Rural Lending Improves; Costs Still Higher

Mortgage lending in rural America expanded last year, along with the rest of the nation. But rural applicants are still more likely to be rejected and to pay higher interest rates than urban residents. The loan-rejection rate for rural African Americans and Native Americans was twice the national figure.

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After declining by more than half from 2003 to 2011, the number of rural mortgage applications increased by 19% last year. And the number of actual mortgage loans issued rose 27% from the previous year, according to data collected under the Home Mortgage Disclosure Act (HDMA).

Of the loan applications reported through HMDA in 2012, approximately 2.4 million, or 16%, were for mortgage loans in rural or small town communities.

While rural finance trends are consistent with improved housing market conditions across much of the nation, mortgage activity in rural America is still well below the levels of the mid 2000s.  In many respects, that’s probably a good thing, some analysts say. Over the past decade, unprecedented housing prices, combined with loose credit and underwriting practices, precipitated the foreclosure crisis that depressed housing markets and displaced millions across the nation.

Loan Denials and High-Cost Mortgages

Rural mortgage applicants – as has traditionally been the case – found it more difficult to get home loans than suburban or urban borrowers. Twenty-one percent, or roughly 500,000 rural applicants, were denied a home loan in 2012. The rural loan denial rate was 3 percentage points higher than the overall U.S. rate of 18%. 

Credit history was the reason cited most frequently for home purchase loan denials. Approximately 40% of denied mortgage applications in rural and small town areas were based on bad credit history or a high debt-to-income ratio in 2012.

HDMA Data compiled by Housing Assistance Corporation
The number of rural loan applications and originations reported under HDMA fell by more than half from 2003 to 2011 but rebounded a bit in 2012. Limitations in HDMA data mean that the chart does not reflect all rural housing mortgage activity.

If rural borrowers were approved for a loan, they were more likely to have higher interest rates than their urban or suburban counterparts. Six percent of rural mortgage originations were classified as “high-cost” loans. Those are loans that have an interest rate at least 1.5 percentage points for first-lien loans (3.5 percentage points for subordinate-lien loans) higher than the annual percentage rate offered on prime mortgage loans of comparable type.  The incidence of high-cost lending in rural areas is twice as high as the national level at 3%. 

Higher mortgage rates in rural areas are attributable in part to a large number of financed manufactured homes, which are more prevalent in rural communities. Manufactured homes are predominately financed with personal property loans that have shorter terms and higher rates. Roughly 37% of rural manufactured homes reported through HMDA in 2012 were classified as high-cost loans.

Loan denial and high-cost lending rates were particularly acute for rural minorities. Approximately 40% of rural African American, and 35% of Native American applicants were denied mortgages – twice the denial rate for all U.S. applicants.  Likewise, rural African American and Native American borrowers were also twice as likely to receive a high-cost home loan as rural white non Hispanics. Rural high poverty regions such as the Lower Mississippi Delta, Central Appalachia, Border Colonias Region and Native American lands frequently suffer the most from limited credit opportunities.

Limitations in Rural Mortgage Reporting 

Nationally, there were 18.7 million loan records filed by 7,400 banks and lending institutions in the United States for 2012, as recorded under HDMA.

HMDA was enacted in 1975 to document how and to what extent banks are lending in their communities.

While HMDA data are a critical resource to understanding lending trends, there are distinct limitations of these data in rural areas. There are two major exemptions that limit rural coverage.  Generally, financial institutions with assets less than $41 million or those that operate exclusively outside of metropolitan areas are not required to report to HMDA.

The Housing Assistance Council’s Rural Data Portal has information on mortgages and housing for individual communities.

Keith Wiley is research associate at the Housing Assistance Council.  

 

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