Mortgage Revenue Bond Program Analysis: Origination Practices and Borrower Outcomes Ohio, Indiana & Florida 1. SUMMARY REPORT April, 2009

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1 Mortgage Revenue Bond Program Analysis: Origination Practices and Borrower Outcomes Ohio, Indiana & Florida 1 SUMMARY REPORT April, 2009 Prepared By: Stephanie Moulton Principal Researcher, Mortgage Revenue Bond Program Analysis Assistant Professor, Public Affairs John Glenn School of Public Affairs The Ohio State University moulton.23@osu.edu With the Support of: Indiana Housing & Community Development Authority, Ohio Housing Finance Agency, and Florida Housing Finance Corporation Funded in part through an EDSRG Grant from the U.S. Department of Housing & Urban Development, While the analysis includes Ohio, Indiana and Florida, this summary report was prepared for Ohio, and thus some of the examples (tables or graphs) are for Ohio s MRB program. 1

2 Table of Contents I. Purpose Statement Page 3 II. Background Page 4 III. Lender Participation Pages Summary of MRB Participating Lenders: Regulatory Structure & Size Pages 5 2. Key Differences Between Participating and Non-Participating Lenders Pages 6-7 a. Regulatory Structure Page 6 b. Secondary Market & Lending Activity Page 7 3. Predicting Lender Participation Page 8 4. Lender Experiences: Survey Responses Pages 9-14 a. Background & General Demographics (Survey Section 2) Page 9 b. General Support (Survey Section 3) Page 10 c. Marketing Practices (Survey Section 4) Page 11 d. Origination Practices (Survey Section 4) Page 12 e. Borrower Education Strategies (Survey Section 5) Page 13 f. Program Logistics & Lender Demographics (Survey Sections 6 & 7) Page 14 IV. Borrower Need Pages Background: Defining Need Page MRB Program and Borrower Need Pages a. Area Need Page 16 b. Individual Need Page Originator Characteristics and Borrower Need Page Origination Practices and Borrower Need Page 19 V. Mortgage Sustainability Pages Background Page Mortgage Sustainability in the MRB Program Page a. MRB Borrower Characteristics and Mortgage Sustainability Page 22 b. MRB Lender Characteristics and Mortgage Sustainability Page 23 c. Factors Predicting Ever 60 Days Delinquent Page Origination Practices and Mortgage Sustainability Page 26 VI. Mortgage Affordability Pages Background Page Mortgage Affordability in the MRB Program: Descriptive Statistics Page Predicting Mortgage Affordability: Multivariate Analysis Page 29 Appendix A: Supplemental Tables Pages Appendix B: MRB Loan Originator Survey Results Pages

3 Purpose This document is a summary of key findings, to date, from a larger analysis evaluating the relationship between the mortgage loan origination process and outcomes in the Mortgage Revenue Bond (MRB) program 2. Broadly, the outcomes considered in this analysis include: (1) lender participation in the MRB program; (2) income and credit needs of borrowers served by the MRB program; (3) mortgage sustainabilityincluding delinquency, foreclosure and prepayment- of MRB subsidized mortgages; and (4) the extent to which the MRB program increases the affordability of homeownership for borrowers in a given lending environment. By outcome, key questions addressed in this analysis include: (1) Lender Participation What are key differences between lenders who participate and lenders who do not participate in the MRB program? What are the marketing and borrower pre-purchase education practices of loan originators working with the MRB program? How do participating lenders describe their experiences with the MRB program? (2) Borrower Need Does the MRB program serve needy borrowers? Which types of originating lenders are more likely to serve MRB borrowers with greater need, based on area need or borrower need? Which origination practices (including marketing and education) are associated with serving MRB borrowers with greater need? (3) Mortgage Sustainability How do the delinquency and foreclosure rates of MRB borrowers compare with other non-mrb mortgage borrowers in the population? What characteristics of MRB borrowers are associated with mortgage delinquency, foreclosure and prepayment? To what extent are characteristics of originating lenders associated with MRB borrower delinquency, foreclosure and prepayment? Which origination practices (including marketing and education) are associated with mortgage sustainability in the MRB program? (4) Affordability What is the general relationship between MRB loan activity and higher cost lending activity? Does an increase in MRB lending in a county decrease the probability that a low income borrower in the county will receive a high cost mortgage? 2 The larger analysis is primarily in the form of a Doctoral Dissertation (2008) for the Principal Researcher, as well as several sub research articles in preparation for or under review for publication. Contact the Principal Researcher for the larger analysis (including methodological approach, description and discussion, as well as complete statistical models) that corresponds to a particular section of this summary report. 3

4 Background This analysis relies on data from the MRB programs in Ohio, Indiana and Florida, including a total of more than 20,000 borrowers purchasing homes with MRB subsidies from from more than 200 unique lending institutions. Borrower characteristics, including mortgage payment performance as of March 23, 2008, were provided by the Housing Finance Agencies (HFA s) in each of the three states. Lender characteristics are derived from the Home Mortgage Disclosure Act (HMDA) data files from , Bank Call Reports and Thrift Financial Reports (for depository institutions), and from a lender survey administered on behalf of the HFA s in Ohio and Indiana, and on behalf of the Researcher in Florida. Finally, neighborhood characteristics are derived largely from the 2000 U.S. Census Data file, supplemented with unemployment information from the U.S. Bureau of Labor Statistics, HUD s online database of housing counseling agencies, and the Office of Federal Housing Enterprise Oversight House Price Index. MRBs are tax exempt securities issued by state or local housing finance agencies, generating nearly 10 billion dollars per year and subsidizing more than 100,000 home purchases annually nationwide. Housing finance agencies sell MRBs to investors at reduced interest rates (because the interest earned is tax exempt), and use the savings to buy down the interest rate on private mortgages to borrowers, typically originated by private lenders participating in the program. MRB subsidized mortgages are currently restricted by Congress to first time homebuyers (who have not purchased a home in the past three years), typically earning less than area median income, or less than 115 percent of area median income for families of three or more. Further, the price of homes to be purchased with MRBs is limited to 90 percent of the average purchase price. In 2006, the median income of borrowers assisted with MRB mortgages nationwide was $31,703, which is 65 percent of the national median of 48,451; further, the average purchase price was $132,939, 62 percent of the national median purchase price of $222, Research on the effectiveness of MRBs for achieving low income homeownership outcomes is sparse and outdated. Previous research in the 1980 s and early 1990 s raised concern about (1) the ability of MRB programs to serve needy borrowers who would not otherwise have purchased a home without the publicly subsidized mortgage; and (2) the efficiency of MRB subsidies. First, early studies found that a majority of the clients served by the MRB program (56%-62%) could have qualified for conventional or FHA mortgage financing within affordable payment ratios without MRB interest rate subsidies 4. Second, some researchers even concluded that the primary benefactors of the MRB program were not low income home buyers, but rather developers and home sellers who capitalized on the reduced interest rate to artificially inflate home prices 5. Most of these criticisms, however, are based on the analysis of data before substantial changes to improve targeting in the MRB program. Further, the true benefit of the MRB program may be difficult to monetize in simple cost benefit terms based on interest rate spreads. Indeed, through MRBs, HFA s have developed a housing policy infrastructure that draws together public and private actors to address housing policy issues at the state level, an invaluable resource and viable alternative given the present mortgage crisis. 3 National statistics on the MRB program are from the National Council of State Housing Finance Agencies, obtained online at 4 Durning, D Policy Instruments and Policy Outcomes: Comparing the Arguments for Mortgage Revenue Bonds with their Policy Results. In Mortgage Revenue Bonds: Housing Markets, Home Buyers and Public Policy. Danny Durning, eds. Boston: Kluwer Academic Publishers; Cooperstein, Richard L Economic Policy Analysis of Mortgage Revenue Bonds. In Mortgage Revenue Bonds: Housing Markets, Home Buyers and Public Policy. Danny Durning, eds. Boston: Kluwer Academic Publishers. 5 Durning, Danny The Efficiency and Distribution of Mortgage Revenue Bond Subsidies: The Distributional Effects of Behavioral Responses. Journal of Policy Analysis and Management 7(1): 74-93; Benjamin, John D. and C. F. Sirmans Who Benefits from Mortgage Revenue Bonds? National Tax Journal 40(1):

5 Lender Participation Summary of MRB Participating Lenders: Regulatory Structure and Size (See Appendix A1) From , there were 161 identifiable unique lenders, or 219 unique lender-state combinations, originating at least one mortgage through the MRB program in Ohio, Indiana or Florida. The majority of lenders were either depository institutions regulated by the OCC (21 percent of lenders comprising 30 percent of loans), or independent mortgage or finance companies, with limited oversight from HUD (27 percent of lenders comprising 29 percent of loans). Further, nearly ¼ (24 percent) of the participating lenders were brokers, not federally regulated and not required to report under HMDA; loans originated by brokers comprise roughly 7 percent of the total loan volume in the state MRB programs from It is also interesting to consider the structure of the institutions; even though an institution may be regulated by one of primary the federal regulators it may operate as an affiliated mortgage company rather than as a depository institution (commercial bank, thrift or credit union). Interestingly, more than half of the total loan volume in the MRB program is generated from non-depository institutions; either from affiliated mortgage company subsidiaries of banks (20 percent), independent mortgage companies (29 percent) or brokerage firms (7 percent). Of the depository institutions, a majority (27 percent of lenders, 32 percent of loans) are commercial banks (regulated by the OCC, FRS or FDIC), with thrifts coming in second (10 percent of lenders and 12 percent of originations) and credit unions comprising less than 1 percent of lenders and less than ¼ of 1 percent of total loan volume. In summary, there is substantial variation in the regulatory structure of lenders participating in the MRB program that may reflect on varying outcomes observed between lenders. Finally, it is important to consider the size of lenders participating in the MRB program. Small institutions are those with less than $1 billion in assets (a threshold used under the CRA), or with fewer than 10 branch offices. While more than ¼ of the lenders participating in the MRB program are considered small, they comprise less than 10 percent of the total loan volume. Midsize institutions, or those with between $1 and $10 billion in assets or between 10 and 50 branch offices, comprise the majority of participating lenders (33 percent) and loan volume (40 percent) in the MRB program. Large lenders have assets between $10 and $100 billion, and between 50 and 500 branch offices; while very large lenders (such as Wells Fargo, Chase and Countrywide Home Mortgage), have more than $100 billion in assets and/or more than 500 branch offices nationwide. Large lenders and very large lenders comprise approximately 1/5 of total lenders each, representing nearly 1/3 (30 percent) and 1/5 (21 percent) of total loan volume, respectively. 5

6 Key Differences Between Participating and Non-Participating Lenders (not including Brokers; at least 30 mortgage applications in the state ) Regulatory Structure In general, MRB lenders are more likely to be regulated by the OCC (Office of the Comptroller of the Currency) than non-mrb lenders; however, this difference is more pronounced for Indiana, where nearly 4 times as many MRB lenders are regulated by the OCC (38 percent) than non-mrb lenders (11 percent), and is only slight higher in Ohio (19 percent compared to 17 percent). Significantly fewer credit unions, regulated by the NCUA (National Credit Union Association), participate in the MRB program; whereas credit unions make up roughly 9 percent of total nonparticipating lenders (across the three states), less than 1 percent of participating lenders are credit unions regulated by the NCUA. Finally, there are substantial differences in the prevalence of Independent lending institutions for participating and non-participating lenders by state; both Indiana and Florida have significantly fewer Independent lenders participating in the MRB program (25 and 22 percent for participating lenders, compared with 35 and 54 percent for non-participating lenders, respectively). Ohio, on the other hand, has more participation from Independent lenders, where nearly 50 percent of participating lenders are Independent, compared with 34 percent of non-participating lenders. 6

7 Secondary Market Activity & High Cost 6 & Local Lending MRB lenders sell a larger proportion of their total loan volume (not limited to MRB loan volume) to GSE s, through FHA and to other banks or affiliate banks, than do non-mrb lenders. For example, MRB lenders sell twice as many of their loans directly to GSEs (20.4% compared with 10.2%); sell more than three times as many of their mortgage loans directly through FHA (3.6% compared with.9%); and sell roughly 5 percent more of their mortgages to other banks or affiliates (18.9% compared with 13.4%). MRB lenders sell a smaller proportion of their total loan volume directly to private securities, finance or insurance companies; 8.3 percent, on average, compared with 12.6 percent of the loan volume for non-participating lenders. MRB lenders retain more than twice as much of their total loan volume in their portfolio; 13.7 percent compared with 6.3 percent. MRB lenders originate substantially fewer high cost loans (as a percent of their total non-mrb loan volume) than non-mrb lenders. This effect is most pronounced in Ohio, where MRB lenders originated five times fewer high cost loans (4.7%) compared with non-mrb lenders (21.8%). MRB lenders in Ohio originate significantly more of their loan volume locally (within the state) than non-mrb lenders (57% compared with 42%). Secondary Market Activity & High Cost & Local Lending All States Ohio Indiana Florida MRB NON- MRB MRB NON- MRB MRB NON- MRB MRB NON- MRB Lending Volume GSE Purchase 20.4% 10.2% 21.2% 10.9% 22.9% 13.9% 16.1% 7.7% Lending Volume FHA Purchase 3.6% 0.9% 2.7% 1.1% 5.7% 0.8% 2.5% 0.9% Lending Volume Private Sec/ Purchase 8.3% 12.6% 5.3% 10.4% 11.2% 11.8% 9.7% 14.7% Lending Volume Bank/Affiliate Purchase 18.9% 13.4% 18.9% 12.7% 15.9% 11.4% 22.1% 15.1% Lending Volume Not Sold 13.7% 6.3% 13.5% 6.0% 15.0% 7.3% 12.5% 6.0% High Cost Loan Volume 8.2% 24.3% 4.7% 21.8% 10.0% 23.5% 11.9% 26.3% Local (State) Lending Volume 42.0% 38.7% 56.7% 41.8% 29.9% 35.3% 31.3% 38.7% 6 Based on the HMDA LAR files, a loan is considered high cost if any cost information is reported to HMDA, signaling that the APR on the mortgage is more than 3 percentage points above the comparable U.S. Treasury rate. The reporting threshold (3 percent above US Treasury) was designed so that 98 percent of prime loans would not qualify under the threshold, and thus may serve as a signal of subprime lending activity. 7

8 Predicting Lender Participation A series of multivariate regression models were completed to simultaneously predict whether or not lenders participate in the MRB program, isolating the effects of different lender characteristics, while controlling for the effects of other lender characteristics. Details on the models run are available from the Principal Researcher 7. Below is a summary of the effects from the primary models. Holding lender regulator and market share constant, the size of a lender (measured by the number of mortgage loan applications in 2005) is the most substantial predictor of whether or not a lender participates in the MRB program, where as larger lenders are significantly more likely to participate in the MRB program than smaller lenders. After controlling for lender regulator, size (total loan volume), and market share, the localness of a lender is the second most substantial predictor of a lender s participation in the MRB program 8. Specifically, lenders originating all of their loan volume in a given state are 26 times more likely to participate in the MRB program than lenders originating less than 1 percent of their loan volume in a given state; lenders originating at least half of their loan volume within a state are 6 times more likely to participate in the MRB program than lenders originating less than 1 percent of their loan volume in a state. Third, after controlling for lender regulator, size and market share, lenders originating a large proportion of high cost loans are significantly and substantially less likely to participate in the MRB program; a lender originating no high cost loans in a state is three times more likely to participate in the MRB program than a lender originating 25 percent of their loan volume in high cost mortgages. Fourth, after controlling for lender regulator and size, the proportion of a lender s loan volume sold directly through FHA is significantly predictive of whether or not a lender participates in the MRB program, as is the proportion of mortgages a lender sells to affiliates/other banks. Each is associated with an increase in the probability of a lender participating in the MRB program. Low, average and high in the diagram above represent the lowest, middle (median) and maximum observed values in the distribution on the given indicator (size, local, high cost, FHA or affiliate), and the associated predicted probability of participating in the MRB program given the observed value. 7 Multivariate logistic and probit regressions were the primary models employed in this particular analysis, controlling for critical community level variables. 8 Localness is defined here as the proportion of a lender s total loan volume (reported to HMDA) made within a given state. 8

9 Lender Experiences: Survey Responses (See Appendix B for Survey Description and Complete Responses) Background/ General Demographics (Section 2) Of the 606 survey respondents, the majority classify themselves as working on behalf of nondepository institutions, either mortgage companies (48%) or broker institutions (3%). About 1/3 report working for a commercial bank (39%) and 4 percent report working for a thrift or savings and loan institution. About half of the respondents have worked as an originator for their lending institution for more than 5 years; however, respondents in Ohio tend to have worked with their lending institutions for a longer period of time than respondents in Indiana. Nearly than 1 in 3 originators in Ohio has been with their lending institution as an originator for more than 10 years, compared with roughly 20 percent of Indiana and Florida originators. On average, MRB mortgages comprise roughly 5 to 25 percent of an originators total mortgage loan volume; however, more than one in ten originators in Indiana (10.1%) and Florida (14.3%) report that MRB mortgages make up at least half of their loan volume (compared with one in 20 of Ohio lenders). Q2.6: Thinking back on mortgages that you have originated in the past 12 months, about what percent were MRB mortgages? 9

10 General Support (Section 3) Realtors are the most frequent source of support identified by originating lenders participating in the MRB program. More than half of the 520 originators (68%) report daily contact realtors related to their role at the lending institution, and no respondents report having no contact with realtors. While realtors are the most frequently mentioned source of contact, there is considerable variation between respondents on other important contacts. For example, in Florida, more than half (51%) of respondents report daily or weekly contact with builders compared with about 1/3 (35%) of Indiana respondents ¼ of respondents in Ohio; at the same time, however, close to ¼ of respondents (across all states) report having very little contact with builders (less than yearly or never). While nearly half (44%) of respondents overall report having no to little contact with housing counseling organizations, nearly half (49%) report having at least monthly contact with housing counselors. Frequent contact with housing counseling organizations is significantly higher in Florida, (where face to face pre-purchase education is required), with 56% reporting at least monthly contact. Nearly 1/2 (46%) of respondents overall report at least monthly contact with other nonprofit or community organizations. Roughly 1/3 (32%) of originators report at least weekly contact with other lenders, and more than half (63%) report at least monthly contact with other lenders. Similarly, 50 percent report at least monthly contact with other for profit businesses. While nearly ½ (42%) of lenders report at least monthly contact with local government, 67 percent of lenders report at least monthly contact with the Housing Finance Agency. Percent Reporting at Least Weekly Contact, All States 100.0% 94.3% 80.0% 60.0% 40.0% 20.0% 0.0% 37.3% 14.3% 15.3% 29.4% 30.8% 18.2% 25.2% 10

11 Marketing (Section 4) More than 1/3 (39%) of respondents report that the primary way 9 in which borrowers hear about the MRB program is from realtors; an amount slightly more than the number reporting any lender advertisements (self before, after or lender marketing) as the primary way in which borrowers hear about the MRB program (31%). Further, 74 percent of respondents list realtors as one of the top three ways in which their borrowers heard about the MRB program. One fifth (20%) of lenders report that MRB borrowers primarily learn about the MRB program from the loan originator after they come in to apply for a mortgage. Originating lenders in Ohio report lender marketing or self referrals (before or after) as the primary referral source significantly more than Indiana lenders. Nearly 50 percent of lenders in Ohio report lender sources at the primary referral for the MRB program, compared with less than 30 percent of Indiana lenders and roughly 40 percent of Florida lenders. On the other hand, builder referrals are a more frequent primary source of MRB borrowers for Indiana lenders, with 10 percent identifying builders as the primary way in which MRB borrowers first hear about the MRB program, compared with less than 1 percent of Ohio lenders and 4 percent of Florida lenders. Further, 20 percent of Indiana lenders and 22 percent of Florida lenders report builders as one of the top three ways in which borrowers hear about the MRB program, compared with less than 5 percent of Ohio lenders reporting builders as one of the top three referral sources. While housing counseling organizations are only mentioned by about 1 in 10 originators in Ohio and Indiana as one of the top three ways in which a borrower hears about the MRB program, in Florida, more than 1 in 5 lenders (27%) report housing counseling organizations among the top 3 sources of referrals. This likely due to the requirement that borrowers in Florida receive face to face education. This is an important observation; it suggests that the face to face counseling requirement in Florida may increase the flow of borrowers from housing counseling organization to the MRB program (not just the other way around)! About 10 percent of lenders identify the Housing Finance Agency (HFA) as one of the top three ways borrowers hear about the MRB program. On the other hand, nearly 20 percent of Ohio lenders identify online sources as one of the top three ways borrowers learn about MRB s, compared with just over 10 percent of Indiana lenders and 16 percent of Florida lenders. Finally, word of mouth is a significant source of MRB borrowers, with nearly 25 percent of lenders reporting word of mouth as one of the top 3 ways in which borrowers hear about the MRB program. Below is a table summarizing the top three ways that MRB borrowers first hear about the MRB program, as identified by the originating lenders. Listed by lender in top 3 ways borrowers hear about MRB program All Ohio Indiana Florida Realtors 74.2% 80.8% 75.2% 68.1% Builders 15.7% 4.7% 20.0% 22.7% Housing Co. Orgs 18.2% 12.2% 11.4% 26.6% Other Lenders 10.5% 9.3% 11.4% 11.1% Lender Advertisements 76.0% 80.2% 70.5% 75.4% HFA 9.7% 10.5% 7.6% 10.1% Word of Mouth 24.8% 25.6% 26.7% 23.1% Online 15.5% 18.6% 10.5% 15.5% N

12 Origination (Section 4- Ohio and Indiana Only) Originating lenders report that borrowers who are income qualified for MRB mortgages who do not get MRB mortgages are more likely to do so because of a credit or debt problem than because they choose another loan product. About 10 percent of lenders report that more than 75 percent of income qualified borrowers do not receive an MRB mortgage because of credit or debt problems, and 50 percent of lenders report that at least 10 percent of income eligible borrowers do not receive an MRB mortgage because of credit or debt problems. If a borrower has a credit or debt problem that prevents them from qualifying for a prime mortgage, more than 1/3(38 percent) say that they would offer the borrower another type of mortgage at their lending institution at least 75 percent of the time; Ohio lenders are more likely to report this strategy (43%) than Indiana lenders (29%). Only 4 percent say that they would refer the borrower to another lender at least 75 percent of the time. When a borrower has a credit or debt problem, 50 percent of lenders say that they would work with their borrowers (75 percent or more of the time) to improve credit issues; on the other hand, only 16 percent report that they would refer the borrower to credit counseling at an outside agency (75 percent or more of the time). In fact, 41 percent of lenders report that they would refer less than 10 percent of their borrowers with credit or debt problems to credit counseling at an outside agency. More than half (54 percent) of lenders report that recent changes in the mortgage credit market have significantly or completely changed the loan products that they have available for low income or credit compromised borrowers; however 18 percent of lenders report no changes or only minor changes. Lenders report various effects on MRB product demand as a result of changes in the mortgage credit market. 48 percent of lenders report that the changes have increased demand for MRB s, 24 percent report no change, and 29 percent report a decrease in MRB demand as a result of changes in the mortgage market. 12

13 Borrower Education Strategies (Section 5) First, it is essential to point out that Florida HFA requires face to face pre-purchase education for MRB borrowers. At the time of the survey, Indiana and Ohio did not require a particular form of pre-purchase education. Also, it is important to note that Indiana HFA launched an online pre-purchase education module in 2008; while borrowers were not required to complete the online module, if they did, they receive a ¼ point interest rate deduction. The most common form of pre-purchase homebuyer education identified by originating lenders in Ohio and Indiana is online education; 43 percent of lenders identify that 75 percent or more of their borrowers receive online pre-purchase education. The proportion of lenders reporting online education for their borrowers is greater in Indiana, where 48 percent report online compared with 40 percent of Ohio lenders, likely due to the recent adoption of an HFA sponsored online curriculum. With this in mind, the intensity of the online education reported in Indiana is greater than Ohio; 63 percent of Indiana lenders report that the online education lasts 2 hours or more, compared with 20 percent of Ohio lenders. Roughly 10 percent of Ohio and Indiana lenders (12 percent in Ohio, 8 percent in Indiana) report that at least half of their borrowers receive book or print materials for pre-purchase education; More than 50 percent of lenders report that book education lasts an hour or less. Similarly, about 10 percent of lenders report that the lenders provide the pre-purchase education for at least half of their borrowers, with 80 percent reporting that such lender counseling lasts less than one hour. Approximately 7 percent of lenders in Ohio and 5 percent in Indiana report that at least half of their borrowers receive face to face pre-purchase education (and counseling) at an outside agency, such as a housing counseling organization. By contrast, 78 percent of Florida lenders report that more than half of their borrowers receive this type of education. Notably, lenders report a higher intensity for this education, with more than half of lenders reporting that such counseling last 5 hours or more. Roughly 12 percent of lenders in Ohio and Indiana report that at least 10 percent of their MRB borrowers receive pre-purchase education BEFORE they come to the lender to apply for an MRB loan. By contrast, more than 40 percent of Florida lenders report that borrowers receive pre-purchase education before coming to the lender to apply for an MRB mortgage. About 1/5 of lenders report that at least half of their borrowers contact them after purchase, though this is more common in Florida (29%); more than 40 percent of lender report that they initiate contact with at least half of their borrowers after purchase. Finally, about 6 percent of lenders report that they encounter at least half of their borrowers after purchase randomly, in the community. 13

14 Program Logistics and Lender Demographics (Section 6 & 7) 67 percent of respondents report that the MRB program is somewhat or extremely helpful to them in their role originating mortgages; Florida and Ohio lenders are more positive, with more than 70 percent reporting that the MRB program is helpful, compared with 53 percent of Indiana lenders. Approximately 90 percent of originating lenders agree or strongly agree that the MRB program provides an important loan product, not provided by other programs. It takes slightly longer to close an MRB loan than a non-mrb loan; while 85 percent of lenders report that a non-mrb loan takes less than 30 days to close, 82 percent of lenders report that an MRB loan takes more than 30 days to close, with the majority (66 percent) indicating it takes days to close an MRB mortgage. More than 80 percent of lenders agree or strongly agree that homebuyer education is an important part of the MRB loan process. This proportion is higher in Florida and Ohio (87%), compared with 71 percent of Indiana lenders. Roughly 80 percent of lenders disagree or strongly disagree that the hassle of the MRB program is greater than its benefits. On average, 60 percent of originator respondents (66 percent in Ohio and 47 percent in Indiana) report living in the community where they originate loans for more than 20 years. The respondents have a substantial amount of experience in mortgage lending; More than 90 percent have worked in mortgage lending for more than 5 years, and more than 70 percent have originated MRB mortgages for more than 3 years (and 56 percent have originated MRB mortgages for more than 5 years). Roughly half of originator respondents report having a college degree (undergraduate or graduate), and all respondents have at least a high school diploma, with 90 percent having some form of education beyond highschool. 14

15 Borrower Need Background: Defining Borrower Need In low income homeownership initiatives, needy borrowers are typically equated with underserved borrowers who are less likely to be served with a mortgage loan than other members of the populations. There are two primary ways in which underserved borrowers may be defined: based on the location of home purchase or individual characteristics of borrowers. First, underserved borrowers may be identified based on the location of home purchase. Both the GSE Affordable Housing Goals and the Community Reinvestment Act (CRA) emphasize the importance of location of purchase (by census tract) as an indicator of borrower need. For this analysis, two dependent variables (indicators of location need) are created that reflect the GSE goals and the CRA, respectively. The GSE Affordable Housing Goals, as defined by the 1992 Federal Safety and Soundness Act, define underserved areas as those neighborhoods with a median income below 90 percent of the metropolitan median income or neighborhoods with a minority population greater than 30 percent of the total population and a median income below 120 percent of the metropolitan median income. Data on census tracts as reported to the FFIEC for HMDA purposes was used to identify tracts in Ohio, Indiana and Florida that meet the GSE underserved criteria, linked to borrowers in the MRB program based on the census tract of their home purchase. Similarly, under the CRA, regulated lenders are evaluated in part on the number of mortgages they originate for purchases in low income areas (the lending test ), defined as areas with a median income below 80 percent of the metropolitan area median income. For this analysis, data on census tract median income was derived from the FFIEC HMDA files, and was linked to borrowers based on census tract of purchase in the MRB program to identify low income census tracts. Second, underserved borrowers may be identified based on individual characteristics signaling borrower need. Income is one of the primary ways in which such need is identified, typically based on the borrower s income as a percent of area median income (AMI). Borrowers with incomes below 100 percent AMI are considered to have low and moderate incomes, and borrowers with incomes of less than 60 percent AMI are considered to have very low incomes according to the GSE Affordable Housing Act. Typically, HUD defines low income individuals as those with incomes below 80 percent AMI. In the MRB program, all borrowers must have incomes below 115 percent AMI to participate. AMI calculations are based not only on borrower income, but are also adjusted based on household size. Unfortunately, the HMDA data does not include information on borrower household size that would be necessary to make AMI calculations. Because an important component of this analysis is the comparison of MRB borrowers (by lender) to all borrowers (by lender) as reported to HMDA, borrower gross annual income is used to capture the income need of borrowers. However, to adjust for area based differences in income, a control variable is added to the models predicting borrower income that indicates the median income of all borrowers in the respective county purchasing homes as reported to HMDA. In the MRB program, individual borrower need has been justified not only on income, but also on affordability. In particular, because one of the main features of MRB financing is the reduced interest rate mortgage, researchers in the past have evaluated borrower need based on the affordability of their mortgage with and without the reduced interest rate (based on standard 28/36 affordability ratios). In this regard, a higher affordability ratio signaled a borrower with more need for the MRB subsidies. While affordability ratios can be calculated for MRB borrowers, HMDA data does not include the interest rate on the mortgage or the total debt of borrowers, that would be necessary to calculate affordability ratios for the comparison non-mrb group analyzed in this chapter. A close proxy measure, used by others using HMDA data to identify borrower affordability is the loan to income ratio (LTI), or the total loan amount divided by the borrowers gross annual income. A higher LTI signals a borrower with greater affordability need (or higher credit risk). The LTI is thus calculated for each borrower to signal the affordability need of the borrowers. 15

16 MRB Program and Borrower Need (See Appendix A2) Scope of MRB Program: Number of Borrowers Served Of the almost 1.95 million first lien, owner occupied home purchase mortgages originated in Ohio, Indiana and Florida from , 1.4 percent, or 26,889 were MRB subsidized purchases. This proportion is much higher in Ohio, where MRB subsidized purchases make up 3.17 percent of total originations, and 6 percent of total originations to low income borrowers. While this is a small percentage, it is important to point out that FHA mortgages make up only 7 percent of total originations in the three states (10 percent in Ohio, 14 percent in Indiana and 4 percent in Florida). Area Need Beginning with the indicator of underserved areas (as defined by the GSE s), nearly 50 percent of all MRB originations in the sample were in underserved areas, compared with only 33 percent of all mortgages combined. This rate is considerably greater than the rate of FHA mortgages in underserved areas (39.43%), and is nearly double the rate of mortgages purchased by the GSE s in underserved areas in the three states (26.65%). Of concern, roughly 50 percent of high cost mortgages were also in underserved areas. Even when limiting mortgages to those serving low income borrowers (less than 80 percent of unadjusted AMI), MRB mortgages in Ohio provide for home purchases in underserved areas at a rate more than 10 percent higher (48 percent) than non-mrb mortgages to low income borrowers (37 percent); and 15 percent higher (46 percent compared with 31 percent) in Indiana. Next, considering the purchase of homes in low income areas (as defined by CRA), nearly 1/3 (27.6%) of all MRB mortgages in the sample were originated for purchases in low income census tracts, compared with only 15% of total mortgages and 1/10th of GSE purchased originations (11.72%). In Indiana, the rate is more than 3 times the rate for GSE purchases (31.31% compared with 8.12%). In general, FHA mortgages are also targeted for low income areas (20.34% overall), though still less than MRB mortgages, particularly in Indiana (15.45% compared with 31.31%). Not surprisingly, high cost loans are also targeted for low income areas, with nearly 1 in 4 high cost originations for purchases in a low income area. When limited to borrowers with low incomes, the spread between the total loan rate in low income areas and the MRB rate in low income areas decreases, but again with substantial differences between state MRB programs. In Indiana, even when limited to low income borrowers, the MRB program still originates nearly twice as many loans in low income areas (33.24% compared with 18.35%). This gap is much smaller for Ohio (25.61% compared with 22.51%) and Florida (33% compared with 29%). 16

17 Individual Need The median gross household income of borrowers assisted through the MRB program is less than 60 percent of the median gross household income for all homebuyers reported under HMDA (35,448 compared with 62,000), and about 80 percent of the median income for FHA originations (44,000). The median income for high cost originations varies considerably by state; in particular, the median income of high cost mortgages in Florida are substantially higher (66,000) than the median incomes of borrowers with high cost mortgages in Indiana or Ohio (42,000 and 44,000, respectively), reflecting the differences in the housing market and thus targets of high cost mortgages in the south (jumbo mortgages, etc) compared with the Midwest. The median loan to income (LTI) ratio is included a measure of borrower affordability. A higher ratio indicates that the total loan amount is a greater proportion of the borrower s income, and thus signals greater need (and greater credit risk). In general, borrowers in the MRB program have substantially higher median LTI s than do borrowers with other lending strategies (although it is important to point out that many of the other mortgage lending strategies from may have included piggyback financing that would reduce the LTI for the first mortgage.) Loans originated through the FHA program are most comparable in terms of LTI to MRB mortgages, though MRB mortgages are still on average 10 percent higher than FHA LTI s (2.85 compared with 2.61). 17

18 Originator Characteristics and Predicting Borrower Need The level of need of borrowers served by the MRB program (based on area or individual indicators) differs substantially between originating lenders originating mortgages through the MRB program. A key question, therefore, is which originating lender characteristics are associated with serving borrowers through the MRB program with greater need? A series of multivariate regression models were completed to simultaneously predict the neediness of borrowers served by the MRB program, isolating the effects of different lender characteristics, while controlling for the effects of other lender characteristics. Details on the models run are available from the author; below is a summary of the effects from the primary models 10. First, borrowers who receive Down Payment Assistance (DPA) through the MRB program, and borrowers who have FHA MRB mortgages, are more likely to be purchasing homes in underserved or low income areas. Those receiving DPA have higher affordability ratios, on average (whereas those purchasing with FHA have lower ratios AFTER controlling for the effects of other variables). Very few lender characteristics are significantly associated with borrower need in the MRB program, after controlling for other factors. There are a few noteworthy exceptions. Independent lenders and mortgage companies are more likely to serve borrowers with higher affordability need (higher LTI ratios) in the MRB program. Independent lenders are also more likely to serve lower income borrowers. High cost lenders are also more likely to lend to MRB borrowers in low income areas. Local lenders, or lenders originating a larger share of their loan volume within the county in which a borrower purchases a home, are more likely to serve borrowers in underserved and low income areas, and with lower incomes. However, such borrowers also have lower affordability need, on average. Affordability need is related to the financial performance of lenders, in that more profitable lenders originate MRB loan with lower LTI ratios, and more specialized mortgage lenders originate MRB mortgages with higher LTI ratios. Underserved Areas Low Income Areas Borrower Income Borrower LTI County & Borrower Specific County % Loans + DPA FHA/VA Days Since Purchase Lender Size Small + Lender Structure Independent + Mortgage Company + Lender Secondary Market & Lending Loans High Cost (%) + Lender % Localness Lender Financial Performance Profitability (ROA) Specialization + Note: Only variables statistically significant at p<.05 on at least one of the models are included in this table. Positive relationships are identified with (+), while negative relationships are identified with (-). 10 The type of model estimated varies by Dependent Variable. The Underserved Areas and Low Income Areas models are estimated using multivariate logistic regression. The Borrower Income model is estimated using OLS with logged values for the dependent variable (income). The LTI model is estimated using a negative binomial model with upper and lower boundaries (0 and 1). 18

19 Origination Practices and Borrower Need To begin to understand potential relationships between origination practices and mortgage sustainability, this analysis links Indiana and Ohio MRB loan originator survey responses with the characteristics of MRB borrowers purchasing homes between , retrospectively. This retrospective analysis is not ideal for obvious reasons, but it provides a rough approximation of potential relationships between origination practices and the types of borrowers served by the MRB program. A series of multivariate regression models were completed to simultaneously predict borrower income (AMI) in the MRB program, isolating the effects of different lender origination practices, while controlling for the effects of other lender characteristics. Details on the models run are available from the principal researcher; below is a summary of the effects from the primary models 11. The average AMI of MRB borrowers in Ohio and Indiana from in the sample (that could be linked to originators completing surveys) is 79 percent. Different lender characteristics, as well as marketing and education practices, are associated with serving borrowers in the MRB program with lower incomes, as indicated by a simple multivariate regression (key findings presented below). As found in the previous analysis, MRB borrowers with MRB mortgages originated by independent lenders or mortgage companies have AMI s that are 3 to 4 percent lower than other borrowers, on average. Also, as found in the previous analysis, MRB borrowers with MRB mortgages originated by local lenders (originating all of their mortgages within the county where a borrower purchases a home) have AMI s that are 9 percent lower, on average, than MRB borrowers with mortgages originated by nonlocal lenders. MRB borrowers with MRB mortgages from lenders who report that builders are the primary way in which their borrowers learn about the MRB program have incomes that are significantly higher; with average AMI s 15 percent higher than other MRB borrowers. MRB borrowers with MRB mortgages from lenders who report that their primary mode of prepurchase education (for 75% or more of their borrowers) is book materials have higher AMI s, on average 6 percent higher than other borrowers. These results are similar for underserved areas in the MRB program. Borrower AMI County & Borrower Specific FHA/VA -4% Days Since Purchase -5% Lender Characteristics Independent -3% Mortgage Company -4% Lender % Localness -9% Lender MRB Referral Sources Builder 1st Referral +15% Lender Borrower Education Sources Book Education (75% or more) +6% Note: The percentages represent the percent change in the predicted AMI of a borrower for a change in the Independent Variable from 0 to 1 or minimum to maximum for continuous variables. 11 As before, the type of model estimated depends on the Dependent Variable. The table below provides the results from the OLS regression predicting borrower income, as a percent of area median income. 19

20 Mortgage Sustainability Background: Defining Mortgage Sustainability The term mortgage sustainability encompasses a variety of mortgage outcomes, including delinquency, default, foreclosure and prepayment. The first three of these outcomes (delinquency, default and foreclosure) clearly represent mortgage loans that are less sustainable. The fourth outcome, prepayment, may or may not signal an issue with sustainability, depending on the reasons and conditions for the prepayment. Mortgage delinquency is an indicator that a borrower is, or has been, past due on their mortgage, typically 60 days late or more is considered severe delinquency. Mortgage default, by contrast, is an indicator that a borrower has ceased to pay on their mortgage altogether, generally indicated when a borrower is 90 days or more past due 12. Mortgage foreclosure indicates that a borrower not only stopped making payments, but that the lender took action to reclaim the home. Finally, mortgage prepayment may occur for one of two reasons: (1) a borrower may sell their home, and thus pay off their mortgage; or (2) a borrower may refinance their home, and thus pay of the existing mortgage with another new mortgage. There are numerous characteristics that may contribute to mortgage sustainability. Below is a brief summary of some of the contributors identified in recent literature on predictors of mortgage delinquency and default, and in some cases, prepayment. A complete review of this literature beyond the scope of this analysis summary, but is part of the larger analysis and is available from the principal researcher upon request. (1) Borrower Characteristics Borrower credit score, income, affordability ratios (percent of gross monthly income for mortgage payment, and percent of gross income monthly income for total debts), loan to value ratio, wealth (savings), age of borrower, household size, minority status, income stability (employment), borrower education, triggering events (medical problems, divorce, etc.) (2) Market Characteristics Rate of home appreciation and equity generation, changes in interest rates, changes in employment (3) Neighborhood Characteristics Residential stability, homeownership rate, population size (4) Characteristics of the Mortgage Interest rate (and terms), prepayment penalties, balloon features (5) Characteristics of the Lending Environment (Origination & Servicing) Pre-purchase education and counseling, third party origination structure, servicing strategies when borrowers become delinquent (including post purchase counseling) When evaluating mortgage sustainability in the MRB program, one must account for each of these factors, typically through statistical controls. A few of the contributors to delinquency are held constant by the design of the MRB program. For example, the characteristics of the mortgage are relatively set in the MRB program, in that all MRB mortgages are fixed rate, 30 year conforming mortgages, with interest rates established by the HFA s at any given point in time. Further, in Ohio, Indiana and Florida, certain characteristics of the lending environment are held constant; namely, the servicing is provided by the same servicer, U.S. Bank. 12 Avery, Robert B., Raphael W. Bostic, Paul S. Calem, Glenn B. Canner, Credit risk, credit scoring, and the performance of home mortgages. Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), July: ; Quercia, R.G. and M.A. Stegman Residential Mortgage Default: A Review of the Literature. Journal of Housing Research 3: