HMDA: Love It or Hate It, This Could Be an Opportune Time for Lenders and Community Advocates

by Anne Diedrick, senior vice president, JP Morgan Chase Community Development Group

Love it or hate it, HMDA has had a major influence on the evolution of the affordable mortgage industry. And it’s going to continue to have a significant impact on how lenders do business and interact with consumers and community advocates.

Beginning in 1989, expanded HMDA data included demographic information for every mortgage loan applicant, including race, gender, income level, and geography. Among other things, the enriched data made it possible to compute mortgage denial rates by race and income — and the data showed that African American and Hispanic applicants were being turned down far more often than white applicants at every income level. These findings, which prompted nationwide headlines, alarmed consumers, lenders, advocates, and regulators, and became the basis for extensive research probing the question of whether the data provided evidence of systematic racial discrimination in the mortgage industry.

Challenging lenders

Gradually, a consensus view emerged that the HMDA data alone did not constitute proof of such discrimination but did dramatically demonstrate the need to do more to meet the credit needs of lower-income and minority borrowers. The data challenged the mortgage lending industry to be more innovative, flexible, and even experimental in developing products and exploring alternate delivery channels.

And the data helped forge new and stronger relationships between bankers and community advocates. To better address the mortgage needs of low- and moderate-income (LMI) and minority borrowers, lenders, and community groups began working more closely together to design new affordable mortgage products and programs. They analyzed underwriting criteria and questioned conventional assumptions about sources of income, indebtedness, and the necessity of requiring a 20 percent down payment. Chase and other lenders experimented with expanded ratios and lower down-payment requirements by holding and seasoning mortgages in their own portfolios. Those early experiments paid off, and by the mid-1990s, the secondary markets began to offer a new array of affordable products that reached more potential first-time home buyers.

There was also a clear need for more counseling to help borrowers successfully navigate the mortgage transaction process and prepare them for the responsibilities of homeownership. Poor credit was the top reason for the high declination rates. In some cases poor credit resulted from student loan defaults and hardships created by unforeseen medical bills. But, in case after case, it was caused by consumers having access to more credit than they could handle.

More than anything else, over-extended consumers needed financial education and credit remediation. Lenders and community advocates began setting aside their differences in order to meet consumers’ needs. Lenders actually began to hear what advocates had to say about outreach, marketing, and product enhancements — and advocates actually began to view bankers as people who cared about consumers and wanted to help local communities. The result was a stronger nationwide network of mortgage counseling programs.

Referral-up

With the advent of credit scoring and risk-based pricing in the mid-1990s, fair lending compliance took on even more importance, especially within the evolving subprime lending field. When Chase Home Finance, a subsidiary of JPMorgan Chase Bank, began offering subprime mortgages, we immediately instituted a “referral-up” program to ensure that borrowers who applied for a subprime loan but who appeared qualified for a prime loan were offered such a product. Over the years, we’ve relied heavily on this “best practice.”

We’ve also developed a strong network of mortgage counseling relationships. Last year, for example, we sponsored 450 financial education workshops, partnering with organizations such as ACORN, the National Urban League, the National Council of LaRaza, Asian Americans for Equality, Rural Opportunities, Housing Opportunities of Houston, the New York Mortgage Coalition, and the MiraCit Community Development Corporation of Columbus, Ohio. More than 10,000 people acquired financial education and money management skills at these workshops.

To augment these efforts, we’ve created a virtual Financial Education Library on our Web site <www.chase.com> featuring workbooks that can be downloaded in multiple languages. Currently available in English and Spanish, the workbooks are being translated into Chinese, Korean, and Vietnamese. More than 20,000 consumers have downloaded our workbook “Understanding the Mortgage Process.”

Chase Home Finance currently has more than 50 community loan officers who work exclusively with mortgage counseling agencies focusing on the credit needs of lower-income and minority home buyers. Loan officers can provide mortgage subsidies to customers who receive mortgage counseling and meet creditworthiness criteria. Chase expects to provide $10 million in such mortgage subsidies this year.

To help identify obstacles to serving emerging markets and to brainstorm solutions, we created a National Housing Advisory Council whose 14 members — representing underserved populations including the African American, Asian, Hispanic, and Gay and Lesbian communities — are not shy about letting us know what we need to do to expand homeownership and take our community partnerships to the next level.

New data = new opportunities

This year, the most recent revisions to HMDA data will be available to the public, including data indicating pricing spreads on loans over certain thresholds (see “The ABCs of HMDA”). Federal Reserve Board senior economist Glenn Canner predicts that “the market segment in which prices will be disclosed will be about 10 percent to 15 percent of the total mortgage market.”

While HMDA provides useful information, it does not contain all the relevant pricing information that would be reflected in the spreads, including credit score, property type, down payment amount, cash-out information, property value, debt-to-income ratio, loan-to-value ratio, employment and payment history, and assets of the borrower. We’re working with our community partners to make sure there’s broad understanding of legitimate differences in pricing, such as product choices or credit characteristics that correlate to delinquency and default.

The risk-based pricing now used by the mortgage lending industry has expanded access to credit and contributed to the highest levels of homeownership in history. A record 70 percent of Americans now own their homes — and, although minority homeownership continues to lag, the rates of increase in African American, Hispanic, and Asian homeownership over the past decade have outpaced that of whites. Consumers generally are benefiting because mortgage lending is more competitive today than ever before, helping to keep prices affordable and allowing consumers to shop around for a better-priced loan.

The challenge to lenders is to ensure that all borrowers get the right product at a fair price. The new HMDA data will help keep lenders and advocates focused on this important goal. Homeownership remains the surest pathway to wealth — but too many Americans today are running up debt, falling behind on their bills, and failing to save for their future. Lenders and community advocates can, and must, work together to change these behaviors and to provide meaningful guidance to would-be homeowners.

HMDA data will play a key part in this process. The future of the mortgage business is in the “emerging market” of groups significantly lagging the national 70-percent homeownership benchmark. Getting pricing fair and right will be key to winning this business — and opening new doors to homeownership. This could, in fact, be an opportune moment when lenders and community advocates seek to achieve exactly the same thing and the consumer is the winner.

For more information, contact Anne Diedrick at anne.diedrick@chase.com.