiable and objectively measured. Some, however, are less readily quantified—for example, the

extent of negotiations, if any, between lender and

borrower. The expanded HMDA data include few of

the factors that may help explain variations in the

prices of reported loans. Even if all of the readily

quantifiable factors were included in the data, they

would not necessarily fully explain loan pricing

because some factors are difficult to measure.

Important factors not included in the HMDA data

include the costs of raising the funds to be lent;

considerations related to credit risk, such as those

reflected in the borrower’s credit history, LTV ratio,

or DTI ratio; prepayment risk (the risk that a loan will

10. For more information about the hearings, refer to Board of

Governors of the Federal Reserve System (2006), ‘‘Board to Hold

Four Public Hearings on the Home Equity Lending Market,’’ press

release, May 1, www.federalreserve.gov/boarddocs/press/bcreg/2006.

11. When the Board amended HMDA to expand data reporting, it

also established transition rules for compliance with Regulation C. The

transition rules provide that for loans with application dates before

January 1, 2004, lenders need not report pricing information. As a

consequence of the transition rules, some indeterminate proportions of

higher-priced loans are reported with the same code as loans that did

not meet the threshold requirements. The inability to distinguish

higher-priced loans from others that were originated in 2004 and 2005

but with application dates before January 1, 2004, means that users of

the data need to take this limitation into account when assessing the

data. The effects of the transition rule were significant for assessments

of the 2004 data but are of much less importance for analysis of the

2005 data. Nonetheless, to identify which applications had dates

before January 1, 2004, the FFIEC added a flag to the 2005 ‘‘loan/

application register’’ (LAR) data it makes available to the public. The

LAR is a register that is prepared annually by each lender covered by

HMDA and that includes data on each of the items reported under

HMDA. For the analysis of loan pricing that follows here, we exclude

all loans with application dates before January 1, 2004.

12. In calculating the rate spread, the lender uses the Treasury yield

for securities of a comparable maturity as of the fifteenth day of a

given month depending on when the interest rate was set on the loan.

For such a calculation, the rule directs lenders to use the fifteenth day

of a given month for any loan on which the interest rate was set on or

after that day through the fourteenth day of the next month. The

relevant date to use is the date the interest rate on the loan was

determined, which is often, but not always, set pursuant to a lock-in

agreement between the borrower and the lender. The APR used in the

calculations is the one calculated and disclosed to the consumer under

section 226.18 of Regulation Z (12 C.F.R. pt. 226).

A126 Federal Reserve Bulletin h 2006
be prepaid before the term of the loan); overhead

expenses, such as those related to providing offices

and to compensating staff for finding prospective

borrowers and underwriting loans; loan-servicing

costs; and possibly the extent of negotiations between

creditor and borrower. Market conditions and competition also bear on pricing, as local economic

conditions—including, importantly, those of local

housing markets—can influence the demand and supply of credit.13 Finally, the legal situation in a state,

including foreclosure rules, may affect loan pricing

by constraining to a greater or lesser degree the

ability of lenders to recover and dispose of the

collateral used to back loans that are in default.

Mortgages are typically priced at a spread above

the yields on Treasury securities or on other, similar

instruments or indexes of funding costs that correspond to the time a loan is expected to be outstanding.

Each of the factors noted earlier may influence the

magnitude of the spread. Elevated credit risk for loans

in the higher-priced mortgage market results in substantially higher default and foreclosure rates and

costs and, consequently, in higher price levels. Prepayment risk is also greater for higher-priced loans

not only because borrowers in the higher-priced

market have an incentive to refinance when interest

rates fall (as do borrowers in the lower-priced market

segment) but also because they have an incentive to

prepay when their credit history improves to the point

that they qualify for lower-priced credit.14 Because

credit and prepayment risks are higher for loans in the

higher-priced segment of the market, such risks tend

to vary more in this market segment.

Lenders active in the higher-priced market may

also face a cost structure different from that faced by

lenders focused on the lower-priced segment of the

market. Lenders focused on the higher-priced market

segment may face steeper funding costs, may incur

higher marketing expenses, and may have a much

lower flow-through rate—that is, the number of applications processed to successfully extend a loan may

be higher for such lenders than for lenders that deal

primarily with borrowers with few credit problems or

with the ability to make large down payments.

Discretionary, or Flexible, Pricing

Some creditors provide their loan officers and agents

working on their behalf (for example, mortgage brokers or loan correspondents) with rate sheets that

indicate the creditors’ baseline prices by loan product

(for example, conventional loans of various types),

owner-occupancy status, loan characteristic (for example, amount of loan, prepayment penalty option,

term to maturity, or LTV ratio), and borrower creditworthiness (as reflected in, for example, a credit

history score or DTI ratio).

Rate sheets vary across lenders. For some lenders,

the rate on the sheet is a ‘‘sticker’’ price; for others, it

is the minimum accepted price; and for still others, it

is the actual target price. Some lenders have a single

rate sheet for the entire organization (for each loan

product); others have different rate sheets for different

geographic markets that reflect local market competition and costs. Rate sheets can change daily with

changes in basic economic conditions, such as market

interest rates.

Loan rates paid by borrowers can deviate from the

interest rates shown on sheets for many reasons. For

example, the rates on the sheets may not reflect

differences in loan origination costs. Also, in some

cases, loan officers and brokers are allowed to deviate

from prices on rate sheets as market conditions,

including the extent of competition, warrant or allow.

Deviations may also occur because of negotiated

outcomes. Loan officers or brokers may benefit from

pricing flexibility through higher compensation by

obtaining a price above the rate stated on a rate sheet

(or above prices obtained by others).

Borrowers differ in their propensity to negotiate—

for example, borrowers with less experience in the

mortgage market, such as first-time homebuyers,

may be less likely than experienced borrowers to

negotiate. These differences in negotiating propensities may be correlated with race, ethnicity, or sex.

For example, minorities are disproportionately firsttime homebuyers.

Discretionary, or flexible, pricing may be a legitimate business practice. Properly developed, monitored, and administered, discretionary pricing programs may help to ensure that markets allocate

resources in an efficient way. However, when loan

officers have latitude in deviating from rate sheets or

13. For example, in areas that have experienced sustained rapid

increases in home prices, more prospective borrowers may rely on

mortgage products intended to minimize initial monthly payment

burdens, such as adjustable-rate loans. Also, differences in prepayment

propensities may result in pricing differences across states.

14. Refer, for example, to Office of Thrift Supervision, Office of

Research and Analysis (2000), ‘‘What about Subprime Mortgages?’’

Mortgage Market Trends, vol. 4 (June), pp.1–13. Borrowers with

higher-priced loans may also prepay more frequently than borrowers

with other loans if they have a greater propensity to extract equity

through a cash-out refinance. Such may be the case if borrowers with

higher-priced loans have fewer alternative sources of funds to address

pressing financial problems. Also, borrowers with higher-priced loans

may prepay more often if, over time, they become more aware of

less-expensive credit opportunities. Refer to Anthony PenningtonCross (2003), ‘‘Credit History and the Performance of Prime and

Nonprime Mortgages,’’ Journal of Real Estate Finance, vol. 27

(November), pp. 279–301.

Higher-Priced Home Lending and the 2005 HMDA Data A127
in determining which rate sheet applies to each

borrower, the lender runs the risk that differential

treatment on a basis prohibited by law may arise. For

this reason, the Interagency Fair Lending Examination Procedures provide that discretionary pricing

should be considered an examination ‘‘risk factor’’

when a lender’s risk for engaging in pricing discrimination is evaluated.15

Variations in Loan-Processing Channels

The delivery channels through which borrowers

obtain loans vary across lenders, and such variation

may affect loan pricing. On the one hand, underwriting and pricing may be centrally controlled even

though applications for credit may begin through

different channels, such as the Internet, the mail, or a

visit to a bank office. On the other hand, in complex

financial organizations with numerous bank branches,

multiple affiliates (both bank and nonbank), decentralized loan production offices, and third-party brokerage operations, each application may be subject to

a different underwriting and pricing regime depending on its point of initiation.

The 2004 HMDA pricing data suggested that the

delivery channel through which a borrower obtains a

loan may matter. For example, the incidence of

higher-priced lending was significantly higher for

borrowers who lived outside the assessment areas of

lenders covered by the Community Reinvestment Act

of 1977 (CRA) than for those who lived inside these

areas.16 The HMDA data do not provide a reason for

this pattern, but several explanations that warrant

further research are possible. For example, the difference may be due, at least in part, to a reliance on

different delivery channels for loans within and outside these lenders’ assessment areas.

Differences in the incidence of higher-priced lending across groups may also arise if different channels

tend to serve different customer groups. For example,

mortgage brokers or loan correspondents that originate loans on behalf of a depository institution (commercial bank, savings association, or credit union)

may focus on the subprime market, while the depository institution may offer a broader range of mortgage

products through its retail branch network. If mortgage brokers or loan correspondents that focus on the

subprime market tend to work disproportionately

with borrowers from minority neighborhoods, then

the depository institution’s overall pricing pattern

may show a higher incidence of higher-priced lending

for minorities than for whites.

GENERAL FINDINGS FROM THE 2005 HMDA

DATA

For 2005, lenders covered by HMDA reported information on roughly 30.2 million home-loan applications—11.7 million for purchasing one- to fourfamily homes, 15.9 million for refinancing existing

home loans, 2.5 million for improving one- to fourfamily dwellings, and the balance for loans on multifamily dwellings for five or more families (table 1).17

These applications resulted in some 15.6 million loan

extensions. Lenders also reported information on

about 5.9 million loans they purchased from other

institutions and on some 397,000 requests for preapprovals of home-purchase loans that either were

turned down by the lender at the time the preapproval was sought or were granted but not acted on

by the applicant (data not shown in table). The total

number of reported applications and purchased loans

increased about 2.8 million, or 7 percent, from 2004;

most of the increase was for applications for homepurchase loans. The number of applications for loans

to refinance an existing loan fell about 1 percent,

likely because of an increase in interest rates in 2005.

From the 2005 HMDA data, the FFIEC prepared

disclosure statements for 8,848 HMDA-reporting

institutions—3,904 commercial banks, 974 savings

institutions, 2,047 credit unions, and 1,923 mortgage

companies (table 2). Of the mortgage companies,

70 percent were independent entities—that is, institutions that were neither subsidiaries of depository

institutions nor affiliates of bank holding companies

(data derived from table). The disclosure statements

consisted of 78,193 distinct reports, each covering the

lending activity of a particular institution in each

metropolitan statistical area (MSA) in which it had a

home or branch office (table 1, last column). The total 15. Refer to www.ffiec.gov/PDF/fairlend.pdf.

16. The assessment areas of lenders covered by the CRA include

principally the locales in which a lender has its main or branch offices

and its deposit-taking automated teller machines. For a more complete

definition of CRA assessment areas, refer to the Federal Reserve

Board’s Regulation BB, section 228.41. Also refer to Robert B. Avery,

Glenn B. Canner, Shannon C. Mok, and Dan S. Sokolov (2005),

‘‘Community Banks and Rural Development: Research Relating to

Proposals to Revise the Regulations That Implement the Community

Reinvestment Act,’’ Federal Reserve Bulletin, vol. 91 (Spring),

pp. 202–35.

17. In recent years, many lending institutions have developed

programs to respond to prospective homebuyers’ need to provide

sellers with evidence that they are likely to qualify for financing once a

contract for sale has been signed. Such programs review requests for

pre-approvals of home-purchase loans and typically provide a prospective homebuyer with a binding written commitment to finance a

purchase (subject to certain conditions). The application counts shown

in table 1 exclude information reported on pre-approvals that did not

result in a loan.

A128 Federal Reserve Bulletin h 2006
number of reporting institutions was little changed

from 2004, as was the distribution of reporters by type

of institution.

Lender Specialization

Mortgage companies, as distinct from depository

institutions, received more than 60 percent of all the

home-loan applications reported in the 2005 HMDA

data, although such companies accounted for only

about one-fifth of the reporting institutions (table 3).

Among mortgage companies, those affiliated (either

directly or indirectly) with a depository institution

tended to be very active lenders: The 576 mortgage

company affiliates processed 24 percent of the applications in 2005.

Different types of lending institutions tend to

specialize in different types of home loans, although

less so than in the past. The most notable change

has been the diminished role that mortgage companies play in originating government-backed loans.

In 2005, mortgage companies accounted for nearly

64 percent of government-backed originations. As

recently as 2002, their share of originations of this

type had been 83 percent. Depository institutions

extended 71 percent of reported home-improvement

loans and about 88 percent of multifamily loans

(data not shown in tables). Commercial banks accounted for about half the loans for manufactured

homes in 2005.

Activity and Size of Lender

Although the number of lending institutions covered

by HMDA is large, most of these institutions, whether

measured by asset size or by some measure of lending

activity (such as the number of reported applications

or loans), are small (table 3). For 2005, 60 percent of

the reporting institutions each provided information

on fewer than 250 loans or applications, accounting for

1. Home loan and reporting activity of home lenders covered under HMDA, 1990–2005

Number

Year

Applications received for home loans on one- to four-family

properties, and home loans purchased from other lenders (millions)

Reporters Disclosure

reports Applications 2

Loans

purchased Total1

Home

purchase Refinance Homeimprovement Total1

1990 ............ 3.27 1.07 1.16 5.51 1.15 6.66 9,332 24,041

1991 ............ 3.26 2.11 1.18 6.55 1.36 7.91 9,358 25,934

1992 ............ 3.54 5.24 1.23 10.01 1.98 12.00 9,073 28,782

1993 ............ 4.52 7.72 1.40 13.64 1.80 15.44 9,650 35,976

1994 ............ 5.20 3.80 1.69 10.69 1.48 12.17 9,858 38,750

1995 ............ 5.51 2.70 1.75 9.96 1.28 11.24 9,539 36,611

1996 ............ 6.33 4.54 2.14 13.01 1.82 14.83 9,328 42,946

1997 ............ 6.75 5.39 2.16 14.30 2.08 16.38 7,925 47,416

1998 ............ 7.96 11.42 2.04 21.43 3.23 24.65 7,836 57,294

1999 ............ 8.43 9.37 2.05 19.85 3.01 22.86 7,832 56,966

2000 ............ 8.28 6.54 1.99 16.81 2.40 19.21 7,713 52,776

2001 ............ 7.69 14.29 1.85 23.83 3.77 27.59 7,631 53,066

2002 ............ 7.40 17.48 1.53 26.41 4.83 31.24 7,771 56,506

2003 ............ 8.15 24.60 1.51 34.26 7.23 41.49 8,121 65,808

2004 ............ 9.79 16.10 2.20 28.13 5.14 33.27 8,853 72,246

2005 ............ 11.67 15.90 2.54 30.17 5.87 36.04 8,848 78,193

Note: Here and in all subsequent tables except tables 3 and 5, for 2004 and

2005, applications exclude requests for pre-approval that were denied by the

lender or were accepted by the lender but not acted upon by the borrower. In

this article, applications are defined as being for a loan on a specific property;

they are thus distinct from requests for pre-approval, which are not related to a

specific property.

1. Applications for multifamily homes are included only in the ‘‘total’’ columns; for 2005, these applications numbered nearly 57,700.

2. A report covers the mortgage lending activity of a lender in a single metropolitan statistical area in which it had an office during the year.

Source: Here and in subsequent tables and figures except as noted, Federal

Financial Institutions Examination Council, data reported under the Home

Mortgage Disclosure Act (www.ffiec.gov/hmda).

2. Distribution of home lenders covered by HMDA,

by type of institution, 2005

Type Number Percent

Depository institution

Commercial bank ........... 3,904 44.1

Savings institution . . . . . . . . . . 974 11.0

Credit union ................ 2,047 23.1

All . . . . . . . . . . . . . . . . . . . . . . . . . 6,925 78.2

Mortgage company

Independent ................ 1,347 15.2

Affiliated1 . . . . . . . . . . . . . . . . . . 576 6.5

All . . . . . . . . . . . . . . . . . . . . . . . . . 1,923 21.7

All institutions ............... 8,848 100

1. Subsidiary of a depository institution or an affiliate of a bank holding

company.

Higher-Priced Home Lending and the 2005 HMDA Data A129
just 1.6 percent of all the reported data. At the other

end of the spectrum, 6 percent of reporting institutions

each provided information on 5,000 or more loans or

applications, but these few highly active lenders accounted for 88 percent of all the reported data.

Asset size is available only for depository institutions. Asset size and lending activity are highly

correlated. For example, the 707 depository institutions with assets of $1 billion or more reported

86 percent of all applications reported by depositories, whereas the 4,236 HMDA-reporting depository

institutions with assets of less than $250 million

accounted for only about 5 percent of the applications

(percentages derived from table 3).

Many HMDA reporters are affiliated with each

other. If individual HMDA reporters are aggregated to

their highest level of corporate organization (such as a

bank holding company), the concentration of mortgage lending nationwide is evident. The twenty-five

organizations reporting the largest number of applications and loans accounted for 54 percent of the 2005

data, a proportion essentially unchanged from 2004

(data not shown in tables).

DISPOSITION OF APPLICATIONS, SELECTED

CATEGORIES OF LOAN PRODUCTS, AND

THE SECONDARY MARKET

The HMDA data provide opportunities to categorize

applications and loans in a wide variety of ways. For

the analysis here, applications were grouped into

twenty-five product categories based on loan and

property type, purpose of the loan, and lien and

owner-occupancy status.18 For each product category,

information is provided on the number of total and

pre-approval applications, application denials, originated loans, loans with prices above the thresholds,

loans covered by the Home Ownership and Equity

Protection Act of 1994, and the mean and median

APR spreads for loans priced above certain thresholds (table 4).

Because the transition rules regarding the reporting

of data create problems for assessing some of the

18. Applications in which the lender reported that the race, ethnicity,

or sex of the applicant or co-applicant was ‘‘not applicable’’ were

assumed to have been made by businesses (including trusts) rather

than by individuals.

3. Distribution of home lenders covered by HMDA, by type of lender and the number of applications they receive, 2005

Type of lender,

and subcategory

(asset size in millions of

dollars, or affiliation)

Number of applications

1–99 100–249 250–999

Percent of

type1

Percent of

subcategory2

Percent of

type1

Percent of

subcategory 2

Percent

of type1

Percent of

subcategory 2

Depository institution

Commercial bank

Less than 250 .......................... 78.8 58.7 66.0 30.4 27.4 10.1

250–999 ............................... 17.9 25.0 29.8 25.8 60.6 41.7

1,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 12.6 4.1 9.6 12.1 22.4

All . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 41.8 100 26.6 100 21.2

Savings institution

Less than 250 .......................... 84.6 40.4 70.3 38.0 25.2 18.4

250–999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.8 7.2 27.3 18.9 65.1 61.3

1,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 5.2 2.4 3.9 9.8 21.4

All . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 22.6 100 25.6 100 34.7

Credit union

Less than 250 .......................... 96.1 63.6 84.4 26.7 34.8 9.5

250–999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 9.1 14.6 16.7 58.7 58.0

1,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . .1 .9 1.0 4.7 6.5 25.2

All . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 49.2 100 23.5 100 20.2

All depository institutions

Less than 250 .......................... 85.2 58.5 71.6 29.9 28.8 10.8

250–999 ............................... 12.6 18.4 25.3 22.6 61.0 48.7

1,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 9.2 3.1 7.6 10.1 22.6

All . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 42.0 100 25.6 100 22.8

Mortgage company

Independent .............................. 41.2 11.4 73.3 13.1 79.4 28.4

Affiliated ................................. 58.8 38.2 26.7 11.1 20.6 17.2

All . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 19.5 100 12.5 100 25.0

All institutions .............................. . . . 37.1 . . . 22.7 . . . 23.3

Memo

All applications, by number reported

by lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 . . . 1.1 . . . 3.4

Note: Refer to table 2, note 1, and general note to table 1.

1. Distribution sums vertically.

2. Distribution sums horizontally.

. . . Not applicable.

A130 Federal Reserve Bulletin h 2006
2004 and 2005 data on loan pricing, as they do for

assessing the data on manufactured homes and preapprovals, the analysis that follows excludes ‘‘transition’’ applications—that is, those submitted before

January 1, 2004 (data on these applications are shown

as memo items in tables 4 and 5). Otherwise, information is given on all applications reported under

HMDA.

Disposition of Applications

HMDA data are the only publicly available source of

information on the disposition of individual applications for home loans. Because the data include information on the race, ethnicity, and sex of applicants as

well as the type and purpose of the loan and the

location of the property, the disposition of applications can be assessed along many dimensions.

The HMDA data for 2005 indicate that lenders

approve most of the applications they receive, although the proportion approved or denied varies somewhat by loan purpose and product and by lien status. In

general, denial rates are notably higher for refinancings and for home-improvement loans than for homepurchase loans, perhaps because of the prequalification and financial counseling activities that many

prospective borrowers go through before purchasing a

home (table 4). Denial rates are lower for governmentbacked loans than for conventional loans and are

especially high for loans to purchase manufactured

homes. Requests for pre-approval are denied at a

higher rate than applications initiated through a preapproval program (table 5).

Compared with denial rates in 2004, those in 2005

are slightly higher for conventional home-purchase

and refinance loans and are either unchanged or

slightly lower for other loan products. Overall, the

denial rate for all loans in 2005 was 27.1 percent,

compared with 26.5 percent in 2004.

Conventional and Government-Backed Loans

As in 2004, most applications (about 95 percent in

2005) for loans to purchase owner-occupied one- to

four-family homes (either site-built or manufactured)

were for conventional loans—that is, nongovernment-backed loans (table 4). The remainder

were for government-backed forms of credit, mostly

those involving the Federal Housing Administration

(FHA).

The share of all HMDA-reported loans backed by

the FHAhas been declining over the past several years,

3.—Continued

Type of lender,

and subcategory

(asset size in millions of

dollars, or affiliation)

Number of applications Memo

1,000–4,999 5,000 or more Any

Number of

lenders

Percent of

Percent of applications

type1

Percent of

subcategory 2

Percent of

type1

Percent of

subcategory 2

Percent of

type1

Percent of

subcategory

Depository institution

Commercial bank

Less than 250 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 .8 1.2 0 57.7 100 2,254 1.0

250–999 ............................... 32.4 7.4 2.5 .2 30.8 100 1,204 1.6

1,000 or more .......................... 61.5 37.9 96.3 17.5 11.4 100 446 19.0

All . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 7.0 100 2.1 100 100 3,904 21.6

Savings institution

Less than 250 .......................... 12.0 2.8 3.4 .4 47.3 100 461 .5

250–999 ............................... 38.9 11.7 5.1 .8 36.9 100 359 .7

1,000 or more .......................... 49.1 34.4 91.5 35.1 15.8 100 154 11.8

All . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 11.1 100 6.1 100 100 974 12.9

Credit union

Less than 250 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 .3 0 0 74.3 100 1,521 .5

250–999 ............................... 50.4 16.2 0 0 20.5 100 419 .8

1,000 or more .......................... 46.7 58.9 100 10.3 5.2 100 107 1.1

All . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 6.6 100 .5 100 100 2,047 2.5

All depository institutions

Less than 250 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 .8 2.0 .1 61.2 100 4,236 2.0

250–999 ............................... 38.4 10.0 3.3 .3 28.6 100 1,982 3.1

1,000 or more .......................... 55.0 40.3 94.7 20.2 10.2 100 707 31.9

All . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 7.5 100 2.2 100 100 6,925 37.0

Mortgage company

Independent .............................. 82.5 30.0 68.3 17.2 70.1 100 1,347 39.5

Affiliated ................................. 17.6 14.9 31.7 18.6 30.0 100 576 23.5

All . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 25.5 100 17.6 100 100 1,923 63.0

All institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4 . . . 5.5 . . . 100 8,848 100

Memo

All applications, by number reported

by lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 . . . 88.0 . . . 100 . . . 100

Higher-Priced Home Lending and the 2005 HMDA Data A131
4. Disposition of applications for home loans, and origination and pricing of loans, by type of home and type of loan, 2005

Type of home and loan

Applications Loans originated

Number

submitted

Acted upon by lender

Number

Loans with annual percentage rate (APR)

spread above the threshold1

Number Percent

Distribution,

by percentage points

of APR spread

Number Number

denied

Percent

denied 3–3.99 4–4.99

ONE- TO FOUR-FAMILY

Nonbusiness related 3

Owner occupied

Site built

Home purchase

Conventional

First lien ...................... 6,838,946 5,922,478 969,271 16.4 4,399,445 1,080,344 24.6 27.0 35.4

Junior lien .................... 1,930,805 1,701,237 304,874 17.9 1,215,902 604,924 49.8 . . . . . .

Government backed

First lien ...................... 554,607 494,785 61,859 12.5 408,618 3,654 .9 76.3 13.0

Junior lien .................... 1,157 941 106 11.3 789 29 3.7 . . . . . .

Refinance

Conventional

First lien ...................... 12,752,498 9,637,488 3,176,225 33.0 5,518,481 1,418,459 25.7 27.4 31.7

Junior lien .................... 1,449,919 1,205,491 359,090 29.8 720,380 217,570 30.2 . . . . . .

Government backed

First lien ...................... 247,768 212,745 42,752 20.1 150,000 1,349 .9 42.8 41.2

Junior lien . . . . . . . . . . . . . . . . . . . . 433 331 50 15.1 257 24 9.3 . . . . . .

Home improvement

Conventional

First lien ...................... 932,159 712,434 252,675 35.5 399,723 104,930 26.3 34.6 29.2

Junior lien .................... 1,090,972 954,402 400,022 41.9 461,296 82,013 17.8 . . . . . .

Government backed

First lien ...................... 3,547 3,082 768 24.9 2,003 110 5.5 52.7 13.6

Junior lien .................... 3,440 2,972 753 25.3 1,867 1,116 59.8 . . . . . .

Conventional or governmentbacked, unsecured ........... 325,391 315,102 149,744 47.5 143,716 . . . . . . . . . . . .

Manufactured

Conventional, first lien

Home purchase .................. 386,286 367,166 193,285 52.6 99,964 58,304 58.3 26.8 24.7

Refinance ........................ 233,159 190,832 103,360 54.2 69,807 38,482 55.1 30.0 30.0

Other .............................. 131,221 119,064 48,584 40.8 60,264 12,957 21.5 17.2 18.0

Nonowner occupied 4

Conventional, first lien

Home purchase .................. 1,548,496 1,361,256 241,699 17.8 1,010,518 205,020 20.3 41.5 27.5

Refinance ........................ 1,053,842 888,321 249,826 28.1 557,262 125,333 22.5 30.7 29.6

Other .............................. 440,842 386,483 118,046 30.5 235,844 112,909 47.9 3.6 2.4

Business related 3

Conventional, first lien

Home purchase .................. 72,619 62,161 4,377 7.0 52,601 6,194 11.8 53.5 23.4

Refinance ........................ 59,831 48,215 4,913 10.2 38,694 5,366 13.9 36.6 24.3

Other .............................. 31,417 25,969 3,645 14.0 19,277 4,235 22.0 3.1 .9

MULTIFAMILY5

Conventional, first lien

Home purchase .................. 27,132 24,867 2,354 9.5 21,526 1,283 6.0 43.8 25.1

Refinance ........................ 24,262 21,840 2,192 10.0 18,872 1,198 6.3 47.5 24.6

Other .............................. 6,144 5,403 598 11.1 4,605 230 5.0 22.6 10.0

Total .............................. 30,146,893 24,665,065 6,691,068 27.1 15,611,711 4,086,033 26.2 21.6 24.3

Note: Excludes transition-period applications (those submitted before 2004)

and transition-period loans (those for which the application was submitted before 2004).

1. APR spread is the difference between the APR on the loan and the yield

on a comparable-maturity Treasury security. The threshold for first-lien loans is

a spread of 3 percentage points; for junior-lien loans, it is a spread of 5 percentage points.

2. Loans covered by the Home Ownership and Equity Protection Act of

1994, which does not apply to home-purchase loans.

3. Business-related applications and loans are those for which the lender

reported that the race, ethnicity, and sex of the applicant or co-applicant are

‘‘not applicable’’; all other applications and loans are nonbusiness related.

4. Includes applications and loans for which occupancy status was missing.

5. Includes business-related and nonbusiness-related applications and loans

for owner-occupied and nonowner-occupied properties.

. . . Not applicable.

A132 Federal Reserve Bulletin h 2006
from about 16 percent in 2000 to less than 3 percent in

2005 (data not shown in tables). Of all first-lien

home-purchase loans reported in 2005, the FHA share

was 5 percent. New, more flexibly underwritten conventional loan products are attracting borrowers who,

in the past, might otherwise have sought FHAbacking,

particularly those borrowers seeking loans with high

LTV ratios.Also, in some areas, high and rapidly rising

home prices have diminished borrower interest in the

FHA program as FHA insurance limits have fallen

behind increases in local home values. In some parts of

the country, FHA-insured products account for a negligible share of the market. In the metropolitan division that includes San Francisco, for example, only

two of the roughly 23,000 first-lien home-purchase

loans were FHA-insured in 2005.

4.—Continued

Loans originated

Memo

Loans with annual percentage rate (APR) Transition-period applications (those submitted before 2004)

spread above the threshold1

Distribution,

by percentage points

of APR spread

APR spread

(percentage points) Number of

HOEPAcovered

loans 2

Number

submitted

Number

denied

Percent

denied

Loans originated

Number of

HOEPAcovered

loans 2

5–6.99 7–8.99 9 or more Mean Median Number

Percent with

APR spread

above

threshold

34.0 3.4 .2 4.8 4.7 . . . 9,178 718 9.5 5,367 2.6 . . .

72.7 25.9 1.4 6.5 6.3 . . . 449 36 10.9 222 9.0 . . .

8.8 1.4 .5 3.8 3.3 . . . 972 124 21.1 302 .3 . . .

51.7 34.5 13.8 7.1 7.0 . . . 2 0 0 0 0 . . .

35.9 4.4 .6 4.8 4.7 15,602 4,382 630 21.8 1,447 9.7 1

59.9 30.9 9.2 7.0 6.7 7,225 206 19 14.7 80 10.0 1

11.9 3.9 .1 4.3 4.5 19 332 66 34.2 49 2.0 0

54.2 41.7 4.2 6.9 6.8 1 0 0 0 0 0 0

30.3 5.0 .9 4.7 4.5 1,873 92 7 9.3 54 11.1 0

43.8 31.4 24.8 7.7 7.4 5,726 31 10 71.4 4 0 0

24.5 9.1 . . . 4.5 3.9 1 1 0 0 0 0 0

42.7 27.8 29.6 8.1 7.4 472 0 0 0 0 0 0

. . . . . . . . . . . . . . . . . . 5 1 50.0 0 0 . . .

31.3 12.4 4.7 5.4 4.9 . . . 89 10 11.9 51 11.8 . . .

30.6 7.0 2.4 5.0 4.7 1,760 87 14 21.2 24 20.8 0

27.5 21.9 15.4 6.5 5.9 1,059 85 14 20.9 30 6.7 0

27.7 2.8 .5 4.5 4.3 . . . 1,599 159 12.1 903 4.8 . . .

34.9 4.2 .5 4.8 4.7 1,534 634 90 21.4 251 15.5 0

48.7 32.6 12.7 7.0 6.8 470 77 14 23.0 36 30.6 0

16.7 4.2 2.1 4.4 3.9 . . . 1,778 123 8.0 1,084 1.6 . . .

32.1 5.4 1.7 4.8 4.6 134 641 80 17.3 167 1.8 1

60.0 29.3 6.7 6.7 6.5 92 361 62 23.2 73 6.8 1

29.0 1.8 .3 4.5 4.2 . . . 59 3 5.7 46 0 . . .

24.6 3.2 .1 4.4 4.1 5 62 3 5.3 34 2.9 0

56.1 8.7 2.6 5.4 5.3 7 9 0 0 8 12.5 0

41.8 10.2 2.0 5.3 5.1 35,980 21,131 2,183 13.5 10,232 4.4 4

Higher-Priced Home Lending and the 2005 HMDA Data A133
Owner-Occupancy Status

Some believe that part of the strength in housing

markets over the past several years is due to a

growing number and share of home sales to investors

or individuals purchasing second homes, as distinct

from buyers who intend to make the units being

purchased their primary residence. HMDA data can

be used to document the role of investors and secondhome buyers in the housing market because the data

indicate whether the property to which an application

or loan relates is intended as the borrower’s principal

dwelling (that is, as an owner-occupied unit).19 A

limitation to using mortgage lending information to

gauge the activity of investors and second-home

buyers is that a portion of these buyers do not use

mortgages; rather, they pay cash for the properties or

take out commercial loans. (Of course, some owneroccupants also purchase homes solely with cash.) In

2005, lenders covered by HMDA reported on roughly

3 million applications for nonowner-occupied properties (data derived from table 4). About half of these

applications were conventional first liens for home

purchase.

The HMDA data indicate that the share of reported

lending for nonowner-occupied purposes remained

steady from 1990 through the mid-1990s, primarily in

the range of 4.5 percent to 6.0 percent (whether

measured in number of loans or dollar amount of

loans), and then began rising (table 6). In 2005, the

nonowner-occupied share of the home-purchase loan

market in terms of number of loans was about

17 percent and in terms of dollar amount of loans was

roughly 16 percent. Both figures rose from 2004,

when the shares were 15 percent and 13 percent

respectively.

19. An investment property is a nonowner-occupied dwelling that is

intended to be continuously rented. Some nonowner-occupied units—

vacation homes and second homes—are for the primary use of the

owner and would thus not be considered investment properties. The

HMDA data do not, however, distinguish between these two types of

nonowner-occupied dwellings.

5. Home-purchase lending that began with a request for pre-approval: Disposition and pricing, by type of home, 2005

Type of home

Requests for pre-approval Applications preceded by

requests for pre-approval 1

Loan originations whose applications were

preceded by requests for pre-approval

Number

acted upon

by lender

Number

denied

Percent

denied

Number

submitted

Acted upon by lender

Number

Loans with annual percentage

rate (APR) spread

above the threshold 2

Number Number

denied Number Percent

ONE- TO FOUR-FAMILY

Nonbusiness related 3

Owner occupied

Site built

Conventional

First lien ........................ 834,824 205,707 24.6 548,224 484,423 38,343 409,856 62,189 15.2

Junior lien ....................... 137,063 25,952 18.9 100,161 90,799 5,991 77,428 22,986 29.7

Government backed

First lien ........................ 94,105 28,830 30.6 64,370 57,719 4,948 48,774 902 1.8

Junior lien . . . . . . . . . . . . . . . . . . . . . . . 186 35 18.8 156 130 17 111 4 3.6

Manufactured

Conventional, first lien ............. 43,042 22,200 51.6 40,178 34,042 19,715 8,980 6,363 70.9

Other .............................. 4,958 1,837 37.1 3,375 3,027 564 2,181 163 7.5

Nonowner occupied 4

Conventional, first lien ............. 121,816 21,453 17.6 86,844 75,387 7,917 61,782 10,355 16.8

Other .............................. 16,600 2,322 14.0 14,375 12,009 1,131 9,659 5,830 60.4

Business related 3

Conventional, first lien ............. 5,197 1,619 31.2 3,784 2,619 263 2,239 420 18.8

Other .............................. 1,107 91 8.2 1,061 810 63 705 272 38.6

MULTIFAMILY5

Conventional, first lien . . . . . . . . . . . . . 420 43 10.2 402 299 33 248 29 11.7

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 7 8.9 77 57 5 45 14 31.1

Total .............................. 1,259,397 310,096 24.6 863,007 761,321 78,990 622,008 109,527 17.6

Note: Excludes transition-period requests for pre-approval (those submitted

before 2004). Refer to general note to table 1.

1. These applications are included in the total of 30,146,893 reported in

table 4.

2. Refer to table 4, note 1.

3. Business-related applications and loans are those for which the lender

reported that the race, ethnicity, and sex of the applicant or co-applicant are

‘‘not applicable’’; all other applications and loans are nonbusiness related.

4. Includes applications and loans for which occupancy status was missing.

5. Includes business-related and nonbusiness-related applications and loans

for owner-occupied and nonowner-occupied properties.

. . . Not applicable.

A134 Federal Reserve Bulletin h 2006
The extent of lending for nonowner-occupied properties varies considerably by geography (figure 1).

Some of the states with the highest incidence of such

lending in 2005 included Florida, Nevada, Hawaii,

South Carolina, and Vermont, all of which have

significant second-home markets. Each of these states

has also experienced elevated shares of lending for

nonowner-occupied properties for the past several

years.

Piggyback Lending

The expanded HMDA data provide an opportunity to

measure the extent to which homebuyers are simultaneously obtaining first- and junior-lien loans. Such

simultaneous borrowing has been a feature of the

conventional mortgage marketplace for some time

but has grown in importance in recent years as

lenders have marketed products intended to offer

consumers an alternative to private mortgage insurance (PMI) or, in some cases, a line of credit that may

be used for a variety of purposes. Simultaneous

borrowing of this type is often referred to as a

‘‘piggyback’’ loan or an ‘‘80-10-10’’ loan.

Many first-time homebuyers have few assets available to satisfy down-payment and closing-cost requirements, and thus they can ordinarily qualify for a

mortgage only with a high LTV ratio and some type

of mortgage backing that protects the lender in case

5.—Continued

Loan originations whose applications were

preceded by requests for pre-approval Memo

Applications with transition-period requests for pre-approval

(request submitted before 2004) Loans with annual percentage rate (APR) spread above the threshold 2

Distribution,

by percentage points of APR spread

APR spread

(percentage points)

Number

submitted

Number

denied

Percent

denied

Loans originated

3–3.99 4–4.99 5–6.99 7–8.99 9 or more Mean

spread

Median

spread Number

Percent

with APR

spread

above

threshold

30.3 25.3 36.0 7.8 .6 4.9 4.8 435 14 4.6 207 6.3

. . . . . . 66.8 30.1 3.1 6.6 6.4 28 0 0 16 6.3

57.4 33.1 8.0 1.1 .3 4.1 3.8 133 7 9.6 57 0

. . . . . . 75.0 25.0 0 6.2 5.6 0 0 0 0

14.4 20.3 32.8 24.1 8.4 6.2 5.8 3 0 0 0 0

28.8 .6 61.3 9.2 0 5.4 6.0 1 0 0 1 0

54.5 22.6 17.3 4.7 .9 4.3 3.9 90 6 9.1 37 10.8

.1 0 39.8 41.4 18.7 7.6 7.5 5 4 80.0 1 100

20.5 11.4 25.2 16.2 26.7 6.8 6.4 41 0 0 23 0

2.2 0 36.4 20.2 41.2 8.4 8.0 7 0 0 2 0

27.6 27.6 41.4 3.4 0 4.7 4.7 0 0 0 0 0

0 0 57.1 28.6 14.3 7.7 6.1 0 0 0 0 0

23.8 18.0 40.5 14.9 2.8 5.5 5.3 743 31 6.2 344 5.5

6. Home-purchase loans on nonowner-occupied site-built

homes as a share of all first-lien home-purchase loans

on one- to four-family homes, by number and dollar

amount of loans, 1990–2005

Percent

Year Number Dollar amount

1990 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 5.9

1991 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6 4.5

1992 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 4.0

1993 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 3.8

1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 4.3

1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 5.0

1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 5.1

1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.0 5.8

1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 6.0

1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 6.4

2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 7.2

2001 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 7.6

2002 .......................... 10.5 9.2

2003 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.9 10.6

2004 .......................... 14.9 13.1

2005 .......................... 17.3 15.7

Higher-Priced Home Lending and the 2005 HMDA Data A135
Percent

±±±±±

Incidence of nonowner-occupied lending for first-lien home-purchase loans on one- to four-family, site-built homes, by state and by quintile, 2005

1.

A136 Federal Reserve Bulletin

h 2006
of default. Other borrowers have the financial capacity to make a large down payment but prefer not to do

so. Traditionally, lenders and secondary-market purchasers have sought protection in case of borrower

default for loans with high LTV ratios. PMI reduces a

lender’s credit risk by insuring against losses associated with borrower default up to a contractually

established percentage of the claim amount. PMI

premiums are paid by the borrower, usually as an

add-on to the monthly mortgage payment.

Typically, PMI is required on conventional loans

with LTV ratios above 80 percent. Over the past few

years, lenders have become more active in selfinsuring by waiving PMI requirements if a borrower

simultaneously takes out a first-lien loan with an LTV

ratio of 80 percent or more and a junior-lien loan at a

higher price to cover the remaining portion of the

loan. The combined loans are often competitive on a

price basis with a single loan involving PMI and offer

the borrower a tax advantage because the interest

payments on the junior-lien loan are generally taxdeductible, whereas the PMI premiums are not.

Piggyback loans are not identified as such in the

HMDA data. However, the data provide a basis for

identifying piggyback loans if one assumes that two

conventional home-purchase loans involving properties in the same census tract, from the same lender,

with identical time of application and closing, and

with the same owner-occupancy status, borrower

income, race or ethnicity, and sex involved the same

borrower and the same home. Since 2004, the identification process has been improved by the addition of

lien status, which earlier could only be approximated

by comparing the size of loans that were matched. For

2005, we estimate that about 85 percent of the

junior-lien home-purchase loans for owner-occupied

properties can be matched to a first-lien loan by this

process.20

The expanded HMDA data document the importance of the junior-lien home-purchase loan market.

For 2005, lenders reported on a total of 1.37 million

junior-lien loans used for the purpose of home purchase, up 74 percent from 2004 (data not shown in

tables). The vast majority of junior-lien loans are

conventional loans: Only a very small number (fewer

than 1,000 nationwide) of the junior-lien loans issued

in 2005 involved government-backed forms of credit

(table 4). Overall, for 2005, we estimate that 22 percent of the reported first-lien home-purchase loans on

owner-occupied site-built homes for one to four

families involved a junior-lien or piggyback loan

reported by the same lender, up from nearly 14 percent in 2004 (table 7).

Piggyback lending varies by borrower income

and race or ethnicity as well as by geography and

loan characteristic.21 Minority borrowers, borrowers

with middle or upper incomes, and borrowers who

purchased homes in lower-income census tracts are

more likely to use piggyback loans to purchase

homes than non-Hispanic whites or lower-income

borrowers.22 The apparent inconsistency between the

results for borrower income and those for censustract income appears to be driven by the relatively

high incidence of the use of piggyback loans by

middle- and upper-income borrowers purchasing

homes in lower-income areas. Piggyback lending is

also related to the amount borrowed, as larger firstlien loans are more likely to be associated with

piggyback lending than are smaller loans. Regionally, piggyback lending is most common in the

western region of the country and is particularly

frequent in California, Nevada, and Colorado.

Piggyback lending is closely related to the location

of a property relative to the lender’s assessment areas

as defined by the CRA. Borrowers who are obtaining

loans to purchase homes in the CRA assessment areas

of their lenders are much less likely to use piggyback

loans than are borrowers purchasing homes outside of

their lenders’ assessment areas or borrowers obtaining loans from lenders not covered by the CRA

(independent mortgage companies and credit

unions).23 Although the HMDA data do not provide

20. Date information collected under HMDA, which is critical to the

accuracy of the matching process, is not made available to the public

but is available to the agencies that oversee HMDA reporting (including the Federal Reserve Board).

21. Only loans with complete information on census-tract characteristics are included in the analysis.

22. The income category of a borrower is relative to the median

family income of the area (MSA or statewide non-MSA) in which the

property being purchased is located, and the income category of a

census tract is the median family income of the tract relative to that of

the area (MSA or statewide non-MSA) in which the tract is located:

‘‘Low’’ is less than 50 percent of the median; ‘‘moderate’’ is 50 percent

to 79 percent (in this article, ‘‘lower income’’ encompasses the low and

moderate categories); ‘‘middle’’ is 80 percent to 119 percent; and

‘‘upper’’ is 120 percent or more. For loans with two or more

applicants, HMDA-covered lenders report data on only two. Income

for two applicants is reported jointly.

For tables 7 and 12, minority means that the applicant or coapplicant is Hispanic or has given at least one nonwhite race. For other

tables, we use a different taxonomy. Applicants are placed under only

one category for race and ethnicity, generally according to the race and

ethnicity of the person listed first on the application. However, under

race, the application is designated as joint if one applicant reported the

single designation of white and the other reported one or more

minority races. If the application is not joint but more than one race is

reported, the following designations are made: If at least two minority

races are reported, the application is designated as two or more

minority races; if the first person listed on an application reports two

races, and one is white, the application is categorized under the

minority race.

23. Larger commercial banks and savings associations covered by

the CRA (generally those with assets of $1 billion or more) are

Higher-Priced Home Lending and the 2005 HMDA Data A137
an explanation for this finding, one possibility is the

availability of special low-down-payment lending

programs for homebuyers purchasing homes in lenders’ CRA assessment areas, programs that would tend

to diminish the need for a junior-lien loan to provide a

source of down payment when purchasing a home.

The incidence of piggyback lending varies across

neighborhoods according to the distribution of credit

scores among those with outstanding mortgages, the

distribution of educational attainment levels of neighborhood residents, and the proportion of minority

residents in the neighborhood.24 The incidence of

piggyback lending is higher in areas that have larger

proportions of mortgage borrowers with low credit

scores and that have larger minority populations and

is smaller in areas that have larger proportions of

residents with more than a high-school education.

These three relationships generally hold regardless of

the level of census-tract income (data not shown in

table).

Loans for Manufactured Homes

Until the release of the 2004 data, users of HMDA

data had no certain way to identify which applications

and loans involved manufactured homes.25 To help

overcome this limitation, the Department of Housing

and Urban Development (HUD) produced annually a

list of reporting institutions (typically about twenty)

that it believed were primarily in the business of

extending such credit.26 Users of the HMDA data

often relied on the HUD list to identify, albeit imperfectly, loans and applications related to manufactured

homes. This practice had its own limitations: It could

not be used to identify applications and loans related

to manufactured homes reported by lenders not on the

HUD list, and data users often assumed that all loans

by lenders on the list were for manufactured homes

when some were not. The expanded HMDA data

resolve this problem by including a code to identify

applications and loans for manufactured homes.

The 2005 HMDA data indicate that roughly 4,400

required to identify the census tracts in their CRA assessment areas as

of the end of each calendar year. That information was used to

determine which loans in the HMDA data were for properties within

the lenders’ CRA assessment areas. When lenders were part of a bank

or thrift holding company, the combined assessment areas of all banks

in the holding company were used for the analysis.

24. The distribution of credit scores for mortgage borrowers by

census tract relates to all individuals with an outstanding mortgage

loan as of the end of 2004. Nonetheless, we believe it is likely to be

representative of the credit-score distribution of 2005 borrowers. The

data were provided by one of the three national credit-reporting

agencies.

25. As distinct from site-built homes, most manufactured homes are

assembled in factories and shipped to a home site.

26. Refer to www.huduser.org/datasets/manu.html.

7. Incidence of piggyback lending for home-purchase

loans on owner-occupied, one- to four-family, site-built

homes, and the incidence of such lending that involved

a higher-priced first-lien loan, by characteristic of

borrower and of census tract and by amount of loan,

type of lender, and location of property, 2004 and 2005

Percent

Characteristic and status

Share of loans

that are

piggyback

Share of

piggyback loans

involving

higher-priced

first liens

2004 2005 2004 2005

Borrower

Income ratio

(percent of area median)

Less than 80 . . . . . . . . . . . . . . . . . . . . . . . 11.9 18.9 25.6 61.9

80–100 ............................ 15.9 24.6 21.7 56.4

100 or more ....................... 14.3 21.9 16.1 50.9

Not reported1 . . . . . . . . . . . . . . . . . . . . . . 8.3 19.4 4.7 20.9

Total .......................... 13.9 21.8 19.6 53.6

Minority status

Minority ........................... 20.7 32.6 26.8 69.7

Non-Hispanic white . . . . . . . . . . . . . . . . 11.4 17.7 15.2 41.2

Missing 2 ........................... 13.3 18.2 16.9 51.4

Total .......................... 13.9 21.8 19.6 53.6

Sex

Female ............................ 15.1 24.8 24.3 59.6

Male .............................. 16.2 25.9 22.7 58.6

Joint 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 16.8 13.3 42.4

Total 4 ......................... 13.9 21.8 19.6 53.6

Amount of Loan

(Thousands of Dollars)

Less than 100 ...................... 10.7 16.7 33.3 65.6

100–250 ........................... 15.1 23.6 18.9 51.8

250 or more ....................... 13.9 21.6 13.6 51.5

Total .......................... 13.9 21.8 19.6 53.6

Type of Lender,

by Property Location

Depository within assessment area 5 . 6.2 9.8 5.0 15.0

Depository outside of assessment

area ........................... 12.1 19.5 23.0 56.0

Lender not covered by CRA6 ....... 22.2 32.2 21.0 60.3

Total 4 ......................... 13.9 21.8 19.6 53.6

Location of Property,

by Freddie Mac Region7

Northeast .......................... 10.3 18.6 18.5 47.6

Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2 19.8 23.0 54.9

North Central . . . . . . . . . . . . . . . . . . . . . . 9.0 16.4 25.9 53.5

Southwest .......................... 15.6 24.0 21.3 47.6

West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.9 28.8 16.0 59.1

Total 4 ......................... 13.9 21.8 19.6 53.6

Census Tract of Property

Income ratio

(percent of area median)

Less than 80 ....................... 18.7 29.4 27.3 67.6

80–119 ............................ 14.1 22.2 20.7 55.2

120 or more . . . . . . . . . . . . . . . . . . . . . . . 11.8 18.0 13.3 41.1

Total 4 ......................... 13.9 21.8 19.6 53.6

Racial or ethnic composition

(minorities as percentage

of population)

Less than 10 . . . . . . . . . . . . . . . . . . . . . . . 9.0 15.0 17.1 42.0

10–50 ............................. 14.5 22.4 17.6 50.3

50–100 ............................ 22.3 33.6 25.9 70.3

Total 4 ......................... 13.9 21.8 19.6 53.6

Location

Central city ........................ 13.7 21.7 19.2 52.7

Noncentral city ..................... 15.5 23.8 19.9 54.9

Rural or only state known . . . . . . . . . . 8.0 13.4 21.7 51.5

Total 4 ......................... 13.9 21.8 19.6 53.6

A138 Federal Reserve Bulletin h 2006
lenders extended more than 256,000 manufacturedhome loans, a loan volume up slightly from that in

2004. Among these lenders, the ten that extended the

largest number of manufactured-home loans accounted for 29 percent of the loans, and the top

twenty accounted for 39 percent (data not shown in

tables).

Loans for manufactured homes entail more credit

risk than do most other forms of secured credit

extended to consumers. Lender caution is reflected in

the very high denial rates on applications for loans

backed by manufactured homes. As noted, past

HMDA data did not distinguish applications for

manufactured homes from those for site-built properties. Analysis of the HUD list of manufactured-home

loan specialists suggested that such lenders had very

high denial rates and that, for lenders offering both

manufactured-home loans and other home loans, a

distorted picture of their propensity to deny credit

could easily be drawn. The 2005 data document the

importance of distinguishing applications for manufactured homes from those for site-built properties.

For example, denial rates for applications for conventional first-lien home-purchase loans on manufactured homes were 52.6 percent in 2005, compared

with 16.4 percent for such applications related to the

purchase of one- to four-family site-built homes

(table 4).

Manufactured housing also differs from site-built

homes in that it serves relatively more lower-income

households but fewer minorities. Of those obtaining

loans to purchase manufactured homes, 38 percent

were of lower income, whereas of those borrowing to

purchase site-built homes, about 20 percent had lower

incomes (table 8). On average, minority borrowers

have lower incomes than do non-Hispanic white

borrowers, but only about 15 percent of manufacturedhome purchasers were members of a racial or ethnic

minority group, whereas about 28 percent of purchasers of site-built homes were minorities.

Secondary-Market Activity

HMDA data document the importance of the secondary market for home loans. Of the 21.5 million home

loans originated or purchased in 2005 by lenders

covered by HMDA, 14.9 million, or nearly 70 percent, were sold in 2005 (data not shown in tables).27

Prominent in the secondary market are governmentsponsored enterprises (GSEs)—in particular, Fannie

Mae and Freddie Mac. For the most part, the purchases of Fannie Mae and Freddie Mac in 2005

27. The HMDA data tend to undercount somewhat the volume of

secondary-market sales. One reason is that, for example, some loans

originated in 2005 will be sold to a secondary-market institution in

2006 or later and thus will never be reported as a sale. Another is that,

as with other HMDA data, about 20 percent of home loans originated

in 2005 were extended by lenders not covered by HMDA.

7.—Continued

Percent

Characteristic and status

Share of loans

that are

piggyback

Share of

piggyback loans

involving

higher-priced

first liens

2004 2005 2004 2005

Credit score of borrowers

(percent of mortgage borrowers

with scores below 600) 8

20 or more ......................... 16.1 27.4 35.8 70.6

10–19 ............................. 15.6 24.4 22.1 57.7

Less than 10 ....................... 12.4 18.7 13.2 43.7

Total 4 ......................... 13.9 21.8 19.6 53.6

Educational attainment of residents

(percent of adults with high-school

education or less)

30 or less .......................... 12.2 18.2 11.5 36.8

31–60 ............................. 14.4 22.6 20.2 54.7

More than 60 ...................... 15.3 24.6 28.8 68.7

Total 4 ......................... 13.9 21.8 19.6 53.6

Real price appreciation

of real estate 9

Less than zero ..................... 15.7 24.1 20.2 58.2

0–20 ............................... 12.4 20.1 20.3 51.4

More than 20 ...................... 12.4 19.6 17.9 46.7

Total 4 ......................... 13.9 21.8 19.6 53.6

Note: For definitions of piggyback lending and higher-priced loan, refer to

text.

Excludes transition-period loans (those for which the application was submitted before 2004). For definition of income categories for borrower and census tract, refer to text note 22. Census tract is for the property securing the

loan. The term minority means Hispanic or Latino ethnicity or any race other

than white for either the borrower or the coborrower. Census-tract data reflect

the 2000 decennial census; they also reflect definitions for metropolitan statistical areas established by the Office of Management and Budget in June 2003

and used in HMDA for the first time in the 2004 data.

1. Information for income was not reported.

2. Information for the characteristic was missing on the application.

3. On the applications for these loans, one applicant reported ‘‘male,’’ and

the other reported ‘‘female.’’ For female and for male, only sole applicants

were considered.

4. Excludes loans for which the information for the characteristic was missing on the application.

5. Includes lending by nonbank affiliates in the CRA assessment area of the

depository institution.

6. Includes credit unions and mortgage companies not affiliated with a

depository institution or with a bank or thrift holding company.

7. Freddie Mac defines its regions as follows: Northeast: N.Y., N.J., Pa.,

Del., Md., D.C., Va., W.V., P.R., Maine, N.H., Vt., Mass., R.I., Conn., V.I.;

Southeast: N.C., S.C., Tenn., Ky., Ga., Ala., Fla., Miss.; North Central: Ohio,

Ind., Ill., Mich., Wis., Minn., Iowa, N.D., S.D.; Southwest: Texas, La., N.M.,

Okla., Ark., Mo., Kan., Colo., Neb., Wyo.; West: Calif., Ariz., Nev., Ore.,

Wash., Utah, Idaho, Mont., Hawaii, Alaska, Guam.

8. Includes all borrowers with an outstanding mortgage regardless of the

year in which the loan was taken out.

9. Based on the change in median home values for a constant 2000-defined

geography.

Source: For Freddie Mac data, Primary Mortgage Market Survey; for

census-tract characteristics, the 1990 and 2000 decennial censuses; for creditscore data, one of the three national credit-reporting agencies.

Higher-Priced Home Lending and the 2005 HMDA Data A139
consisted of conventional first-lien loans originated to

purchase homes or to refinance existing loans. These

two GSEs accounted for 28 percent of all loans

purchased by all secondary-market institutions as

reported in the HMDA data. Fannie Mae and Freddie

Mac, however, focus on the purchase of conventional

home loans within size limits established each year

by the Federal Housing Finance Board. Among such

loans, these two GSEs accounted for about 32 percent

of the purchased conventional conforming loans.28

28. Conforming loans are loans that are within the loan-size limits

determined by the Federal Housing Finance Board and that meet other

requirements used by Freddie Mac and Fannie Mae to determine

8. Distribution of home-purchase loans for one- to four-family owner-occupied homes, by characteristic of borrower

and of census tract and by type of home, 2005

Note: Data revised on Sept. 18, 2006, to correct computational errors.

Characteristic

and status

Site-built Manufactured Total

Memo

Percent of Number

characteristic1

Percent of

status 2

Percent of

characteristic1

Percent of

status 2

Percent of

characteristic1

Percent of

status

Borrower 3

Income ratio (percent of area median)

Less than 50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 93.0 10.4 7.0 3.9 100 181,818

50–79 .......................................... 15.9 95.6 27.4 4.4 16.2 100 765,134

80–119 ......................................... 27.1 97.1 30.7 2.9 27.2 100 1,281,742

120 or more .................................... 53.3 98.5 31.5 1.6 52.7 100 2,483,787

Total 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 97.4 100 2.6 100 100 4,712,481

Race

American Indian or Alaska Native . . . . . . . . . . . . . . . .7 95.8 1.2 4.2 .7 100 36,064

Asian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 99.8 .4 .2 4.9 100 244,143

Black or African American . . . . . . . . . . . . . . . . . . . . . . 7.7 98.4 4.6 1.6 7.6 100 375,188

Native Hawaiian or other Pacific Islander . . . . . . . . . .5 98.2 .4 1.8 .5 100 26,045

White ........................................... 75.1 97.1 85.9 2.9 75.3 100 3,730,468

Two or more minority races . . . . . . . . . . . . . . . . . . . . . .1 97.0 .1 3.0 .1 100 2,453

Joint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 97.9 1.0 2.1 1.3 100 61,723

Missing 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.7 98.3 6.4 1.7 9.6 100 475,141

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 97.4 100 2.6 100 100 4,951,225

Ethnicity

Hispanic or Latino .............................. 12.3 98.4 7.6 1.6 12.2 100 602,774

Not Hispanic or Latino .......................... 76.5 97.2 84.1 2.8 76.7 100 3,798,888

Joint 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 97.8 1.1 2.2 1.3 100 64,609

Missing 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.9 98.1 7.3 1.9 9.8 100 484,954

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 97.4 100 2.6 100 100 4,951,225

Minority status

Minority ........................................ 27.8 98.6 15.4 1.4 27.5 100 1,360,100

Non-Hispanic white ............................. 61.8 96.8 77.0 3.2 62.2 100 3,080,720

Missing 5 ........................................ 10.4 98.1 7.6 1.9 10.3 100 510,405

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 97.4 100 2.6 100 100 4,951,225

Census Tract of Property

Income ratio (percent of area median)

Less than 50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 99.4 .4 .6 1.7 100 81,222

50–79 .......................................... 13.6 97.0 16.1 3.0 13.7 100 668,547

80–119 ......................................... 49.7 96.4 72.2 3.6 50.3 100 2,461,940

120 or more .................................... 35.1 99.2 11.2 .8 34.5 100 1,687,639

Total 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 97.5 100 2.5 100 100 4,899,348

Racial or ethnic composition

(minorities as percentage of population)

Less than 10 .................................... 32.1 96.5 45.3 3.5 32.4 100 1,589,295

10–19 .......................................... 22.8 97.7 21.0 2.3 22.8 100 1,114,804

20–49 .......................................... 28.0 97.8 24.9 2.2 27.9 100 1,366,972

50–79 .......................................... 10.4 98.3 6.8 1.7 10.3 100 505,574

80–100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 99.2 2.0 .8 6.6 100 324,229

Total 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 97.5 100 2.5 100 100 4,900,874

Location

Central city ..................................... 38.6 98.9 16.3 1.1 38.0 100 1,866,761

Noncentral city .................................. 52.3 97.7 48.4 2.3 52.2 100 2,562,936

Rural or only state known . . . . . . . . . . . . . . . . . . . . . . . 9.1 90.9 35.3 9.1 9.8 100 479,951

Total 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 97.5 100 2.5 100 100 4,909,648

Note: Excludes transition-period loans (those for which the application was

submitted before 2004). For definition of income categories for borrower and

census tract, refer to text note 22. Census tract is for the property securing the

loan. Categories for race and ethnicity reflect the revised standards established

in 1997 by the Office of Management and Budget (OMB). The term minority

means Hispanic or Latino ethnicity or any race other than white for both the

borrower and the coborrower. Census-tract data reflect the 2000 decennial census; they also reflect definitions for metropolitan statistical areas established by

the OMB in June 2003 and used in HMDA for the first time in the 2004 data.

1. Distribution sums vertically.

2. Distribution sums horizontally.

3. For details on the identification of borrower income, race, and ethnicity,

refer to text note 22.

4. Excludes loans for which the information for the characteristic was missing on the application.

5. Information for the characteristic was missing on the application.

6. On the applications for these loans, one applicant reported ‘‘Hispanic or

Latino,’’ and the other reported ‘‘not Hispanic or Latino.’’

A140 Federal Reserve Bulletin h 2006
Moreover, mortgage loans purchased by Fannie Mae

and Freddie Mac are largely resold in the form of

mortgage-backed securities.

Other types of purchasing institutions active in the

secondary market include private securitization pools

(12 percent of all loans sold); mortgage, finance, and

insurance companies (13 percent); depository institutions (6 percent); Ginnie Mae (3 percent); affiliates of

institutions covered by HMDA (16 percent); and

‘‘other’’ purchasers (22 percent).29

THE 2005 HMDA DATA ON LOAN PRICING

The expanded HMDA data allow analysis of loan

pricing along a number of dimensions, including by

loan product, across lenders and markets, and by

financial and personal characteristics of borrowers.

The results of this analysis have implications for fair

lending enforcement and CRA supervision activities

and for consumer financial education efforts. The

release of the 2005 HMDA data adds a time dimension to the analysis that can be undertaken because

data users now have two years of loan-pricing information at their disposal. However, caution is warranted, as the different interest rate situations in 2004

and 2005 affected the reported pricing data in important ways.

The Interest Rate Situation and the Reporting

of Higher-Priced Loans

Year-to-year changes in the number or proportion of

loans with prices that exceed the thresholds for

reporting price information under HMDA must be

interpreted with great care. It is tempting to assume

that a change in the incidence of higher-priced

lending from one year to the next simply reflects

changes in the volume of subprime lending activity.

This simple interpretation ignores a number of factors that may influence the incidence of reported

higher-priced lending. An important consideration is

the difference between the criteria used to distinguish loans that are reportable under HMDA as

higher priced and the factors that truly reflect the

elevated credit risks or costs associated with

subprime lending. The difference means that there is

not a direct correspondence between higher-priced

and subprime lending.

Three factors may lead to changes in the reporting

of higher-priced lending. The first is lenders’ business

practices, particularly lenders’ willingness or ability

to bear credit risk. For example, an increase in

competitive conditions in the higher-credit-risk portion of the market has driven down margins and

encouraged lenders to offer a wider range of products.

The second factor that may affect the reporting of

higher-priced lending is consumers’ borrowing practices or credit-risk profiles. Changes in borrower

credit-risk profiles can alter the incidence of subprime

lending even when the interest rate situation is stable.

Such changes reflect real fluctuations in economic

behavior or conditions rather than an artifact of the

HMDA reporting criteria. The credit-risk profile of

the population of borrowers can vary as changes in

general economic conditions encourage one group or

another to be relatively more active in the homebuying or refinancing markets or to alter the types of

refinancings that are undertaken (for example, the

share that involves cashing out equity). The creditrisk profiles of borrowers may also be affected by

local economic conditions. For example, when local

house prices are high relative to incomes or rise

rapidly, more borrowers may have to stretch financially to qualify for loans, and the result is an increase

in the pool of borrowers with high DTI or LTV ratios,

both of which are related to elevated credit risk.

The third factor is the interest rate situation—

specifically, the relationship between short- and longterm interest rates. Generally, interest rate changes

can significantly affect whether loans are reported as

higher priced but are less likely to affect the creditrisk component of loan pricing. The credit-risk component can be affected if interest rate movements

influence the loan-product mix that borrowers use: In

some years, for example, adjustable-rate loans may

be relatively more attractive than fixed-rate loans.

The Interest Rate Situation and the Yield Curve

The yield curve displays how the yield on financial

instruments, such as U.S. Treasury securities, varies

with maturity and, therefore, reflects the relationship

between short- and long-term interest rates. The yield

curve is typically upward sloping—that is, short-term

rates are typically lower than long-term rates. It

usually has such a slope because longer-term investments ordinarily involve greater risk (credit risk,

market interest rate risk, and inflation premium), and

consequently investors require a higher return to be

willing to invest their funds for longer periods.

which loans they may purchase. Loan-size limits for 2005, by property

size, were as follows: one-family unit, $359,650; two-family unit,

$460,400; three-family unit, $556,500; and four-family unit, $691,600.

Limits are 50 percent higher in Alaska, Hawaii, the Virgin Islands, and

Guam.

29. The ‘‘other’’ category includes depository institution holding

companies and subsidiaries of depository institutions that are neither

depository institutions themselves nor affiliates of mortgage or finance

companies.

Higher-Priced Home Lending and the 2005 HMDA Data A141
Over the past twenty years, longer-term rates (for

example, the average annual yield on thirty-year

Treasury securities) have almost always exceeded

shorter-term rates (for example, the average annual

yield on five-year Treasuries), a pattern illustrated by

the positive difference in these rates over time (figure 2). Sometimes, however, the yield curve is relatively flat—that is, short-term rates are close to

long-term rates; occasionally, the yield curve inverts,

and short-term rates rise above long-term rates. A

review of the rate spreads between five-year and

thirty-year Treasury securities over the past two

decades indicates that 2003 and 2004 were somewhat

unusual years by historical standards because the

yield curve was particularly steep during this time,

and consequently the gap between longer- and shorterterm rates was particularly large.

Changes in the shape of the yield curve affect the

reporting of higher-priced loans under HMDA. Because most mortgages prepay in a relatively short

period (well before the stated term of the loan is

reached), lenders use relatively short-term interest

rates to set mortgage rates. For example, lenders often

price thirty-year mortgages according to interest rates

on maturities of fewer than ten years, and they

frequently price certain loan products, such as

adjustable-rate mortgages, on the basis of much

shorter terms than those for fixed-rate loans. But for

most loans, Regulation C requires lenders to use

longer-term rates (for terms of twenty years or more)

to determine whether to report a loan as higher priced

because the stated maturity of most loans, particularly

first-lien loans, exceeds twenty years. Thus, a change

from one year to the next in the relationship between

short- and long-term rates can cause a change in the

proportion of loans that are reported as higher priced,

all other things being equal.

For example, if short-term rates rise relative to

long-term rates, then the number and proportion of

loans reported as higher priced will increase even if

all other factors that may influence the number and

proportion of higher-priced loans, such as the business practices of lenders and the credit-risk profiles

and borrowing practices of borrowers, remain constant. Conversely, if short-term rates fall relative to

long-term rates, then the number and proportion of

loans reported as higher priced will fall even if all

other possibly influential factors remain constant.

Changes in the Yield Curve from 2004 to 2005

The yield curve at the start of 2004 (the first year

lenders were subject to the price disclosure provisions

of HMDA) was upward sloping: In mid-January, for

example, the yield on five-year Treasuries was

2.97 percent, and the yield on thirty-year Treasuries

was 4.87 percent. Over the course of the year, the

difference narrowed as shorter-term rates rose and

longer-term rates fell slightly. By early January 2005,

the yield on five-year Treasuries had risen to 3.71 percent, and the yield on thirty-year Treasuries had fallen

to 4.72 percent. Shorter-term interest rates continued

to rise through 2005 (4.33 percent at the end of

December), while longer-term rates were essentially

unchanged (4.75 percent). Thus, although at the

beginning of 2004 short-term rates were well below

long-term rates, by the end of 2005 short- and longterm rates were much closer.

Because of the changes in the relationship between

short- and long-term interest rates, the gap between

the effective interest rate (measured by the APR on

the loan) on most mortgages and the HMDA threshold for reporting higher-priced loans narrowed markedly between 2004 and 2005. For example, for loans

priced during the week of January 15, 2004, the

average APR on conventional first-lien fixed-rate

thirty-year prime loans reported by Freddie Mac was

5.72.30 As a result, a gap of 215 basis points, or

2.15 percentage points, separated the APR of the

30. Data are from Freddie Mac’s Primary Mortgage Market Survey

(PMMS). We calculated the effective rate (or APR) on the basis of

interest rates and points reported in the survey for conventional

first-lien fixed-rate thirty-year prime loans. Since April 1971, Freddie

Mac has surveyed lenders weekly to determine the average thirty-year

fixed rate offered to prime consumers during the Tuesday of the

surveyed week. Currently, 125 lenders are surveyed each week, and

the mix of lender types—thrifts, commercial banks, and mortgage

lending companies—is roughly proportional to the level of mortgage

business that each type commands nationwide. Over time, the PMMS

2. Spread between interest rates on thirty-year and 

five-year Treasury bonds, 1977–2006 

1.5

1.0

.5

+

_

0

.5

1.0

1.5

2.0

Percentage points

1978 1982 1986 1990 1994 1998 2002 2006

NOTE: After March 2002, the spread is between twenty-year and five-year

Treasury bonds. 

SOURCE: Federal Financial Institutions Examination Council, “FFIEC Rate

Spread Calculator,” www.ffiec.gov/ratespread/default.aspx. 

A142 Federal Reserve Bulletin h 2006
typical prime loan priced that week and the HMDA

reporting threshold. By December 15, 2005, the gap

between the calculated APR and the HMDA threshold

had narrowed to 140 basis points. Although factors

other than interest rate changes may also have influenced the proportion of higher-priced loans reported

under HMDA, this example clearly demonstrates that

even if such factors (including business practices or

consumer credit-risk profiles) had remained the same,

the proportion of higher-priced loans reported under

HMDA would have increased in 2005.

Although the year is not complete, the yield curve

for 2006 has experienced further flattening and, if

other conditions remain the same, will likely result in

an even greater incidence of higher-priced lending as

defined by Regulation C. Through mid-July 2006, the

gap between the calculated APR on conventional

first-lien fixed-rate thirty-year prime loans reported

by Freddie Mac and the HMDA threshold had decreased to about 120 basis points.

The Interest Rate Situation and the Relative

APRs of Fixed- and Adjustable-Rate Loans

The Federal Reserve Board’s Regulation Z requires

that, in calculating the APR for adjustable-rate loans,

lenders assume that the interest rate situation at the

time of origination will continue for the term of the

loan. When the yield curve is steep, it suggests that

the market expects short-term interest rates to rise, yet

the APR calculation for adjustable-rate loans assumes

that interest rates will stay the same.31 Because of this

regulatory construct, when the yield curve is positively sloped, the APRs for adjustable-rate loans tend

to be lower than those for fixed-rate loans of similar

term and credit risk.

Thus, the flattening of the yield curve over the

2004–05 period had two effects. First, as noted earlier,

it narrowed the gap between the longer-term rates used

for the HMDA reporting threshold and the shorterterm rates used for pricing loans. Second, the flattening narrowed the APR gap between adjustable- and

fixed-rate loans because, as short-term interest rates

increased, it reduced the effect of the comparatively

low APR calculations for adjustable-rate loans.32

The likely result of the flattening of the yield curve

was an increase in the proportion of adjustable-rate

loans that exceeded the HMDA price-reporting thresholds. The increase occurred because many relatively

high-rate adjustable-rate loans that would not have

been reported as higher priced in 2004 because of

comparatively low APRs were reported that way in

2005.

To illustrate this effect, we show the APRs of the

prime thirty-year fixed-rate loans, the prime one-year

adjustable-rate loans, and the prime five-year

adjustable-rate loans reported in the Freddie Mac

mortgage interest rate survey for 2004–05 (figure 3).33 The bottom three lines of the figure represent

the differences (gaps) between the effective rates

(APRs) reported by Freddie Mac and the HMDA

reporting threshold. As noted earlier, the reporting

gap between the typical prime thirty-year fixed-rate

loan and the reporting threshold narrowed from 215

basis points at the beginning of 2004 to 140 basis

points at the end of 2005. For one-year adjustable-rate

loans, the gap narrowed much more, from 404 basis

points at the beginning of 2004 to only 75 basis points

at the end of 2005.

Although the differences between the APRs on

fixed- and adjustable-rate loans and the reporting

threshold decreased for both types of loans, the

has expanded to include other types of loans. For more information,

refer to www.freddiemac.com/pmms/pmms_archives.html.

31. Under Regulation Z, borrowers are provided a variety of

disclosures explaining the possibility of a rise in loan rates, the

possible size of the increase, and the circumstances under which an

increase might occur.

32. The flattening of the yield curve actually had a third effect: It

also caused a general increase in the interest rates on adjustable-rate

mortgages. This rise in real rates for adjustable-rate loans may have

affected borrower behavior.

33. The Freddie Mac series for five-year adjustable rates did not

begin until January 1, 2005. For 2004, we show estimates for five-year

adjustable rates based on a statistical model using the one-year

adjustable rates and thirty-year fixed rates reported in Freddie Mac’s

Primary Mortgage Market Survey and the one- and five-year rates for

Treasury securities.

3. HMDA price-reporting threshold, interest rates for 

fixed- and adjustable-rate loans, and spreads between 

the threshold and such rates, 2004–05 

APR, HMDA threshold

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Percentage points

2004 2005

APR, 30-year fixed APR, 1-year adjustable

APR, 5-year adjustable

Spread, 1-year adjustable

Spread, 5-year adjustable

Spread, 30-year fixed

NOTE: For explanation of HMDA price-reporting threshold, refer to text.

Threshold and annual percentage rates (APRs) are for conventional first-lien

thirty-year prime loans. 

SOURCE: APRs are estimated from Freddie Mac, Primary Mortgage

Market Survey. 

Higher-Priced Home Lending and the 2005 HMDA Data A143
decrease for adjustable-rate loans was much larger.

Thus, the gap between the APRs on fixed- and

adjustable-rate loans, which was substantial at the

beginning of 2004, had been virtually eliminated by

the beginning of 2005. This finding suggests that, as

an artifact of regulation, geographic areas with different percentages of fixed-rate versus adjustable-rate

loans might have shown different incidences of

higher-rate loans in 2004. That is, in 2004, areas with

larger shares of adjustable-rate loans likely had fewer

higher-priced loans than areas with larger shares of

fixed-rate loans. This effect should have been much

smaller in 2005 (and in the first half of 2006) because

interest rates on adjustable- and fixed-rate loans were

closer together.

The Interest Rate Situation and Junior-Lien

Loans

The effects of the changing yield curve are reflected

primarily among first-lien loans, which typically have

long terms to maturity. The effect on junior-lien loans

is likely much less, as these loans typically have

maturities considerably shorter than those of first-lien

loans and are priced accordingly. Also, the HMDA

price-reporting threshold for junior-lien loans is set

2 percentage points higher than that for first-lien

loans, a fact that may make the price reporting for

junior-lien loans less sensitive to changes in the yield

curve.

Real Incidence of Higher-Priced Lending

Changes in the incidence of higher-priced lending

caused by the yield curve effects described earlier are

to a large extent an artifact of the way Regulation C

defines a higher-priced loan. That is, they reflect

changes in the way the threshold and APRs (particularly for adjustable-rate loans) are computed and not

necessarily changes in the business practices of lenders or in the credit-risk profiles or preferences of

consumers. It is difficult to speculate on the importance of the latter two factors in explaining changes in

the ‘‘real’’ incidence of higher-priced lending over

time.

The 2004–05 period was characterized by a relatively robust housing market without equity declines

or economic downturns. However, rapidly rising

home prices in several areas of the country may have

put upward pressure on LTV and DTI ratios, particularly for first-time homebuyers, many of whom

stretched financially to buy homes. These changes

may have increased the proportion of homebuyers

who obtained higher-priced loans. The effects may

have differed geographically, as rates of home-price

appreciation and the levels of home prices varied

across the country. Analysis of HMDA data provides

support for this conjecture, as it shows a positive

correlation between the rate of house-price appreciation in a state and the loan-to-income ratio of homebuyers.34

Industry sources provide some support for the view

that the incidence of higher-priced lending experienced a real increase from 2004 to 2005. Most of the

increase seems to have taken place in the near-prime,

or ‘‘alt-A,’’ market. For example, Inside Mortgage

Finance Publications reports that from 2004 to 2005,

the subprime share of the overall market rose somewhat, from 18.5 percent to 20 percent.35 But over the

same period, the near-prime portion of the market

rose substantially more, from 7 percent to 13 percent.

Incidence of Higher-Priced Lending

Most loans reported in 2005 were not higher priced as

defined under Regulation C, although the incidence of

higher-priced lending was significantly greater in

2005 than in 2004. For 2005, 26.2 percent of all

reported loans (excluding loans with application dates

before 2004) were higher priced (table 4). This percentage represents an increase of nearly 70 percent

over the 15.5 percent rate in 2004.

The incidence of higher-priced lending varies considerably across loan products. First, in almost all

cases, government-backed loans—insured by the Federal Housing Administration (FHA) or guaranteed by

the Veterans Administration (VA)—have much lower

incidences of higher-priced lending than do comparable conventional loan products. For example, in

2005, among first-lien home-purchase loans for sitebuilt homes, 24.6 percent of conventional loans had

APRs above the pricing threshold versus only 0.9 percent of government-backed loans. Second, with few

exceptions, first-lien loans have a lower incidence of

higher-priced lending than do junior-lien loans for the

same purposes. For example, in 2005 the incidence of

higher-priced lending for conventional first-lien refinance loans was 25.7 percent, whereas for comparable junior-lien loans it was 30.2 percent. Third,

manufactured-home loans exhibit the greatest incidence of higher pricing across all loan products, a

34. Data on house-price appreciation are from the Office of Federal

Housing Enterprise Oversight (OFHEO). OFHEO estimates and makes

publicly available a quarterly house-price index for single-family

detached homes. The index uses data from Fannie Mae and Freddie

Mac on conventional loan transactions. For details, refer to

www.ofheo.gov/hpiabout.asp.

35. Estimates are derived from Inside Mortgage Finance Publications, Mortgage Market Statistical Annual 2006.

A144 Federal Reserve Bulletin h 2006
result consistent with the elevated credit risk associated with such lending. For 2005, nearly 60 percent of

the conventional first-lien loans used to purchase

manufactured homes were higher priced.

In the secondary market, the vast majority of the

purchases by Fannie Mae and Freddie Mac involved

loans with prices below the thresholds for reporting

price information under HMDA (data not shown in

tables). In total, institutions reporting under HMDA

indicated that 3 percent of their loan sales to these

two GSEs had involved higher-priced loans and that

Fannie Mae had purchased the bulk of the loans.36

Other secondary-market purchasers were active in

buying higher-priced loans, which accounted for more

than half the sales of private securitization pools;

about one-third the sales of insurance companies,

mortgage bankers, finance companies, and credit

unions; and about one-third the sales of ‘‘other’’

purchasers.

Rate Spreads for Higher-Priced Loans

There is considerable variation across loan products

in the incidence of higher-priced lending, but variation across products in mean and median APR spreads

as reported in the HMDA data is much smaller. For

example, for 2005, the mean APR spreads reported

for higher-priced conventional first-lien loans for the

purchase or refinancing of an owner-occupied sitebuilt home were both about 4.8 percent (table 4).

Reflecting, at least in part, the changing interest rate

situation, the levels of the average spreads for these

two large loan product categories were both about

70 basis points higher in 2005 than in 2004.

Because the threshold for reporting is set higher for

junior liens than for first liens, higher-priced juniorlien products have higher mean and median spreads

than do higher-priced first-lien loans. However, unlike

the average spreads for first-lien loans, those for

junior liens rose little between 2004 and 2005. As

noted earlier, the typical junior-lien loan has a term to

maturity that is much shorter than that for first-lien

loans, and so its funding cost typically depends more

on shorter-term sources of funds; consequently, the

flattening of the yield curve had much less effect on

price reporting for junior-lien products. In fact, the

mean spreads reported for the refinancing of juniorlien loans were actually somewhat lower in 2005 than

in 2004.

Loans for manufactured homes differ from other

loan products in that they generally have the highest

mean spreads. As with the pricing of junior-lien loans,

prices on loans for manufactured homes were little

changed from 2004, an indication that most of these

loans have shorter terms to maturity than do most

first-lien loans.

Although the changes in the means and the medians are consistent with an upward shift in the distribution of reported interest rates from 2004 to 2005,

the changes in the distribution of spreads for higherpriced loans are somewhat puzzling. In 2004, for

conventional first-lien products, almost 60 percent of

the higher-priced loans fell within 1 percentage point

of the reporting threshold, and the percentage declined in each subsequent pricing segment (refer to

segment ranges—such as 3–3.99, 4–4.99, and so

on—in table 4). The pattern was similar to the

truncated upper tail of a normal (bell-shaped)

distribution—that is, the distribution was monotonically declining. For 2005, the pattern was quite

different. Only about 27 percent of the higher-priced

loans fell within 1 percentage point of the reporting

threshold, and the percentage increased in the next

two pricing segments before declining thereafter. This

nonmonotonic pattern is not what one would expect if

the changes in interest rates in 2004–05 uniformly

shifted the distribution of loan rates. The pattern is

not a consequence of reporting by any one (highly

active) lender or for any one loan product or area of

the country. Interestingly, this pattern does not hold

for junior liens, which exhibited the same declining

segment share of a truncated normal curve for 2005

as they did for 2004.

As in 2004, only a very small proportion of the

higher-priced first-lien loans reported in 2005 had

spreads that exceeded 7 percentage points. Similarly,

only a small proportion of most types of junior-lien

loans had spreads of 9 percentage points or more. For

example, among the higher-priced conventional firstlien loans used to purchase owner-occupied site-built

homes, only 3.6 percent had spreads that exceeded

7 percentage points (in 2004, the share of loans of this

type with rate spreads exceeding 7 percentage points

was 1.4 percent). Among the conventional junior-lien

loans, only those for home improvement had large

proportions (about 25 percent) with rate spreads

above 9 percentage points.

Pre-Approval Programs and Loan Pricing

Since 2004, the HMDA data have included information about certain types of requests for pre-approval

36. The role of Fannie Mae and Freddie Mac in the higher-priced

portion of the loan market is incompletely measured in the HMDA

data, as the data reflect only their purchases of loans.

Higher-Priced Home Lending and the 2005 HMDA Data A145
of home-purchase loans. But for purposes of reporting under Regulation C, pre-approval programs pertain only to requests for home-purchase loans, and

consequently the data do not include pre-approval

information for applications involving a refinance or

home-improvement loan.

As with the 2004 data, the data for 2005 indicate

that the incidence of higher-priced lending is notably

lower for conventional loans for site-built homes that

were initiated through a pre-approval program than

for all such loans. For example, for conventional

loans secured by a first lien on a site-built home, the

incidence of higher-priced lending for loans initiated

through a pre-approval program was 15.2 percent

(table 5), whereas the rate for all similar first-lien

conventional loans was 24.6 percent (table 4). The

pattern differs for conventional loans to purchase

manufactured homes: Loans initiated through a preapproval program were more likely to be higher

priced. Perhaps those who seek pre-approvals for

manufactured homes are more likely to be stretching

financially and feel a need to provide prospective

sellers with some assurance that they will qualify for

credit.

For borrowers who received higher-priced loans

for site-built homes, the data do not suggest any

meaningful differences in actual prices paid, as the

mean and median spreads were quite similar whether

or not a borrower went through a pre-approval program. For those obtaining loans to buy manufactured

homes, the mean and median spreads were about 100

basis points higher for loans initiated through preapproval programs.

Differences among Lenders in the Propensity

to Make Higher-Priced Loans

As in 2004, most of the nearly 8,500 lenders covered

by HMDA reported extending few if any higherpriced loans in 2005: Nearly 3,200 lenders made no

such loans, and an additional 2,000 reported only

between one and nine higher-priced loans (data not

shown in tables). Toward the other end of the spectrum, about 1,120 lenders reported making at least

100 higher-priced loans; these more-active lenders

accounted for 98 percent of all reported higher-priced

loans. Moreover, the ten lenders with the largest

volume of higher-priced loans extended 59 percent

of all such loans, a share that had increased from

38 percent in 2004.

Lenders extending large numbers of higher-priced

loans can be quite different from other lenders in

business orientation. Some lenders focus on the

higher-priced segment of the market and extend

nearly all their loans to near-prime or subprime

borrowers. However, many institutions serve a broader

market, including borrowers from the prime and

nonprime market segments. If one considers a lender

that devotes 60 percent or more of its business to

higher-priced lending a ‘‘specialist’’ in this business

segment, then among the roughly 1,120 lenders

reporting at least 100 higher-priced conventional

home loans, 346, or 4 percent of all reporting institutions, can be characterized as specialists. It should be

kept in mind that the HMDA data can be used to

gauge a lender’s business focus only roughly, as some

prime loans will exceed the HMDA price-reporting

threshold and some subprime loans may not reach the

threshold.

Loans Covered by HOEPA

Under the Home Ownership and Equity Protection

Act of 1994 (HOEPA), certain types of mortgage

loans that have rates or fees above specified levels

require additional disclosures to consumers and are

subject to certain restrictions on loan terms.37 Under

the 2002 revisions to Regulation C, the HMDA data

indicate whether a loan is subject to the protections of

HOEPA.

Coverage under HOEPA is determined by a twopart test that considers both the APR and the dollar

amount of points and fees. The APR portion of the

coverage test is similar to the method used to determine which loans are higher priced under HMDA.

The difference relates to the rules for choosing the

specific Treasury security to use for determining

coverage under the two regulations. In the case of

HMDA, determining which loans are higher priced

requires using the Treasury security of comparable

maturity for the fifteenth day of the month preceding

the date on which the loan rate was set. For HOEPA,

the APR portion of the coverage test requires using

the Treasury security of comparable maturity for the

fifteenth day of the month preceding the month in

which the application was received. Another difference is that the APR spreads for determining HOEPA

coverage are 8 percent and 10 percent for first- and

junior-lien loans respectively.

Before the release of the 2004 data, little information was publicly available about the extent of

HOEPA-related lending or the number or type of

institutions involved in this activity. Although the

37. HOEPA, which is implemented by the Federal Reserve Board’s

Regulation Z, applies to home-refinance loans and other nonpurchase

loans secured by a consumer’s principal dwelling.

A146 Federal Reserve Bulletin h 2006
expanded HMDA data provide important new information, the data fail to capture all HOEPA-related

lending. Some HOEPA loans are extended by institutions not covered by HMDA, and some HOEPA loans

made by HMDA-covered institutions are not reported

under Regulation C, which implements HMDA. Most

notably, if the proceeds of a home-secured loan are

not used to refinance an existing home loan or to

finance home improvement, then the loan may be

covered by HOEPA but is not reportable under Regulation C.38 The extent of HOEPA-related lending not

reported under HMDA is unknown.

Incidence of HOEPA-Related Lending

For 2005, more than 1,300 lenders reported nearly

36,000 loans covered by HOEPA, an increase of

53 percent from 2004 (table 4). As in 2004, most

lenders did not report extending any HOEPA loans in

2005. For 2005, HOEPA-related lending appears to

have been quite concentrated: The ten lenders that

reported the largest number of HOEPA originations

accounted for 70 percent of all reported HOEPA loans

(data not shown in tables). At the other extreme, 730

institutions reported making only one or two HOEPA

loans.

Although the incidence of HOEPA-related lending

was up significantly over that reported in 2004, such

lending still accounted for a very small proportion of

the market. HOEPA loans accounted for less than

one-half of 1 percent of all the originations of homesecured refinance or home-improvement loans reported for 2005 (data derived from table 4). The

volume of HOEPA-related lending, like that of higherpriced lending, was affected by the flattening of the

yield curve from 2004 to 2005. However, it is impossible to determine precisely how much of the increased volume of HOEPA-related lending was due

to changes in interest rates because, as noted earlier,

HOEPA coverage is based not only on APR levels but

also on the dollar amount of loan points and fees.

Characteristics of HOEPA-Related Lending

For 2005, the vast majority of HOEPA loans involved

conventional loan products: Only a very small percentage of such loans were government backed.

About 60 percent of the reported HOEPA loans

involved conventional first-lien loans (of these, more

than 80 percent were for refinancings), and about

40 percent involved conventional junior-lien loans

(more than half of these were for refinancings).

Reported HOEPA lending varies among borrowers

sorted by borrower income, race, and ethnicity and

among census tracts sorted by census-tract income,

population, and location. However, the data do not

indicate that HMDA-reportable HOEPA lending is

focused primarily on lower-income or minority individuals or on those residing in lower-income neighborhoods or neighborhoods with high concentrations

of minority individuals. For example, although reported HOEPA loans were extended to borrowers in

all income groups, nearly two-thirds were extended to

middle- and upper-income borrowers (data not shown

in tables). Similarly, more than 70 percent of the

reported HOEPA loans were extended to nonHispanic white borrowers. Most of the homes securing HOEPA loans were in middle- or upper-income

areas, and a large proportion were in areas where the

minority population was less than 20 percent of the

census-tract population.

PRICING ANALYSIS USING ADJUSTED 2004

AND 2005 DATA

As discussed earlier, the flattening of the yield curve

over the 2004–05 period affected the proportion of

loans reported as higher priced because of the way the

price-reporting threshold and the adjustable-rate APR

are determined. The size of these effects cannot be

quantified precisely with the limited information

available in the HMDA data. However, we can compute rough estimates of the magnitude of the yield

curve effects on the incidence of higher-priced lending, although our estimates likely understate the

effects.

Effects on Loan Pricing of the Method for

Setting the HMDA Price-Reporting Threshold

To estimate the effect on loan pricing of the way the

HMDA price-reporting threshold is determined, we

use an adjusted set of the 2004 and 2005 HMDA data

that enables us to identify those loans that exceeded

the pricing thresholds solely because of a change in

the interest rate situation. We separate all reported

higher-priced loans into two groups: (1) those that

would have been reported under any interest rate

situation that prevailed during the 2004–05 period

and (2) those that were reported only because of the

interest rate situation that existed at the time the loan

38. For example, if a homeowner takes out a HOEPA-covered loan

to pay off outstanding credit card debt or some other type of consumer

credit and the loan does not involve the refinancing of an existing

home loan or home improvement, then the loan is not covered by

Regulation C and is thus not required to be part of an institution’s

HMDA reporting.

Higher-Priced Home Lending and the 2005 HMDA Data A147
was made. In separating the higher-priced loans, we

assume that a nonprime borrower would receive a

loan rate that is no less than a constant markup over

the rate on a ‘‘prime mortgage’’ and that this markup

(discussed below) is independent of interest rates.

Thus, our exercise is to determine how much above

the interest rate for a prime mortgage a cutoff would

need to be set such that a loan priced above the cutoff

would have been reported under any interest rate

situation prevailing in 2004–05. To conduct the exercise, we must determine the prime rate that would

apply to each loan. In reality, the prime rate can vary

from day to day and from product to product, depending on the term of the mortgage, the type of rate (fixed

or adjustable), the date the loan price was set, the

geographic location in which the loan was made, and

other factors.

The only portion of this information that is explicitly included in the HMDA data is location. Nevertheless, the necessary information can be approximated.

Almost 80 percent of first-lien prime mortgages have

a fixed rate of interest, according to LoanPerformance, and most of these have a thirty-year term to

maturity.39 The date the loan price was set (the lock

date) is not reported in the HMDA data, but the

application and origination dates are recorded. We

approximate the loan terms and the lock dates for all

conventional first-lien mortgages by assuming that

they are all thirty-year fixed-rate mortgages and that

the day on which the mortgage pricing was set is

halfway between the date of application and the date

the loan was originated.40 Because terms vary so

much for junior-lien loans, we conduct this exercise

only for first-lien loans.

To estimate the prime rate, we use the weekly

Freddie Mac Primary Mortgage Market Survey. The

survey reports the average contract rates and points

for all loans and the margin for adjustable-rate

loans.41 We use this information to estimate the

average APR for adjustable- and fixed-rate loans

prevailing each week. We calculate the ‘‘adjusted

spread’’ for each loan in the HMDA data as the

difference between the estimated prime fixed APR

and the applicable HMDA threshold in effect on the

date the loan was estimated to have locked.

We estimate that a loan with an adjusted spread of

228 or more basis points above prime would have

been reported as higher priced regardless of the date

of origination during 2004–05—that is, 228 basis

points is the minimum spread for a loan to have been

reported as higher priced during this period. Loans

with adjusted spreads between 140 basis points and

228 basis points would have been reported as higher

priced if originated on some days during the period

but not on others. Loans with adjusted spreads below

140 basis points would not have been reported under

any circumstances during this time frame.

We compute incidences and APR spreads for 2004

and 2005 that have been ‘‘spread adjusted’’ for

changes in the yield curve. These figures are computed in exactly the same way as the overall incidences and mean APR spreads, as shown in tables 4

and 5, except that those loans with adjusted spreads

below 228 basis points are deemed not to be higher

priced. And the adjusted spreads are spreads above

the markup over the rate on a prime mortgage rather

than spreads above the yield on a comparablematurity Treasury security. By construction, the adjusted spreads for higher-priced loans have a minimum of 228 basis points instead of 300.

Overall, the incidence of higher-priced lending for

conventional home-purchase loans on owneroccupied site-built homes was 11.5 percent in 2004

and 24.6 percent in 2005, an increase of 13.1 percentage points (table 9). The spread-adjusted estimates for

the same period were 10.4 percent and 21.5 percent

respectively, an increase of 11.1 percentage points.

This comparison suggests that 2 percentage points, or

roughly 15 percent, of the total difference in reported

higher-priced lending for this product can be attributed solely to the flattening of the yield curve. For

refinancings for similar properties, about 2 percentage

points of the 10.2 percent increase in higher-priced

lending for refinance loans can be attributed solely to

the yield curve.

Estimated mean APR spreads are also lower after

spread adjustment for the two conventional loan

products. The mean APR spreads for conventional

first-lien home-purchase loans, and for conventional

first-lien refinance loans, on owner-occupied sitebuilt homes were both about 4.8 percentage points

before spread adjustment and 3.7 percentage points

and 3.8 percentage points respectively using the

spread-adjusted 2005 data. The unadjusted spreads

increase about 70 basis points, and the adjusted

spreads increase about 40 basis points.

39. Data from LoanPerformance suggest that about 90 percent of the

first-lien loans extended in 2004 and 2005 had a term of thirty years.

40. Within the HMDA data for 2004, the median time between the

date of application and the date of loan origination for conventional

first-lien home-purchase loans was thirty days; for 2005, the comparable figure was twenty-eight days. For refinancings, the median

numbers of days for 2004 and 2005 were twenty-seven and twenty-six

respectively. Less than 10 percent of home-purchase loans had a

difference in dates of application and origination of more than ninety

days. For refinancings, less than 10 percent had differences in dates of

application and origination of more than sixty days.

41. The margin for an adjustable-rate loan is the markup above the

interest rate established by the index (such as the rate for a Treasury

security) used to set the base rate for the loan.

A148 Federal Reserve Bulletin h 2006
Effects of APR Calculations on Pricing of

Adjustable-Rate Loans

The spread adjustments just described address only

the effect that the flattening of the yield curve had on

the gap between the HMDA reporting threshold and

the interest rate at which long-term mortgages are

typically priced, approximated by the Freddie Mac

prime APR for thirty-year fixed-rate loans. Our spread

adjustment reflects what the yield curve effect would

have been if all first-lien loans reported in the HMDA

data had been thirty-year fixed-rate mortgages. However, many loans included in the HMDA data are

adjustable-rate loans, and, as noted earlier, the flattening of the yield curve also affected the gap between

the calculated APRs on adjustable-rate mortgages and

the calculated APRs on fixed-rate mortgages. At the

beginning of 2004, a one-year adjustable-rate loan

would have been treated comparably for purposes of

HMDA price reporting to a thirty-year fixed-rate

9. Incidence of higher-priced lending for first-lien loans, and the mean and median APR spreads for such loans,

unadjusted and adjusted for changes in interest rates, by type of home and type of loan, 2004 and 2005

Percentage points except as noted

Type of home and loan

Loans with annual percentage rate (APR) spread above the threshold1

2004 2005

Spread unadjusted Spread adjusted Spread unadjusted Spread adjusted

Incidence

(percent)

APR spread Incidence

(percent)

APR spread Incidence

(percent)

APR spread Incidence

(percent)

APR spread

Mean Median Mean Median Mean Median Mean Median

ONE- TO

FOUR-FAMILY

Nonbusiness related 2

Owner occupied

Site built

Home purchase

Conventional

First lien . . . . . . . . 11.5 4.1 3.8 10.4 3.3 3.1 24.6 4.8 4.7 21.5 3.7 3.6

Government backed

First lien . . . . . . . . 1.3 4.2 3.9 1.2 3.5 3.1 .9 3.8 3.3 .4 3.7 3.0

Refinance

Conventional

First lien ........ 15.5 4.2 3.9 14.2 3.4 3.1 25.7 4.8 4.7 22.4 3.8 3.7

Government backed

First lien . . . . . . . . 1.5 3.9 3.6 1.4 3.2 2.8 .9 4.3 4.5 .6 3.7 3.4

Home improvement

Conventional

First lien ........ 21.9 4.4 4.0 20.3 3.7 3.3 26.3 4.7 4.5 21.5 3.8 3.6

Government backed

First lien . . . . . . . . 3.8 4.7 4.0 3.7 3.9 3.2 5.5 4.5 3.9 3.9 3.9 3.5

Manufactured

Conventional, first lien

Home purchase .... 57.1 5.7 5.2 55.5 4.9 4.5 58.3 5.4 4.9 50.4 4.5 4.0

Refinance .......... 47.8 5.0 4.6 45.8 4.2 3.8 55.1 5.0 4.7 46.7 4.1 3.7

Nonowner occupied 3

Conventional, first lien

Home purchase .... 12.2 4.1 3.8 11.1 3.4 3.0 20.3 4.5 4.3 15.3 3.7 3.5

Refinance .......... 14.0 4.2 3.9 12.9 3.5 3.2 22.5 4.8 4.7 18.8 3.8 3.7

Business related 2

Conventional, first lien

Home purchase . . . . 9.4 4.4 4.0 8.5 3.7 3.3 11.8 4.4 3.9 8.3 3.7 3.2

Refinance .......... 10.3 4.4 4.1 9.3 3.7 3.3 13.9 4.8 4.6 10.9 3.9 3.7

MULTIFAMILY4

Conventional, first lien

Home purchase . . . . 4.5 4.1 3.7 4.1 3.4 3.0 6.0 4.5 4.2 4.3 3.7 3.7

Refinance . . . . . . . . . . 4.8 4.1 3.8 4.4 3.4 3.0 6.3 4.4 4.1 4.6 3.7 3.5

Total 5 ............... 15.5 4.8 4.3 14.5 4.3 3.6 26.2 5.3 5.1 23.4 4.6 4.2

Note: For definition of higher-priced lending and explanation of spread

adjustment, refer to text.

1. APR spread is the difference between the APR on the loan and the yield

on a comparable-maturity Treasury security. The threshold for first-lien loans is

a spread of 3 percentage points.

2. Business-related applications and loans are those for which the lender

reported that the race, ethnicity, and sex of the applicant or co-applicant are

‘‘not applicable’’; all other applications and loans are nonbusiness related.

3. Includes applications and loans for which occupancy status was missing.

4. Includes business-related and nonbusiness-related applications and loans

for owner-occupied and nonowner-occupied properties.

5. Total is for all secured loans, including junior liens not shown in table.

Higher-Priced Home Lending and the 2005 HMDA Data A149
mortgage (of the same term to maturity) with an

adjusted spread 200 basis points lower (refer to

figure 3). By the beginning of 2005, this gap had been

virtually eliminated. The implication of this narrowing of the gap is that, relative to fixed-rate loans,

fewer adjustable-rate loans would have met the

HMDA price-reporting thresholds in 2004 than in

2005.

Fully quantifying this effect would be difficult even

if the HMDA data distinguished fixed- from

adjustable-rate loans. As shown in figure 3, applying

the same method to one-year adjustable-rate loans

that we employed for fixed-rate loans would necessitate using an adjusted threshold of about 400 basis

points above the APR on the Freddie Mac prime

one-year adjustable-rate loan. This approach would

potentially exclude a large share of the higher-priced

adjustable-rate loans reported under HMDA and

would reflect only changes at the higher end of the

subprime market.

To provide some rough approximations as to what

the effect might have been, we use information on the

mix of adjustable- and fixed-rate loans for each state

as derived from the LoanPerformance database. States

are arrayed into quintiles based on the percentage of

loans originated in 2005 that had an adjustable rate

(table 10). California, which would have been placed

in the quintile with the highest percentage of

adjustable-rate mortgages, is treated as a special

category and shown separately. For each quintile, we

calculate the average incidence (spread unadjusted

and spread adjusted) of higher-priced lending for

2004 and 2005. For home-purchase loans, the analysis indicates that states with high levels of adjustablerate lending had both relatively low levels of higherpriced lending in 2004 and larger increases in such

lending from 2004 to 2005 (refer to data under

‘‘Change, 2004–05’’ in home-purchase section of

table), patterns that would have been predicted as

resulting from the narrowing of the adjustable-fixed

APR gap. It is noteworthy that the average spreadunadjusted incidence of higher-priced home-purchase

lending for each of the five quintiles for 2005 was

almost the same, an indication that the distortions

caused by the difference in APRs between adjustableand fixed-rate loans had been virtually eliminated

during 2005.42

California shows the same pattern as other states

with a high percentage of adjustable-rate homepurchase loans, as it witnessed a significant increase

in the spread-unadjusted incidence of higher-priced

lending from 2004 to 2005. California’s spreadunadjusted incidence of higher-priced lending in 2005

(31.4 percent) is substantially higher than that of

other states with a large proportion of adjustable-rate

loans, but this finding may be due not just to the

flattening of the yield curve but also to the effects of

borrowers stretching financially because of high home

prices in California. The pattern for refinancing is

different in California because large increases in

home values are likely to benefit rather than hurt

refinancers.

Effects of Yield Curve Changes on Pricing of

Adjustable- and Fixed-Rate Loans

To a limited extent, we can assess the differential

42. The patterns are not as pronounced for refinance loans, perhaps

because other factors are more relevant. The rank order of the five

quintiles is as predicted, as is the narrowing of differences from 2004

to 2005; but unlike the results for home-purchase lending, some

differences remain in 2005.

10. Incidence of higher-priced lending for states grouped by the share of loans originated that had an adjustable rate,

and the change in the incidence of such lending, unadjusted and adjusted for changes in interest rates,

by type of loan and by quintile or state, 2005

Percent except as noted

Quintile1

or

state

Home purchase Refinance

2005 Change, 2004–05

(percentage points) 2005 Change, 2004–05(percentage points)

Spread

unadjusted

Spread

adjusted

Spread

unadjusted

Spread

adjusted

Spread

unadjusted

Spread

adjusted

Spread

unadjusted

Spread

adjusted

Lowest ...................... 23.4 19.7 7.8 5.2 33.1 28.0 7.8 4.3

Second lowest ............... 25.0 21.5 10.0 7.6 30.0 25.7 9.5 6.5

Middle ...................... 21.3 18.8 9.8 8.2 28.2 24.4 10.7 8.1

Second highest .............. 23.5 20.2 12.1 10.0 26.5 22.9 11.2 8.9

Highest ...................... 24.8 22.0 14.0 12.3 26.2 22.9 10.4 8.5

California 2 .................. 31.4 28.7 23.5 22.0 19.0 17.3 10.3 9.6

Total ........................ 24.8 21.8 13.2 11.2 26.0 22.6 10.3 8.2

Note: For definition of higher-priced lending and explanation of spread

adjustment, refer to text.

1. Based on share of loans originated in 2005 that had an adjustable rate.

2. California is shown separately because it accounts for a large number of

loans and has a high incidence of adjustable-rate lending.

Source: For share of adjustable-rate loans originated, LoanPerformance

(www.loanperformance.com).

A150 Federal Reserve Bulletin h 2006
effect of the flattening of the yield curve on the

incidence of higher-priced lending among adjustableand fixed-rate loans using individual loan data. The

Monthly Interest Rate Survey (MIRS) of the Federal

Housing Finance Board is a monthly survey of major

lenders that collects detailed information on each

conventional single-family nonfarm loan used to purchase a home closed during the last five business days

of each month.43 The survey includes enough information to calculate an APR for each loan, to determine whether it is an adjustable- or fixed-rate loan,

and, among the adjustable-rate loans, to identify the

type of loan.

The focus of the survey is on conventional prime

rate loans. For 2004, the data for one-year adjustablerate loans included near-prime loans. But starting

with the data for February 2005, most of the nearprime loans were excluded from the sample. Thus, we

limit the analysis of the one-year adjustable-rate loans

to those made before February 2005.

For the first few months of 2004, the percentage of

one-year adjustable-rate loans included in the MIRS

data that we estimate would have been reported as

higher priced under HMDA was only about 1 percent.

This percentage began to rise substantially in the

middle of 2004, and by the end of the year the portion

had risen to more than 18 percent. It appears that, at

least within the MIRS data, the increase in the

incidence of loans that would have been reported as

higher priced under HMDA was driven almost entirely by the narrowing of the gap between the

calculated APRs on adjustable- and fixed-rate loans.

The distribution of rates of one-year adjustable-rate

loans in the MIRS data relative to the APRs of the

Freddie Mac prime one-year adjustable-rate loans

remained unchanged—that is, their movements mirrored each other.

The percentage of thirty-year fixed-rate loans in the

MIRS data that we estimate would have been reported

as higher priced under HMDA was little changed

during the course of 2004 but rose, from about

1 percent to almost 4 percent, during 2005 (the

thirty-year fixed-rate loans were not pruned to exclude near-prime loans).

The patterns for the thirty-year fixed-rate and the

one-year adjustable-rate loans in the MIRS data are

consistent with what one would expect from the yield

curve changes shown in figure 3. We emphasize that

because the MIRS data do not include a full sampling

of near-prime and subprime loans, the incidence of

loans in the sample that would have been reported as

higher priced under HMDA is not representative of

all the loans included in the HMDA data. Nevertheless, the analysis here suggests that the flattening of

the yield curve had a significantly larger effect on the

reporting of adjustable-rate loans as higher priced

than on the reporting of fixed-rate loans as higher

priced. Therefore, our earlier estimate of the effect of

the flattening of the yield curve is likely understated,

perhaps substantially.

Differences in Pricing across Geographies

The HMDA data allow analysis of higher-priced

lending along geographic lines. The analysis can be

conducted by region of the country, metropolitan

area, or census tract.

Region of the Country

Interest rates on prime home loans vary across

regions. For example, for 2005, there is a difference

of 12 basis points between the average prime rate for

the region with the highest rates (the North Central

region) and that for the region with the lowest rates

(the Southeast) as reported by Freddie Mac in its

survey of interest rates (table 11). This variation

likely reflects differences across regions in such factors as prepayment rates, foreclosure laws, origination costs, or degree of competition.

The variation in the incidence of higher-priced

lending across regions in both the 2004 and 2005

HMDA data is much larger than might be expected

given the difference in prime rate variation and does

not show the same rank ordering. For example, the

Northeast region shows the lowest incidence of

higher-priced lending for home-purchase loans in the

2005 HMDA data and the West region the highest.

Further, the variation in the incidence of higherpriced lending across regions is 9 percentage points, a

sizable difference. The large differences in the incidences of higher-priced lending across regions suggest that the regions differ considerably in terms of

borrower credit-risk characteristics or other factors.

43. Information collected includes the contract interest rate, fees,

loan terms (for example, the LTV ratio and the term to maturity),

property value, property type (newly constructed or previously occupied unit), loan type (fixed or adjustable rate), and type of lender

(savings association, mortgage company, or commercial bank). The

data also include an estimated effective interest rate. For adjustablerate loans, the survey includes information on the annual limit (the

‘‘cap’’) on how much the interest rate may increase, the margin, and

the index used to set the contract interest rate. The survey excludes

FHA-insured and VA-guaranteed loans, multifamily loans, and mobilehome loans and is limited to home-purchase loans. Refer to Federal

Housing Finance Board, www.fhfb.gov.

The data in the survey reflect the shares of lending by lender size

and lender type as reported in the HMDA data. Although the scope of

the survey varies from month to month, it typically covers about

20,000 loans and about 100 lenders.

Higher-Priced Home Lending and the 2005 HMDA Data A151
Metropolitan Area

Analysis of loan-pricing patterns for 2004 revealed

that the incidence of higher-priced lending for homepurchase loans varied widely across regions of the

country and MSAs.44 The 2005 data reveal a similar

pattern, with some notable differences. A review of

home-purchase lending at the level of the MSA

indicates that, as compared with the 2004 pricing

patterns, areas of the country with the highest incidence of higher-priced lending are not primarily in

the southern and southwestern regions of the country

but also include a number of MSAs in California

(figure 4). The presence of several MSAs in California on the list of areas with a relatively high incidence

of higher-priced lending may reflect the effects of

rapid house-price increases, which result in more

borrowers in these areas stretching financially to

purchase homes. The fact that California MSAs

tended to have relatively high proportions of higherpriced lending in 2005 but did not in 2004 may also

be due to the relatively more frequent use in these

areas of adjustable-rate loan products that are priced

off of extremely short-term sources of funds, a practice that would, because of the flattening of the yield

curve, tend to result in large increases from 2004 to

2005 in the number of loans with prices reported

above the APR thresholds established by Regulation C.

The great variation in the incidence of higherpriced lending across MSAs is seen in a simple

comparison. If one focuses on the incidence of higherpriced lending among conventional first-lien homepurchase loans on owner-occupied, one- to fourfamily, site-built homes, the MSA in the continental

United States with the lowest incidence of higherpriced lending for this product is Ithaca, New York, at

4 percent; the MSA with the highest incidence is

McAllen-Edinburg-Pharr, Texas, at 53 percent.

Assessment of the reasons for the wide variation in

the incidence of higher-priced lending for homepurchase loans across MSAs finds a close association

between the proportion of individuals in an MSA

county with low credit scores and the incidence of

higher-priced lending in that area.45 Other factors

positively related to a greater incidence of higherpriced lending across MSAs include the percentage of

the MSA’s adult population with less than a highschool education, rates of unemployment, and the

racial or ethnic makeup of the MSA. Areas with

higher unemployment rates and larger minority populations are more likely to have higher incidences of

higher-priced lending.

The geographic pattern in the incidence of higherpriced lending for refinancings is similar to the pattern for home-purchase loans, although the proportions of loans with prices above the reporting

thresholds are generally higher for refinancings. The

findings for MSAs along the Pacific Coast, and in the

state of California in particular, are noteworthy

because they differ from the general pattern: The

incidences of higher-priced lending for refinancings

in the MSAs in this area are typically much lower

than those for home-purchase loans and for refinance

loans in other areas. As noted earlier, this pattern may

reflect, at least in part, the need for many homebuyers

in this region, which has experienced rapid houseprice appreciation, to stretch financially to purchase

homes, while those refinancing have generally benefited from increased home equity as a result of

home-price appreciation and consequently tend to

pose less credit risk.

Census Tract

The incidence of higher-priced lending varies considerably across census tracts, with similar patterns for

home-purchase loans (table 12.A.) and refinance 44. Reporting institutions are required to report all their lending in

MSAs as well as in the nonmetropolitan portions of states. However,

because institutions operating exclusively in nonmetropolitan areas are

not covered by HMDA, loans in such areas are underrepresented in the

data. For this reason, the geographic analysis here is focused on

MSAs.

45. The distribution of credit scores by geography is also considered

in Matt Fellowes (2006), ‘‘Credit Scores, Reports, and Getting Ahead

in America,’’ Survey Series (Washington: Brookings Institution, May).

11. Interest rates for thirty-year home-purchase loans,

and the spread-unadjusted incidence of higher-priced

lending for such loans, by region of the country,

2004 and 2005

Percent

Region1

30-year APR2 Spread-unadjusted

incidence

2004 2005 2004 2005

Northeast ....... 5.90 5.94 9.3 19.1

Southeast ....... 5.86 5.87 14.0 26.1

North Central . . . 5.96 5.99 12.7 23.9

Southwest ....... 5.89 5.92 15.8 26.9

West . . . . . . . . . . . . 5.89 5.89 8.7 28.2

Total ........... 5.90 5.92 11.7 24.8

Note: For definition of higher-priced lending and explanation of spread

adjustment, refer to text.

1. Defined by Freddie Mac as follows: Northeast: N.Y., N.J., Pa., Del., Md.,

D.C., Va., W.V., P.R., Maine, N.H., Vt., Mass., R.I., Conn., V.I.; Southeast:

N.C., S.C., Tenn., Ky., Ga., Ala., Fla., Miss.; North Central: Ohio, Ind., Ill.,

Mich., Wis., Minn., Iowa, N.D., S.D.; Southwest: Texas, La., N.M., Okla.,

Ark., Mo., Kan., Colo., Neb., Wyo.; West: Calif., Ariz., Nev., Ore., Wash.,

Utah, Idaho, Mont., Hawaii, Alaska, Guam.

2. Annual percentage rate (APR) is the average for the year.

Source: APRs are estimated from Freddie Mac, Primary Mortgage Market

Survey.

A152 Federal Reserve Bulletin h 2006
Percent

±±±±±

Incidence of higher-priced lending for conventional first-lien home-purchase loans on owner-occupied, one- to four-family,site-built homes, by metropolitan statistical area and by quintile, 2005

4.

Higher-Priced Home Lending and the 2005 HMDA Data A153
loans (table 12.B.). Higher-priced lending is most

common in census tracts with lower incomes, high

percentages of minorities, depreciating real home

values, low educational attainment, low credit scores,

and high application denial rates. The variations

across most of these categories are quite considerable.

For example, in 2005, the incidence of higher-priced

lending for home-purchase loans averaged 47 percent

for census tracts in the category with the largest

percentage of mortgage borrowers with low credit

scores, compared with an incidence of only 16 percent for census tracts with a low percentage of

mortgage borrowers with low credit scores

(table 12.A.). Almost 40 percent of borrowers in

census tracts with a low percentage of adults with

schooling beyond high school had higher-priced

loans, compared with 13 percent in tracts with a high

percentage of residents with more than a high-school

education.

These relationships appear to be robust and persist

even when we control for other factors. For example,

if a comparison is made for census tracts with similar

income levels and minority percentages but with

varying educational attainment and credit scores,

wide differences in the incidence of higher-priced

lending persist. The fact that the relationship between

12. Incidence of higher-priced lending, unadjusted and adjusted for changes in interest rates, for loans on one- to fourfamily homes, and the change in such incidence, by characteristic of borrower, loan, and census tract and by type of

lender and location of property, 2005

A. Home purchase, owner-occupied site-built home

Percent except as noted

Characteristic and status

Conventional, first lien

Number of loans Incidence

2005

Percentage

change,

2004–05

2005 Change, 2004–05

(percentage points)

Spread

unadjusted

Spread

adjusted

Spread

unadjusted

Spread

adjusted

Borrower

Income ratio (percent of area median)

Less than 80 ................................................ 988,156 5.6 31.9 28.1 14.9 12.5

80–100 ..................................................... 1,079,629 12.1 28.1 24.9 14.9 13.0

100 or more ................................................ 2,014,029 26.9 20.3 18.1 12.4 11.1

Not reported1 ............................................... 176,941 25.8 17.4 9.6 8.1 1.4

Total ................................................... 4,258,755 17.4 24.8 21.8 13.2 11.2

Minority status

Minority .................................................... 1,162,532 28.8 40.6 36.3 21.3 19.0

Non-Hispanic white ......................................... 2,726,119 12.7 17.3 14.7 8.5 6.8

Missing 2 .................................................... 370,104 21.5 31.0 28.0 18.7 16.9

Total ................................................... 4,258,755 17.4 24.8 21.8 13.2 11.2

Sex

Female ..................................................... 1,001,191 20.1 30.9 27.4 15.5 13.4

Male ....................................................... 1,452,993 23.6 31.9 28.1 16.7 14.3

Joint 3 ....................................................... 1,804,571 11.6 15.8 13.6 8.6 7.1

Total 4 .................................................. 4,258,755 17.4 24.8 21.8 13.2 11.2

Loan

Amount (thousands of dollars)

Less than 100 ............................................... 731,341 3.6 37.2 32.7 15.2 12.2

100–250 .................................................... 2,169,777 12.3 24.1 21.0 13.3 11.3

250 or more ................................................ 1,357,637 37.4 19.4 17.2 13.4 12.0

Total ................................................... 4,258,755 17.4 24.8 21.8 13.2 11.2

Status

Piggyback 5 ................................................. 927,451 84.2 53.6 48.5 33.9 31.8

Not piggyback .............................................. 3,331,304 6.7 16.8 14.3 6.4 4.8

Total 4 .................................................. 4,258,755 17.4 24.8 21.8 13.2 11.2

Type of Lender, by Property Location

Depository within assessment area 6 .......................... 1,108,769 8.5 7.0 5.1 2.6 1.2

Depository outside of assessment area ........................ 1,535,824 11.7 23.5 20.6 12.8 10.7

Lender not covered by CRA7 ................................ 1,614,162 31.3 38.4 34.3 19.5 17.6

Total 4 .................................................. 4,258,755 17.4 24.8 21.8 13.2 11.2

Location of Property, by Freddie Mac Region8

Northeast ................................................... 915,573 13.6 19.1 16.6 9.8 8.2

Southeast ................................................... 907,695 23.3 26.1 23.0 12.1 10.1

North Central ............................................... 753,081 12.8 23.9 20.3 11.2 8.7

Southwest ................................................... 635,200 20.2 26.9 23.3 11.1 8.6

West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,047,206 17.9 28.2 25.5 19.5 18.0

Total 4 .................................................. 4,258,755 17.4 24.8 21.8 13.2 11.2

A154 Federal Reserve Bulletin h 2006
the denial rate and the incidence of higher-priced

lending persists after credit scores of tracts are controlled for is noteworthy. Certainly, a portion of thehigh correlation between the incidence of higher12.—Continued

A. Home purchase, owner-occupied site-built home—Continued

Percent except as noted

Characteristic and status

Conventional, first lien

Number of loans Incidence

2005

Percentage

change,

2004–05

2005 Change, 2004–05

(percentage points)

Spread

unadjusted

Spread

adjusted

Spread

unadjusted

Spread

adjusted

Census Tract of Property

Income ratio (percent of area median)

Less than 80 ................................................ 640,985 24.3 41.6 37.2 20.4 17.9

80–119 ..................................................... 2,099,773 19.2 26.6 23.3 13.8 11.7

120 or more ................................................ 1,517,997 12.6 15.3 13.2 8.7 7.3

Total 4 .................................................. 4,258,755 17.4 24.8 21.8 13.2 11.2

Racial or ethnic composition

(minorities as percentage of population)

Less than 10 ................................................ 1,395,467 14.5 17.5 14.9 8.3 6.6

10–50 ...................................................... 2,159,244 17.9 23.2 20.3 12.7 10.8

50–100 ..................................................... 704,044 22.0 44.4 39.9 23.5 21.2

Total 4 .................................................. 4,258,755 17.4 24.8 21.8 13.2 11.2

Location

Central city ................................................. 2,263,107 16.6 23.3 20.4 12.7 10.9

Noncentral city .............................................. 1,622,306 17.8 26.8 23.7 14.3 12.5

Rural or only state known ................................... 373,342 21.4 25.8 21.8 10.3 7.4

Total 4 .................................................. 4,258,755 17.4 24.8 21.8 13.2 11.2

Credit score of borrowers

(percent of mortgage borrowers with scores below 600) 9

20 or more .................................................. 567,150 28.5 47.1 42.0 18.1 15.1

10–19 ...................................................... 1,453,580 22.7 29.6 26.0 15.2 13.0

Less than 10 ................................................ 2,238,025 11.9 16.1 13.9 9.8 8.4

Total 4 .................................................. 4,258,755 17.4 24.8 21.8 13.2 11.2

Educational attainment of residents

(percent of adults with high-school education or less)

30 or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,117,002 9.3 13.0 11.2 7.8 6.6

31–60 ...................................................... 2,388,381 19.1 25.6 22.5 13.7 11.7

More than 60 ............................................... 753,372 25.9 39.9 35.3 18.0 15.2

Total 4 .................................................. 4,258,755 17.4 24.8 21.8 13.2 11.2

Denial rate for loan type (percent of applicants denied credit)

10 or less ................................................... 1,178,823 −13.4 12.6 10.7 6.1 4.9

11–20 ...................................................... 2,161,489 25.5 23.9 20.8 12.0 10.2

More than 20 ............................................... 918,443 69.4 42.9 38.4 18.5 16.0

Total 4 .................................................. 4,258,755 17.4 24.8 21.8 13.2 11.2

Real price appreciation of real estate10

Less than zero .............................................. 1,913,712 16.5 27.3 24.2 15.3 13.5

0–20 ........................................................ 1,089,984 18.1 23.9 20.7 11.7 9.7

More than 20 ............................................... 1,255,059 18.4 21.9 19.0 11.0 9.1

Total 4 .................................................. 4,258,755 17.4 24.8 21.8 13.2 11.2

Note: For definition of higher-priced loans and explanation of spread adjustment, refer to text.

Excludes transition-period loans (those for which the application was submitted before 2004). For definition of income categories for borrower and census tract, refer to text note 22. Census tract is for the property securing the

loan. The term minority means Hispanic or Latino ethnicity or any race other

than white for either the borrower or the coborrower. Census-tract data reflect

the 2000 decennial census; they also reflect definitions for metropolitan statistical areas established by the Office of Management and Budget in June 2003

and used in HMDA for the first time in the 2004 data.

1. Information for income was not reported on the application.

2. Information for the characteristic was missing on the application.

3. On the applications for these loans, one applicant reported ‘‘male,’’ and

the other reported ‘‘female.’’ For female and for male, only sole applicants

were considered.

4. Excludes loans for which the information for the characteristic was missing on the application.

5. For definition of piggyback, refer to text.

6. Includes lending by nonbank affiliates in the CRA assessment area of

depository institution.

7. Includes credit unions and mortgage companies not affiliated with a

depository institution or bank or thrift holding company.

8. Freddie Mac defines its regions as follows: Northeast: N.Y., N.J., Pa.,

Del., Md., D.C., Va., W.V., P.R., Maine, N.H., Vt., Mass., R.I., Conn., V.I.;

Southeast: N.C., S.C., Tenn., Ky., Ga., Ala., Fla., Miss.; North Central: Ohio,

Ind., Ill., Mich., Wis., Minn., Iowa, N.D., S.D.; Southwest: Texas, La., N.M.,

Okla., Ark., Mo., Kan., Colo., Neb., Wyo.; West: Calif., Ariz., Nev., Ore.,

Wash., Utah, Idaho, Mont., Hawaii, Alaska, Guam.

9. Includes all borrowers with an outstanding mortgage regardless of the

year in which the loan was taken out.

10. Based on the change in median home values for a constant 2000-defined

geography.

Source: For Freddie Mac data, Primary Mortgage Market Survey; for

census-tract characteristics, the 1990 and 2000 decennial censuses; for creditscore data, one of the three national credit-reporting agencies.

Higher-Priced Home Lending and the 2005 HMDA Data A155
priced lending and elevated denial rates is due to both

factors being related to borrower indicators of elevated credit risk. However, the persistence of this

pattern when credit scores are controlled for suggests

that high denial rates may also increase the per-loan

costs of loan origination and thus may influence

pricing across census tracts.46

Differences in Pricing by Characteristic of

Borrower, Loan, and Lender

There is considerable variation in the incidence of

higher-priced lending by borrower, loan, and lender

characteristics (tables 12.A. and 12.B.). Lowerincome borrowers, borrowers with loan amounts

below $100,000, borrowers using piggyback loans or

loans from lenders not covered by the CRA, and

minority borrowers all show elevated levels of higherpriced lending in the 2005 HMDA data. These factors

reflect more than census-tract characteristics, as they

show the same variation within census tracts of

similar incomes. For example, the incidence of higherpriced lending for home-purchase loans averaged

about 37 percent for loans below $100,000 but only

19 percent for loans of at least $250,000. Although

HMDA data do not contain sufficient information to

explain the latter pattern, one hypothesis is that some

of the variation may be due to the fact that individuals

who borrow small amounts may be more likely to

46. The HMDA data indicate that such a relationship may hold, as

lenders who serve mainly borrowers in the higher-priced market have

origination rates that are about 20 percent lower than those of lenders

who serve primarily borrowers receiving loans with rates below the

HMDA price-reporting thresholds.

12. Incidence of higher-priced lending, unadjusted and adjusted for changes in interest rates, for loans on one- to fourfamily homes, and the change in such incidence, by characteristic of borrower, loan, and census tract and by type of

lender and location of property, 2005—Continued

B. Refinance, owner-occupied site-built home

Percent except as noted

Characteristic and status

Conventional, first lien

Number of loans Incidence

2005

Percentage

change,

2004–05

2005 Change, 2004–05

(percentage points)

Spread

unadjusted

Spread

adjusted

Spread

unadjusted

Spread

adjusted

Borrower

Income ratio (percent of area median)

Less than 80 ................................................ 1,410,566 −7.2 35.2 30.8 12.0 9.3

80–100 ..................................................... 1,481,181 −3.1 29.4 25.7 11.8 9.6

100 or more ................................................ 2,226,956 −.1 20.1 17.5 9.4 7.7

Not reported1 ............................................... 275,362 −6.3 7.3 4.8 4.3 2.1

Total ................................................... 5,394,065 −3.2 26.0 22.6 10.3 8.2

Minority status

Minority .................................................... 1,291,246 4.5 35.5 31.5 14.4 12.2

Non-Hispanic white ......................................... 3,433,488 −5.5 21.1 18.0 8.1 6.1

Missing 2 .................................................... 669,331 −4.9 32.5 28.9 12.6 10.4

Total ................................................... 5,394,065 −3.2 26.0 22.6 10.3 8.2

Sex

Female ..................................................... 1,213,093 4.8 31.2 27.5 11.3 9.1

Male ....................................................... 1,539,606 4.5 30.3 26.6 11.9 9.8

Joint 3 ....................................................... 2,641,366 −10.2 21.1 18.0 8.5 6.5

Total 4 .................................................. 5,394,065 −3.2 26.0 22.6 10.3 8.2

Loan

Amount (thousands of dollars)

Less than 100 ............................................... 1,101,140 −23.9 33.4 28.7 9.2 5.9

100–250 .................................................... 2,709,682 −5.6 26.8 23.3 12.2 10.0

250 or more ................................................ 1,583,243 26.4 19.3 17.1 11.3 10.1

Total ................................................... 5,394,065 −3.2 26.0 22.6 10.3 8.2

Type of Lender, by Property Location

Depository within assessment area 6 .......................... 1,433,289 −14.8 9.2 6.6 3.5 1.4

Depository outside of assessment area ........................ 1,920,562 −1.8 24.8 21.2 9.9 7.4

Lender not covered by CRA7 ................................ 2,040,214 5.6 38.9 35.1 13.9 12.3

Total 4 .................................................. 5,394,065 −3.2 26.0 22.6 10.3 8.2

Location of Property, by Freddie Mac Region8

Northeast ................................................... 1,318,512 .6 25.1 21.9 10.5 8.4

Southeast ................................................... 910,382 7.2 31.5 27.3 9.1 6.3

North Central ............................................... 967,734 −13.1 28.2 24.0 11.7 8.7

Southwest ................................................... 559,113 −16.4 31.5 27.1 10.3 7.3

West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,638,324 .5 20.3 18.2 10.4 9.4

Total 4 .................................................. 5,394,065 −3.2 26.0 22.6 10.3 8.2

A156 Federal Reserve Bulletin h 2006
have riskier credit attributes, such as lower credit

scores.47 Another hypothesis is that small loans are

more expensive on a per-dollar basis to originate and

thus are more likely to be higher priced.

As in 2004, the data for 2005 continue to show a

much lower incidence of higher-priced lending by

lenders that are covered by the CRA and that lend in

their assessment areas than is shown by the same

lenders when they make loans outside of their assessment areas. Although the HMDA data do not contain

sufficient information to enable us to determine the

causes of this pattern, several hypotheses are possible. As noted earlier, one possible explanation for at

least part of the assessment-area effect may be that

the channel through which loans are originated matters. Loans extended to borrowers outside an institution’s assessment area may be more likely to come

47. The hypothesized relationship between credit scores and loan

amounts is borne out in the credit records of a nationally representative

sample of credit files obtained by the Federal Reserve Board from one

of the three national credit-reporting agencies. Refer to Robert B.

Avery, Paul S. Calem, and Glenn B. Canner (2004), ‘‘Credit Report

Accuracy and Access to Credit,’’ Federal Reserve Bulletin, vol. 90

(Summer), pp. 297–322.

12.—Continued

B. Refinance, owner-occupied site-built home—Continued

Percent except as noted

Characteristic and status

Conventional, first lien

Number of loans Incidence

2005

Percentage

change,

2004–05

2005 Change, 2004–05

(percentage points)

Spread

unadjusted

Spread

adjusted

Spread

unadjusted

Spread

adjusted

Census Tract of Property

Income ratio (percent of area median)

Less than 80 ................................................ 896,846 5.0 39.6 35.1 13.2 10.6

80–119 ..................................................... 2,798,392 −.6 27.4 23.7 10.3 8.0

120 or more ................................................ 1,698,827 −10.7 16.4 14.1 7.8 6.3

Total 4 .................................................. 5,394,065 −3.2 26.0 22.6 10.3 8.2

Racial or ethnic composition

(minorities as percentage of population)

Less than 10 ................................................ 1,770,723 −7.6 22.4 19.0 8.6 6.3

10–50 ...................................................... 2,516,983 −2.7 23.6 20.5 9.7 7.7

50–100 ..................................................... 1,106,359 3.6 37.1 33.1 14.0 11.9

Total 4 .................................................. 5,394,065 −3.2 26.0 22.6 10.3 8.2

Location

Central city ................................................. 2,947,231 −2.7 24.3 21.1 10.3 8.3

Noncentral city .............................................. 1,911,159 −4.2 27.1 23.8 11.0 8.9

Rural or only state known ................................... 535,675 −1.9 30.9 26.4 8.4 5.3

Total 4 .................................................. 5,394,065 −3.2 26.0 22.6 10.3 8.2

Credit score of borrowers

(percent of mortgage borrowers with scores below 600) 9

20 or more .................................................. 758,118 5.0 47.8 42.2 12.8 9.4

10–19 ...................................................... 1,835,281 2.6 30.8 26.8 11.4 8.9

Less than 10 ................................................ 2,800,666 −8.5 16.8 14.5 8.0 6.6

Total 4 .................................................. 5,394,065 −3.2 26.0 22.6 10.3 8.2

Educational attainment of residents

(percent of adults with high-school education or less)

30 or less ................................................... 1,220,761 −14.3 13.4 11.6 6.8 5.6

31–60 ...................................................... 3,037,703 −.1 26.2 22.8 10.4 8.3

More than 60 ............................................... 1,135,601 2.7 38.7 33.8 11.9 9.0

Total 4 .................................................. 5,394,065 −3.2 26.0 22.6 10.3 8.2

Denial rate for loan type (percent of applicants denied credit)

20 or less ................................................... 915,057 −39.1 11.6 10.1 5.7 4.7

21–40 ...................................................... 3,441,463 5.3 25.2 21.9 9.3 7.4

More than 40 ............................................... 1,037,545 29.9 41.3 35.9 8.5 5.2

Total 4 .................................................. 5,394,065 −3.2 26.0 22.6 10.3 8.2

Real price appreciation of real estate10

Less than zero .............................................. 2,679,049 .4 26.2 23.1 10.9 9.1

0–20 ........................................................ 1,279,137 −4.5 27.1 23.3 10.1 7.6

More than 20 ............................................... 1,435,879 −8.1 24.5 21.0 9.5 7.2

Total 4 .................................................. 5,394,065 −3.2 26.0 22.6 10.3 8.2

Note: Refer to notes to table 12.A.

Higher-Priced Home Lending and the 2005 HMDA Data A157
through mortgage brokers, who may price differently

or who operate in areas with different market conditions than those faced by institutions that originate

loans directly. Another possible factor is that these

brokers serve markets or individuals who are more

costly to serve or whose credit profiles are weaker,

and the brokers price accordingly.

Differences in Pricing by Race, Ethnicity,

and Sex of Borrower

Analysis of the 2004 HMDA data revealed substantial

disparities in the incidence of higher-priced lending

across racial and ethnic lines and further showed that

such differences could not be fully explained by

factors included in the HMDA data. The 2005 data

show similar patterns.

Because of its importance, we look at the incidence

of higher-priced lending by race, ethnicity, and sex in

a more detailed way than in previous sections. The

analysis is more detailed in three respects. First, we

examine pricing patterns for specific racial, ethnic,

and gender groups. Second, we examine the incidence of higher-priced lending (both spread unadjusted and spread adjusted for changes in the yield

curve) and the APR spreads (also spread unadjusted

and spread adjusted) paid by those receiving higherpriced loans. Third, and most important, we examine

whether these patterns persist when other factors

included in the HMDA data are accounted for. We

restrict our analysis to conventional first-lien homepurchase and refinance loans on owner-occupied,

one- to four-family, site-built homes, as these are by

far the largest two loan product categories in the

HMDA data.48 In 2005, home-purchase and refinance

loan products involved roughly 4.4 million and

5.5 million loans respectively.

The HMDA data do not include many of the factors

considered in credit underwriting and pricing. However, our analysis can include some variables likely

related to the loan-pricing process. Specifically, the

HMDA data allow an accounting for property location (for example, same metropolitan area), income

relied on for underwriting, loan amount, and time of

year the loan was made as well as presence of a

co-applicant. To the extent that some of these HMDA

factors are not used directly in loan underwriting or

pricing, they are included in the analysis as proxies

for at least some of the factors that are considered.

For example, accounting for borrower income and for

loan amount is a measure of the financial burden

associated with the loan payments, as larger loans

relative to income imply higher monthly payment

burdens (if we assume that housing values are proportionate to income, higher loan-to-income ratios may

also reflect higher LTVs). Because we are focusing on

specific loan products, we are already controlling in

broad terms for loan type and purpose, type of

property securing the loan, lien status, and owneroccupancy status.

In comparing lending outcomes across racial and

ethnic groups, one can match for the sex of the

applicant and co-applicant. Accounting for sex in the

analysis is intended to better distinguish pricing issues

related purely to the race or ethnicity of the borrower

from those that may be related to sex. In assessing

lending outcomes by sex, one can match for race and

ethnicity.

The analysis focuses on both the incidence of

higher-priced lending and the mean APR spreads paid

by borrowers with higher-priced loans, and we compare these outcomes across eleven groups—nine

racial or ethnic groups and the two sexes. Comparisons of average outcomes for each group are made

both before and after modifying the results for differences in the borrower-related factors cited earlier

(income; loan amount; location—MSA—of the property; presence of a co-applicant; and, in the comparisons by race and ethnicity, sex) and for differences in

borrower-related factors plus the specific lending

institution used by the borrower. Excluded from the

pricing analysis are applicants residing outside the

fifty states and the District of Columbia, applications

deemed to be business related, and applications filed

during the transition period. Otherwise, the sample

includes all 2005 HMDA loans for the two loan

product categories we examine. Our method of controlling for these factors is to group borrowers into

cells, as we did in our 2005 article assessing the 2004

HMDA data.49

Comparisons for lending outcomes across groups

are discussed in the following sections. The comparisons are of three types: unmodified (or ‘‘gross’’),

modified for borrower-related factors (or ‘‘borrower

modified’’), and modified for borrower-related factors

plus lender (or ‘‘lender modified’’). For purposes of

presentation, the borrower- and lender-modified outcomes shown in the tables are normalized so that, for

the base comparison group (non-Hispanic whites in

the case of comparison by race and ethnicity, and

males in the case of comparison by sex), the mean at

48. In the analysis of the 2004 HMDA data, we assessed pricing

patterns for a broader group of loan products than is presented here.

We also examined patterns for borrowers grouped by income, censustract income, type of lender, and disposition of loan. We do not present

the corresponding analysis for 2005 because the patterns are largely

unchanged from 2004.

49. For a description of our approach, refer to Avery, Canner, and

Cook, ‘‘New Information Reported under HMDA,’’ pp. 387–88.

A158 Federal Reserve Bulletin h 2006
each modification level is the same as the gross mean.

Consequently, the borrower- and lender-modified outcomes for any other group represent the expected

average outcome if the members of that group had the

same distribution of control factors as that of the base

comparison group.

Incidence of Higher-Priced Lending by Race and

Ethnicity

The 2005 HMDA data, like the 2004 data, indicate that

black and Hispanic borrowers are more likely, and

Asians borrowers less likely, to obtain loans with

prices above the pricing thresholds than are nonHispanic white borrowers. These relationships hold

for both loan products and persist when the incidence

is spread adjusted for the effects of the flattening of the

yield curve (table 13, sections labeled ‘‘Spread adjusted’’). Gross differences in the incidence of higherpriced lending between non-Hispanic whites, on the

one hand, and blacks or Hispanic whites, on the other,

are large, but these differences are substantially reduced after controlling for borrower-related factors

plus lender. Most of the reduction in the difference in

the incidence across groups comes from adding the

control for lender to the control for borrower-related

factors, an indication that the pricing differences

within a given lender are typically smaller than the

differences among loans across lenders.50

For 2005, for conventional home-purchase loans,

the gross mean incidence of higher-priced lending

was 54.7 percent for blacks and 17.2 percent for

non-Hispanic whites, a difference of 37.5 percentage

points (table 13.A.). Borrower-related factors included in the HMDA data accounted for about onefifth of the difference. Adding to this modification the

control for lender reduces the remaining gap to

10 percentage points. By comparison, in 2004, the

unmodified mean incidence of higher-priced lending

for conventional first-lien home-purchase loans was

32.4 percent for blacks and 8.7 percent for nonHispanic whites, a difference of 23.7 percentage

points. Borrower-related factors accounted for about

one-fourth of the difference. Adding to this modification the control for lender reduced the remaining gap

to 7 percentage points.

For 2005, for refinancings, the gross difference

between blacks and non-Hispanic whites is 28.3 percentage points; the difference is reduced to 6.2 percentage points after controlling for borrower-related

factors plus lender; most of the reduction in differences comes from the addition of the control for

lender (table 13.B.). By comparison, in 2004, the

gross difference between blacks and non-Hispanic

whites was 21.7 percentage points; the difference was

reduced to 4.7 percentage points after controlling for

borrower-related factors plus lender, and about twothirds of that reduction came from the addition of the

control for lender.

The picture for Asians differs greatly from that for

blacks or Hispanic whites: Compared with nonHispanic whites, Asians have a lower gross mean

incidence of higher-priced lending for home-purchase

and refinance loans. The gap is affected some by

controlling for borrower-related factors plus lender;

for home-purchase loans, the incidence of higherpriced lending remains lower for Asians than for

non-Hispanic whites; for refinancings, the gap is

essentially eliminated. Hispanic whites show a pattern similar to that of blacks but with smaller differences relative to non-Hispanic whites.

One of the more notable pricing patterns that

emerges is much narrower gaps across racial and

ethnic groups for refinancings as compared with

home-purchase lending. This pattern occurs despite

the fact that the gross incidence of higher-priced

lending is higher for refinancings for at least some

groups, including non-Hispanic whites. Also, the gap

between blacks and non-Hispanic whites is notably

larger than that for other minority groups.

Rate Spreads by Race and Ethnicity

The 2005 data, like the data for 2004, indicate that

among borrowers with higher-priced loans, the gross

mean prices paid by black and Hispanic white borrowers are about the same as those paid by nonHispanic white borrowers (table 14). Asian borrowers

with higher-priced loans also paid about the same

price, on average, as non-Hispanic whites with higherpriced loans. These relationships are consistent for

both types of loans.

Pricing Differences by Sex

The 2005 HMDA data reveal little difference in

pricing when borrowers are distinguished by sex.

For example, sole female borrowers generally have

a slightly lower incidence of higher-priced lending

than sole male borrowers for home-purchase loans

50. Racial and ethnic differences in higher-priced lending vary

substantially across loan product categories (data not shown in tables).

For government-backed loan products, small proportions of borrowers

have higher-priced loans, and no meaningful differences appear across

racial and ethnic groups. At the other extreme, the majority of

borrowers for manufactured homes have higher-priced loans, and for

this product significant differences appear across racial and ethnic

groups (although the differences are smaller than for some other

products). These relationships persist after controlling for borrowerrelated factors and for borrower-related factors plus lender.

Higher-Priced Home Lending and the 2005 HMDA Data A159
after accounting for borrower-related factors plus

lender but a slightly higher incidence for refinancings (table 13). Similarly, few if any differences are

revealed in the average prices (mean APR spreads)

paid by those receiving higher-priced loans

(table 14).

Effects of the Yield Curve on Pricing Differences

across Racial and Ethnic Groups

An important question is whether the flattening of the

yield curve had a different effect across racial and

ethnic groups and consequently affected the observed

gaps in loan pricing from 2004 to 2005. Evidence

suggests that such differential yield curve effects exist

but were likely not large. For example, for conventional home-purchase lending, the borrower- and

lender-modified gap between black and non-Hispanic

whites was 7.0 percentage points in 2004 and 10.0 percentage points in 2005 (table 13.A.). The comparable

spread-adjusted gaps are 6.5 percentage points for

2004 and 8.7 percentage points for 2005. The fact that

13. Incidence of higher-priced lending, unadjusted and adjusted for changes in interest rates, and unmodified and modified

for borrower- and lender-related factors, for loans on one- to four-family homes, by type of loan and by race, ethnicity,

and sex of borrower, 2004 and 2005

A. Home purchase, owner-occupied site-built home

Percent except as noted

Race, ethnicity, and sex

Conventional, first lien

2004 2005

Number

of loans

Unmodified

incidence

Modified incidence,

by modification factor

Number

of loans

Unmodified

incidence

Modified incidence,

by modification factor

Borrowerrelated

Borrowerrelated

plus lender

Borrowerrelated

Borrowerrelated

plus lender

Spread unadjusted

Race

American Indian or Alaska Native . . . 28,107 18.1 17.2 11.8 27,766 35.3 29.5 21.8

Asian ............................... 199,359 5.9 7.4 8.1 237,383 16.6 15.8 16.6

Black or African American .......... 232,688 32.4 26.7 15.7 312,451 54.7 47.0 27.2

Native Hawaiian or other

Pacific Islander ................. 20,293 15.7 16.3 11.1 23,450 34.8 30.4 21.0

Two or more minority races ......... 2,613 22.9 22.2 12.2 2,112 30.4 28.7 20.8

Joint ................................ 47,299 6.9 10.8 9.4 51,881 18.2 23.0 19.0

Not available ........................ 390,136 13.4 16.8 11.1 431,159 32.4 33.6 21.6

Ethnicity

Hispanic white ...................... 301,915 20.3 16.6 11.6 464,634 46.1 34.2 21.9

Non-Hispanic white ................. 2,476,255 8.7 8.7 8.7 2,789,265 17.2 17.2 17.2

Sex

One male ........................... 1,129,781 15.3 15.3 15.3 1,392,947 31.7 31.7 31.7

One female ......................... 850,213 15.3 14.4 15.0 1,021,006 30.8 29.8 30.8

Two males .......................... 38,170 9.5 9.5 9.5 44,278 23.1 23.1 23.1

Two females ........................ 31,083 10.4 9.0 9.8 36,140 24.7 22.4 23.9

Spread adjusted

Race

American Indian or Alaska Native . . . 28,107 16.4 15.6 10.8 27,766 31.2 25.6 18.3

Asian ............................... 199,359 5.1 6.7 7.4 237,383 14.5 13.4 14.1

Black or African American .......... 232,688 30.0 24.6 14.4 312,451 50.1 42.6 23.3

Native Hawaiian or other

Pacific Islander ................. 20,293 13.9 14.9 10.3 23,450 30.9 26.9 17.6

Two or more minority races ......... 2,613 20.2 19.2 10.5 2,112 27.7 25.9 17.7

Joint ................................ 47,299 6.1 9.7 8.5 51,881 15.9 20.0 16.2

Not available ........................ 390,136 12.1 15.4 10.1 431,159 29.3 30.1 18.5

Ethnicity

Hispanic white ...................... 301,915 17.8 14.8 10.3 464,634 40.8 29.6 18.2

Non-Hispanic white ................. 2,476,255 7.9 7.9 7.9 2,789,265 14.6 14.6 14.6

Sex

One male ........................... 1,129,781 13.8 13.8 13.8 1,392,947 27.9 27.9 27.9

One female ......................... 850,213 13.9 13.0 13.5 1,021,006 27.2 26.4 27.3

Two males .......................... 38,170 8.5 8.5 8.5 44,278 19.7 19.7 19.7

Two females ........................ 31,083 9.5 8.2 8.9 36,140 21.8 19.6 20.6

Note: Excludes transition-period loans (those for which the application was

submitted before 2004). For definition of higher-priced lending and explanations of spread adjustment and of modification factors, refer to text. Categories

for race and ethnicity reflect the revised standards established in 1997 by the

Office of Management and Budget. The term minority means Hispanic or

Latino ethnicity or any race other than white for both the borrower and the

coborrower. For method of allocation into racial and ethnic categories and definitions of categories, refer to text note 22. Loans taken out jointly by a male

and female are not tabulated here because they would not be directly comparable with loans taken out by one borrower or by two borrowers of the same

sex.

A160 Federal Reserve Bulletin h 2006
both spread-adjusted gaps are lower than the comparable unadjusted figures suggests that to the extent

that the yield curve changes affected the measurement

of racial and ethnic pricing differences, they tended to

widen gaps rather than narrow them.

Denial Rates by Race, Ethnicity, and Sex

Analyses of the HMDA data from different years

consistently find that denial rates vary across applicants grouped by race or ethnicity (table 15). For each

loan product category in 2005, American Indians,

blacks, and Hispanic whites had higher denial rates

than non-Hispanic whites; blacks generally had the

highest rates, and Hispanic whites had rates about

halfway between those for blacks and those for

non-Hispanic whites. The pattern was less consistent

for Asians, who had higher denial rates than nonHispanic whites for some loan products but lower

rates for others.

These patterns reflect gross differences in lending

outcomes but do not account for differences in

economic or financial circumstances that may vary

across groups. To account for the subset of these

factors included in the HMDA data, we conducted

13.—Continued

B. Refinance, owner-occupied site-built home

Percent except as noted

B. Percent except as noted

Race, ethnicity, and sex

Conventional, first lien

2004 2005

Number

of loans

Unmodified

incidence

Modified incidence,

by modification factor

Number

of loans

Unmodified

incidence

Modified incidence,

by modification factor

Borrowerrelated

Borrowerrelated

plus lender

Borrowerrelated

Borrowerrelated

plus lender

Spread unadjusted

Race

American Indian or Alaska Native . . . 44,503 20.2 21.0 14.7 37,213 28.9 32.1 24.1

Asian ............................... 207,114 5.9 9.7 12.1 165,011 15.2 18.9 21.1

Black or African American .......... 391,524 34.6 29.5 17.6 441,299 49.3 45.0 27.2

Native Hawaiian or other

Pacific Islander ................. 31,381 16.4 18.6 14.5 31,453 28.4 32.2 24.3

Two or more minority races ......... 5,089 21.1 22.4 15.0 3,650 28.6 29.5 24.2

Joint ................................ 67,199 10.4 14.7 13.5 61,200 19.3 26.2 22.4

Not available ........................ 827,590 19.3 25.4 15.3 752,573 32.2 38.0 24.5

Ethnicity

Hispanic white ...................... 378,826 19.3 18.5 14.3 478,381 33.8 31.5 23.6

Non-Hispanic white ................. 3,698,309 12.9 12.9 12.9 3,496,425 21.0 21.0 21.0

Sex

One male ........................... 1,360,350 18.6 18.6 18.6 1,424,721 30.3 30.3 30.3

One female ......................... 1,173,835 19.8 18.5 18.7 1,229,138 31.1 30.0 30.4

Two males .......................... 40,012 12.1 12.1 12.1 37,442 21.2 21.2 21.2

Two females ........................ 43,208 17.3 14.5 13.4 41,572 27.0 23.5 22.5

Spread adjusted

Race

American Indian or Alaska Native . . . 44,503 18.3 19.3 13.3 37,213 25.1 27.9 20.6

Asian ............................... 207,114 5.2 8.9 11.1 165,011 13.4 16.1 18.1

Black or African American .......... 391,524 32.3 27.5 16.3 441,299 43.9 39.9 23.3

Native Hawaiian or other

Pacific Islander ................. 31,381 14.8 17.0 13.2 31,453 25.3 28.5 20.9

Two or more minority races ......... 5,089 18.7 20.4 13.8 3,650 25.5 25.7 20.2

Joint ................................ 67,199 9.4 13.5 12.3 61,200 16.6 22.6 19.2

Not available ........................ 827,590 17.8 23.6 14.1 752,573 28.6 33.8 20.9

Ethnicity

Hispanic white ...................... 378,826 17.4 16.8 13.0 478,381 30.1 27.4 20.2

Non-Hispanic white ................. 3,698,309 11.8 11.8 11.8 3,496,425 17.9 17.9 17.9

Sex

One male ........................... 1,360,350 17.0 17.0 17.0 1,424,721 26.8 26.8 26.8

One female ......................... 1,173,835 18.2 16.9 17.2 1,229,138 27.4 26.4 26.8

Two males .......................... 40,012 11.0 11.0 11.0 37,442 18.2 18.2 18.2

Two females ........................ 43,208 16.0 13.3 12.2 41,572 23.4 20.2 19.4

Note: Refer to note to table 13.A.

Higher-Priced Home Lending and the 2005 HMDA Data A161
an analysis analogous to that undertaken in the

pricing discussion.51

With few exceptions, controlling for borrowerrelated factors in the HMDA data reduces the differences among racial and ethnic groups. Accounting for

the specific lender used by the applicant almost

always reduces differences further, although large

differences remain between non-Hispanic whites and

most of the other racial and ethnic groups. For

example, for conventional first-lien home-purchase

loans, the gross mean denial rate was 27.5 percent for

blacks and 12.3 percent for non-Hispanic whites, a

difference of 15.2 percentage points. Accounting for

income, loan amount, and other borrower-related

51. The sample rules used for the denial rate analysis are identical to

those used for the pricing analysis except that transition-period

applications were not excluded.

14. Mean APR spreads, unadjusted and adjusted for changes in interest rates, and unmodified and modified for borrowerand lender-related factors, for higher-priced loans on one- to four-family homes, by type of loan and by race, ethnicity,

and sex of borrower, 2004 and 2005

A. Home purchase, owner-occupied site-built home

Percentage points except as noted

Race, ethnicity, and sex

Conventional, first lien

2004 2005

Number of

higher-priced

loans

Unmodified

mean spread

Modified mean spread,

by modification factor Number of

higher-priced

loans

Unmodified

mean spread

Modified mean spread,

by modification factor

Borrowerrelated

Borrowerrelated

plus lender

Borrowerrelated

Borrowerrelated

plus lender

Spread unadjusted

Race

American Indian or Alaska Native . . . 5,101 4.0 4.1 4.1 9,799 4.6 4.8 4.8

Asian ............................... 11,771 3.8 4.0 4.0 39,471 4.6 4.7 4.7

Black or African American .......... 75,427 4.2 4.2 4.2 171,009 5.0 4.9 4.9

Native Hawaiian or other

Pacific Islander ................. 3,186 4.0 4.1 4.1 8,162 4.6 4.8 4.8

Two or more minority races . . . . . . . . . 598 4.1 4.3 4.1 641 4.8 4.9 4.8

Joint ................................ 3,242 4.0 4.1 4.1 9,468 4.6 4.8 4.8

Not available ........................ 52,094 4.1 4.1 4.1 139,740 4.9 4.9 4.8

Ethnicity

Hispanic white ...................... 61,248 3.9 4.0 4.1 214,415 4.6 4.7 4.8

Non-Hispanic white ................. 216,409 4.1 4.1 4.1 479,338 4.7 4.7 4.7

Sex

One male ........................... 173,166 4.0 4.0 4.0 441,919 4.8 4.8 4.8

One female ......................... 130,250 4.1 4.0 4.0 313,959 4.8 4.8 4.8

Two males .......................... 3,632 4.1 4.1 4.1 10,213 4.5 4.5 4.5

Two females ........................ 3,246 4.1 4.0 4.1 8,943 4.7 4.6 4.5

Spread adjusted

Race

American Indian or Alaska Native . . . 4,603 3.2 3.3 3.3 8,658 3.6 3.8 3.8

Asian ............................... 10,222 3.1 3.3 3.3 34,340 3.5 3.7 3.7

Black or African American .......... 69,867 3.4 3.4 3.4 156,504 3.9 3.9 3.8

Native Hawaiian or other

Pacific Islander ................. 2,824 3.2 3.4 3.4 7,243 3.5 3.8 3.8

Two or more minority races . . . . . . . . . 528 3.3 3.5 3.4 586 3.7 3.8 3.8

Joint ................................ 2,885 3.3 3.4 3.3 8,247 3.6 3.7 3.8

Not available ........................ 47,071 3.3 3.4 3.4 126,398 3.8 3.9 3.8

Ethnicity

Hispanic white ...................... 53,750 3.2 3.3 3.3 189,768 3.6 3.7 3.8

Non-Hispanic white ................. 195,778 3.3 3.3 3.3 408,297 3.7 3.7 3.7

Sex

One male ........................... 156,146 3.3 3.3 3.3 388,632 3.7 3.7 3.7

One female ......................... 117,763 3.3 3.3 3.3 277,536 3.8 3.7 3.7

Two males .......................... 3,246 3.3 3.3 3.3 8,706 3.5 3.5 3.5

Two females ........................ 2,944 3.3 3.3 3.4 7,874 3.6 3.5 3.5

Note: Spread-unadjusted APR is the difference between the APR on the

loan and the yield on a comparable-maturity Treasury security. Spread-adjusted

APR is the difference between the APR on the loan and the estimated APR

reported by Freddie Mac for a thirty-year fixed-rate loan in its Primary Mortgage Market Survey. Excludes transition-period loans (those for which the

application was submitted before 2004). For definition of higher-priced lending

and explanation of modification factors, refer to text. Categories for race and

ethnicity reflect the revised standards established in 1997 by the Office of

Management and Budget. The term minority means Hispanic or Latino ethnicity or any race other than white for both the borrower and the coborrower. For

method of allocation into racial and ethnic categories and definitions of categories, refer to text note 22. Loans taken out jointly by a male and female are not

tabulated here because they would not be directly comparable with loans taken

out by one borrower or by two borrowers of the same sex.

A162 Federal Reserve Bulletin h 2006
factors in the HMDA data reduces the difference

3.1 percentage points. Controlling for borrowerrelated factors plus lender further reduces the gap to

7.0 percentage points. The reduction for conventional

first-lien refinance loans is similar. The gross difference between denial rates for blacks and those for

non-Hispanic whites is 15.9 percentage points, a

difference cut in half when modified for borrowerrelated factors plus lender.

With regard to the sex of applicants, sole male

applicants typically have higher denial rates than

females do, but in general, the sizes of the differences

by sex are small. Controlling for borrower-related

factors plus lender generally has only a small effect

on differences in denial rates.

Limitations of the HMDA Data in Accounting

for Differences across Groups

Like the 2004 data, the data for 2005 show large

differences in the incidence of higher-priced lending

between minorities and non-Hispanic whites. Analysis indicates that the information in the HMDA

data—that is, the data modified for borrower-related

factors plus lender—is insufficient to account fully

for racial or ethnic differences in the incidence of

14.—Continued

B. Refinance, owner-occupied site-built home

Percentage points except as noted

Race, ethnicity, and sex

Conventional, first lien

2004 2005

Number of

higher-priced

loans

Unmodified

mean spread

Modified mean spread,

by modification factor Number of

higher-priced

loans

Unmodified

mean spread

Modified mean spread,

by modification factor

Borrowerrelated

Borrowerrelated

plus lender

Borrowerrelated

Borrowerrelated

plus lender

Spread unadjusted

Race

American Indian or Alaska Native . . . 8,977 4.1 4.2 4.1 10,770 4.8 4.8 4.8

Asian ............................... 12,250 3.9 4.1 4.1 25,119 4.7 4.8 4.8

Black or African American .......... 135,467 4.3 4.3 4.3 217,351 5.0 5.0 4.9

Native Hawaiian or other

Pacific Islander ................. 5,153 4.1 4.2 4.2 8,945 4.8 4.8 4.8

Two or more minority races ......... 1,072 4.0 4.1 4.1 1,043 4.9 4.9 4.8

Joint ................................ 6,973 4.1 4.2 4.2 11,815 4.7 4.8 4.8

Not available ........................ 159,741 4.2 4.2 4.2 242,666 5.0 5.0 4.8

Ethnicity

Hispanic white ...................... 73,181 4.0 4.1 4.2 161,713 4.8 4.8 4.8

Non-Hispanic white ................. 476,034 4.2 4.2 4.2 733,290 4.8 4.8 4.8

Sex

One male ........................... 252,618 4.1 4.1 4.1 432,386 4.9 4.9 4.9

One female ......................... 232,583 4.2 4.2 4.1 382,071 4.9 4.9 4.9

Two males .......................... 4,833 4.2 4.2 4.2 7,937 4.8 4.8 4.8

Two females ........................ 7,479 4.3 4.2 4.2 11,208 4.8 4.8 4.8

Spread adjusted

Race

American Indian or Alaska Native . . . 8,160 3.4 3.4 3.4 9,354 3.8 3.8 3.8

Asian ............................... 10,867 3.2 3.4 3.4 22,074 3.6 3.8 3.8

Black or African American .......... 126,314 3.5 3.5 3.5 193,660 3.9 3.9 3.9

Native Hawaiian or other

Pacific Islander ................. 4,630 3.3 3.4 3.4 7,943 3.7 3.8 3.8

Two or more minority races . . . . . . . . . 951 3.2 3.3 3.4 929 3.9 3.9 3.9

Joint ................................ 6,343 3.3 3.4 3.4 10,139 3.7 3.8 3.8

Not available ........................ 147,619 3.5 3.5 3.4 215,508 4.0 4.0 3.8

Ethnicity

Hispanic white ...................... 65,733 3.3 3.4 3.4 143,893 3.7 3.8 3.8

Non-Hispanic white ................. 436,611 3.4 3.4 3.4 625,890 3.8 3.8 3.8

Sex

One male ........................... 231,756 3.4 3.4 3.4 381,119 3.9 3.9 3.9

One female ......................... 214,180 3.4 3.4 3.4 336,179 3.9 3.9 3.9

Two males .......................... 4,402 3.5 3.5 3.5 6,821 3.8 3.8 3.8

Two females ........................ 6,897 3.5 3.5 3.4 9,713 3.8 3.8 3.8

Note: Refer to note to table 14.A.

Higher-Priced Home Lending and the 2005 HMDA Data A163
higher-priced lending; significant differences remain

unexplained. Similar patterns are shown in racial or

ethnic differences in denial rates.

The unexplained differences may stem from creditrelated factors not available in the HMDA data, such

as measures of credit history, LTV and DTI ratios,

and differences in loan products. Differential costs of

loan origination may also bear on the differences in

pricing. Differences in pricing and underwriting outcomes may also reflect discriminatory treatment of

minority groups. Further research is needed to assess

the extent to which credit- or cost-related factors

account for the unexplained differences in loan pricing and denial rates.

CONCLUDING THOUGHTS

Much of the attention paid to the 2005 HMDA data

will likely focus on loan pricing and, in particular,

on the significant increase in the reported incidence

of higher-priced lending relative to that reported in

2004. For example, the incidence of higher-priced

lending for conventional first-lien home-purchase

loans on owner-occupied, one- to four-family, sitebuilt homes rose from 11.5 percent in 2004 to

24.6 percent in 2005. At least three effects contributed to this increased incidence of higher-priced

lending.

The first effect was driven by the flattening of the

yield curve and its relationship to fixed-rate loans.

The gap between the APRs on thirty-year fixed-rate

mortgages and the yield on the thirty-year Treasury

security used to compute the threshold for higherpriced loan reporting under HMDA narrowed over

the 2004–05 period. This narrowing was primarily

driven by rising mortgage rates, though the yield on

the thirty-year Treasury security did fall slightly

during the period. This increase in mortgage rates

affected all mortgage borrowers.

The second effect was a combination of the flattening of the yield curve and an artifact of the way APRs

on adjustable-rate loans are determined. The APRs

used to determine whether adjustable-rate loans met

the threshold for being reported as higher priced

under HMDA were artificially low in 2004 because of

the nature of the formula used to construct APRs for

such loans and the interest rate situation that prevailed during the year. By the beginning of 2005, this

effect had been largely eliminated because of the

flattening yield curve. For the same credit-risk characteristics, adjustable-rate loans would have had

higher APRs in 2005 than in 2004, and consequently

15. Denial rates on applications, unmodified and modified for borrower- and lender-related factors, for loans on owneroccupied, one- to four-family, site-built homes, by type of loan and by race, ethnicity, and sex of applicant, 2005

Percent except as noted

Race, ethnicity, and sex

Conventional, first lien

Home purchase Refinance

Number of

applications

acted upon

by lender

Unmodified

denial rate

Modified denial rate,

by modification factor Number of

applications

acted upon

by lender

Unmodified

denial rate

Modified denial rate,

by modification factor

Borrowerrelated

Borrowerrelated

plus lender

Borrowerrelated

Borrowerrelated

plus lender

Race

American Indian or Alaska Native . . 41,081 22.4 21.5 17.4 76,922 39.9 40.8 34.1

Asian .............................. 325,881 15.8 14.4 14.3 257,577 23.6 30.0 31.2

Black or African American ......... 512,130 27.5 24.4 19.3 953,323 43.1 42.5 35.2

Native Hawaiian or other

Pacific Islander ................ 33,931 19.6 17.3 16.2 54,290 30.9 37.1 32.8

Two or more minority races ........ 3,052 20.1 19.2 15.7 6,782 36.6 39.0 33.5

Joint ............................... 65,752 12.5 15.3 13.6 96,179 27.6 34.8 30.5

Not available ....................... 672,062 22.5 22.2 17.1 1,824,626 47.7 49.3 34.8

Ethnicity

Hispanic white ..................... 669,703 21.3 18.0 16.0 807,409 30.5 33.7 31.6

Non-Hispanic white ................ 3,490,403 12.3 12.3 12.3 5,482,979 27.2 27.2 27.2

Sex

One male .......................... 1,944,385 18.9 18.9 18.9 2,671,069 36.2 36.2 36.2

One female ........................ 1,410,239 18.3 17.6 18.0 2,187,420 34.1 33.1 34.3

Two males ......................... 59,548 17.5 17.5 17.5 63,351 31.9 31.9 31.9

Two females ....................... 48,745 17.5 16.1 16.1 71,160 33.0 30.3 30.7

Note: Includes transition-period applications (those submitted before

2004). For explanation of modification factors, refer to text. Categories for race

and ethnicity reflect the revised standards established in 1997 by the Office of

Management and Budget. The term minority means Hispanic or Latino ethnicity or any race other than white for both the borrower and the coborrower. For

method of allocation into racial and ethnic categories and definitions of categories, refer to text note 22. Applications made jointly by a male and female are

not tabulated here because they would not be directly comparable with applications made by one applicant or by two applicants of the same sex.

A164 Federal Reserve Bulletin h 2006
some of them would have surpassed the HMDA

threshold in 2005, whereas a loan with the same risk

characteristics would not have been reported as higher

priced in 2004.

The third factor influencing the incidence of higherpriced lending was borrower- or lender-specific and

reflected changes in the risk characteristics of lending. Evidence indicates that changes in risk characteristics varied across geographic regions, largely because of substantial house-price appreciation in some

locales, and likely caused more borrowers to stretch

financially to obtain loans. The substantial growth in

piggyback lending from 2004 to 2005—more than

84 percent—is consistent with financial stretching.

Indeed, the increase in the number of higher-priced

piggyback loans in 2005 accounted for more than half

of the increase in the number of all higher-priced

loans.

Allocating the increase in the incidence of higherpriced lending across these three effects is difficult.

We estimate that 2 percentage points of the 13.1 percentage point increase in the incidence of higherpriced lending for conventional first-lien homepurchase loans on owner-occupied, one- to fourfamily, site-built homes can be attributed to the first

effect, the narrowing of the gap between mortgage

rates for fixed-rate loans and the HMDA pricereporting threshold. Although we are unable to estimate the share of the increased incidence attributable

to the other two effects, our comparison of changes in

the incidence of higher-priced lending in areas with

different mixes of adjustable- and fixed-rate mortgages suggests that the second effect, the reduction in

the distortion in the APR calculation for adjustablerate loans, could be substantial.

APPENDIX: REQUIREMENTS OF

REGULATION C

Under the Home Mortgage Disclosure Act (HMDA),

lenders use a ‘‘loan/application register’’ (HMDA/

LAR) to report information annually to their federal

supervisory agencies for each application and loan

acted on during the calendar year. Lenders must make

their HMDA/LARs available to the public by March

31 following the year to which the data relate, and

they must remove the two date-related fields to help

preserve applicants’ privacy.52

Only lenders that have offices (or, for nondepository institutions, are deemed to have offices) in

metropolitan areas are required to report under

HMDA. However, if a lender is required to report, it

must report information on all of its applications and

loans in all locations, including nonmetropolitan

areas.

The Federal Reserve Board’s Regulation C requires

lenders to report the following information on homepurchase and home-improvement loans and on the

refinancing of such loans:

For each application or loan

• application date and the date an action was taken on

the application

• action taken on the application

— approved and originated

— approved but not accepted by the applicant

— denied (with the reasons for denial—voluntary

for some lenders)

— withdrawn by the applicant

— file closed for incompleteness

• pre-approval program used (for home-purchase

loans only)

• loan amount

• borrower income relied on in loan underwriting

• loan type

— conventional

— insured by the Federal Housing Administration

— guaranteed by the Veterans Administration

— backed by the Farm Service Agency or Rural

Housing Service

• pre-approval status

• lien status

— first lien

— junior lien

— unsecured

• loan purpose

— home purchase

— refinance

— home improvement

• type of purchaser (if the lender subsequently sold

the loan)

For each applicant or co-applicant

• race

• ethnicity

• sex

For each property

• location, by state, county, and census tract

• type

— one- to four-family dwelling

— manufactured home

— multifamily property (dwelling with five or more

units) 52. Lenders must make their date-modified register available to the

public for a period of three years.

Higher-Priced Home Lending and the 2005 HMDA Data A165
• occupancy status (owner-occupied or nonowneroccupied)

Information is also reported on home loans purchased

by an institution during the calendar year. Under the

2002 revisions to Regulation C, additional items

became subject to reporting beginning with the data

collected for 2004.

A166 Federal Reserve Bulletin h 2006