Microfinance Practice: RE: [MFP] RE: The Equal Credit Opportunity Act / USA

Your explanation and blog are very informative Daniel, thanks.

Prompted by your mail, I spent some time searching electronic libraries thru my university and also some other leads from friends on this list. What I have found so far is quite revealing and amazing (to me). The best one-stop source was US department of Treasury that provides quarterly updated data on mortgages and portfolio at national level. http://www.occ.gov/publications/publications-by-type/other-publications-reports/mortgage-metrics-q1-2008/index-mortgage-metrics-q1-2008.html

Two points that I can share from my review.

A. in addition to the three categories that you have described, USDT also uses another category called 'other', where the credit scoring has been apparently missing or in error. This category is as high as 20% of overall number of mortgages in US.

B. in the entire data set, available for each quarter, it does not give information on value of loans for each category (prime, Alt A, Sub-prime, and Other)!! Not sure why. There are aggregate numbers of total value of portfolio in arrear; but not by category. I am a bit baffled about that, but will keep searching. Hence, it is not possible to know whether sub-prime mortgages were indeed loans to poorer borrowers (or using a proxy, if those were relatively smaller loans), and what amount of portfolio was tied in sub-prime. Interestingly, the report has a note saying "The statistics and calculated ratios in this report are based on the number of loans rather than the dollar balance outstanding."

And I also found this report to be very informative.

Paper presented at the 2009 Federal Reserve

System Community Affairs Research Conference

Washington, DC, April 16, 2009

Abstract

The recent rise in subprime lending and record-level foreclosure rates has generally been explained in terms of ill-informed borrowers, irresponsible lenders, greedy investors, lax regulators, fraudulent appraisers, and other institutional actors in the financial and insurance services industries. Few have asked whether broader contextual factors influence the growth of high-cost loans. Some research has examined selected individual- and neighborhood-level predictors of subprime lending. In particular, prior research has shown that minorities or residents of predominately minority neighborhoods are more likely to receive a subprime loan.

However, little research has examined the possible effects of racial segregation and the concentration of people of color. Using multivariate OLS regression models, with data from the 2006 HMDA report, the 2006 American Community Survey, and the 2000 Census, and credit score information, we find evidence that even after controlling for percent minority, low credit

scores, poverty, and median home value, racial segregation is clearly linked with the proportion of subprime loans originated at the metropolitan level. We also find that black segregation has a

stronger effect than Hispanic segregation. This research suggests that the context of racial segregation is an important determinant of subprime lending. We also find that general education levels seem to be an important protective factor against high proportions of subprime loans. Consequently, policy initiatives should address these broader dimensions of segregation

and uneven development, in addition to consumer behavior, banking practices, and regulation of financial services industries.

http://www.kansascityfed.org/publicat/events/community/2009carc/Hyra.pdf

Equal Credit opportunity Act provides a framework, but the devil remains in the details, I guess. But it will be unwise to jump to that conclusion without further confirmation.

Thanks again for your insights.

anuj

From: MicrofinancePractice@yahoogroups.com [mailto:MicrofinancePractice@yahoogroups.com] On Behalf Of danrozas@yahoo.com
Sent: Wednesday, February 19, 2014 7:14 AM
To: MicrofinancePractice@yahoogroups.com
Subject: [MFP] RE: The Equal Credit Opportunity Act / USA

Replying to several questions raised in the discussion. Hopefully might provide some clarity, though to be sure, the topic is awfully complex and hard to deal with short email postings...

First, on the infamous Alt-A: yes, "liar loans" (which required little or no documentation of income, assets, or both) would very much fall into this category. In general, Alt-A is a catch-all category that includes all kinds of risk profiles, but its key distinguishing feature is that Alt-A borrowers had to have reasonably high credit scores. In Table 3 of the blog, you'll see the breakdown: only 1% of Alt-A loans are marked as "bad credit" (FICO score < 620), whereas >50% of subprime fall in that category. Indeed, the average FICO score for Alt-A was in the mid-700s, which is above the national average.

Regarding credit quality: this get s a bit more complicated. The argument isn't that Alt-A loans were worse than subprime, though during the height of the crisis they were nearly as bad. The trouble is that this was -- at least at Fannie Mae and among many other banks/investors -- unexpected. Prior to the crisis, the performance of Alt-A was only slightly below that of "prime" loans (i.e. good credit history and no special risk features). In the data I had available when writing the analysis, the delinquency rate of Alt-A loans in Fannie's portfolio in Sep 2007 was 1.4% vs. <0.4% for prime (Fannie Mae didn't disclose prime separately, so I had to extrapolate). Bear in mind that by that point, the mortgage crisis was already ~10 months old. The gap in performance was far smaller prior to this. Unfortunately, I haven't seen any publicly-disclosed figures prior to that time, though my personal recollection is that the delinquency for Alt-A loans was in the range of 0.6% or so prior to the crisis vs. <0.2% for prime. So, from a strictly risk management perspective, it wasn't the high delinquencies themselves that were the issue, but the fact that they were so unexpected for this portion of the portfolio. Arguably, one should've seen it coming, but that's another discussion...

In terms of outreach to minorities & the poor: it's not as though Alt-A had no minorities or poor people represented -- pretty much any loan pool would include some minorities & poor. But in Alt-A, these groups were UNDER-represented compared to the overall portfolio, so that buying Alt-A loans made it actually more difficult for Fannie Mae to reach its "housing goals" -- the government mandates for serving marginalized groups. And yet, it was these Alt-A loans that made up the largest share of losses at the company, at least as of Dec09.

Perhaps the saddest part of t he commentary is the outcome of the loans that explicitly targeted the minority & marginalized groups -- products essentially developed to meet the minority lending targets set by regulations. Were these high-risk loans? Yes. But they were significantly smaller share of portfolio (in part also because the loan sizes were smaller), and their risk was well known and priced-for. But the most important factor is that these loans -- while they served people with poor credit and often had low downpayments -- didn't feature the kinds of risks common to subprime & Alt-A. These were mostly fixed rate loans, no "exploding ARMs," no interest-only, full documentation of income, and so on. Their performance, while certainly problematic, was better than subprime, and actually on a similar level as Alt-A. The tragedy is that on the street, the borrowers who qualified for these loans were so often steered into the subprime product instead, at the expense of the borrowers, but to the benefit the mortgage brokers, the subprime lenders, Wall Street -- i.e. the whole poisonous chain...

Ok, so this is long enough for a post. For those interested, you'll find a lot of data in the blog (here it is again: http://www.danielrozas.com/housing/2012/06/11/affordable-housing-goals-and-the-collapse-of-fannie-mae-debunking-the-myth/). Just to be clear -- I'm no apologist for Fannie Mae and the mistakes it made, which were many. But I think it behooves us to learn the right lessons, and not those that happen to fit convenient political preconceptions. There are many reasons behind the collapse of the company and the US mortgage market generally, but government mandate s to serve minorities and the poor were not among them.

Daniel

---In MicrofinancePractice@yahoogroups.com, <DFitchett@...> wrote:

It would be interesting to know how the definition of "conforming loan" (i.e., mortgages which conform to certain standards and requirements in order to be eligible to be purchased by Fannie, Freddie, Federal Home Loan Bank, Farmer Mac and other GSEs) may have changed over the last twelve-fifteen years.

For instance, currently the FHFA's maximum conforming loan size for a single family unit is $417,000, except for about 60 or 70

"Metropolitan Statistical Areas, Micropolitan Statistical Areas and Rural Counties" in the Continental United States, Alaska, Hawaii, Guam and U.S. Virgin Islands,where maximum conforming loan limits for mortgages acquired in 2014 by FHFA agencies may exceed $417,000, and go up to $625,500. ( http://www.fhfa.gov/Default.aspx?Page=185 )

In "Alice in Wonderland" isn't there a line from the Queen about words meaning what she wants them to mean?

Del

----- Original Message -----
From: Normand Arsenault
To: MicrofinancePractice@yahoogroups.com
Sent: Tuesday, February 18, 2014 11:32 AM
Subject: RE: [MFP] RE: The Equal Credit Opportunity Act / USA

For your information:

WELLS FARGO EDGES BACK INTO SUBPRIME AS US MORTGAGE MARKET THAWS
CNBC News - 14 Feb 2014
http://www.cnbc.com/id/101417200

WELLS FARGO EDGES BACK INTO SUBPRIME AS U.S. MORTGAGE MARKET THAWS
REUTERS - 14 Feb 2014
http://www.reuters.com/article/2014/02/14/us-banks-subprime-insight-idUSBREA1D07820140214

Subprime lending is back in the US. To avoid the taint associated with the word "subprime," lenders are calling their loans "another chance mortgages" or "alternative mortgage programs."