Why We Don't Know about Rural Foreclosures
Editor's Note: For years we've been asked about the extent of the housing foreclosure crisis in rural communities. We've never had a good answer because we could never find complete information. The Housing Assistance Council has issued a report, below, on why that is the case. To get a full copy, click here.
Our nation is experiencing one of the most extensive and painful economic crises of an entire generation.
Housing markets are undeniably at the heart of the crisis, and millions of American households are having trouble meeting their mortgage payments and facing foreclosure or eviction. Rural America has also been impacted by the housing crisis, but it is difficult to determine the extent of housing distress in rural communities, given the lack of credible and comprehensive data.
The Home Mortgage Disclosure Act (HMDA) provides an example of the limitations of available lending information for rural areas. HMDA is a critical source of information on home lending activities, making it possible for the public at-large to identify potential areas of disinvestment and discrimination in housing. However, there are significant limitations to these data in rural America.
The Home Mortgage Disclosure Act
Congress enacted the Home Mortgage Disclosure Act (HMDA) in 1975 to provide the public with information that would allow stakeholders to determine if financial institutions are serving the credit needs of their communities and identify discriminatory lending activities.
The law requires certain financial institutions such as banks, savings associations, credit unions, and other mortgage lending institutions to collect and publically disclose information on home loan applications and purchases.
HMDA provides an array of information on mortgage lending activity such as loan level characteristics (type of loan, disposition of loan, reason for denial, etc), borrower characteristics (race, sex, income, of the borrower), and lending institution details. In 2009, HMDA provided information on almost 19.5 million loan records from 8,124 lending institutions.
HMDA Coverage for Rural America Falls Short
There are two major HMDA filing exemptions that limit rural coverage. Generally, financial institutions with the following size and location thresholds are not required to report to HMDA.
1) Lenders with assets less than $39 million in 2010.
2) Lenders that operate exclusively in nonmetropolitan areas.
These exemptions disproportionally impact small lenders that operate in rural communities.
For example, of the 989 FDIC-insured lending institutions with assets totaling less than the HMDA filing threshold in 2009, 70 percent were headquartered in rural counties. These institutions likely represent one of the only sources of credit in some communities.
The filing exemption for lenders with offices exclusively in nonmetropolitan areas has an even larger impact. Approximately 81 percent (over 3,000) of all institutions headquartered in nonmetropolitan counties in 2009 had less than $250 million in assets.
Initially this might not seem like a major issue since most of these lenders exceed the HMDA asset filing threshold; however, banks of this size primarily operate in the county in which they are headquartered. Consequently, many of these rural lenders likely qualify for the HMDA filing exemption.
Due to the filing exemptions and the resulting lack of reporting from these institutions, the larger picture of rural home lending is unclear. The extent to which HMDA accurately captures lenders is currently undetermined, but many experts believe it to be lacking.
Even the Federal Reserve Board’s own economists state, “While HMDA coverage for MSAs is quite complete, reporting exceptions lead to significant distortions in the coverage of rural areas in HMDA. For these reasons, rural areas are often dropped from analysis of HMDA.”
Size and asset exemptions are typically justified under the auspices of overburdening small banks with limited resources. However, with advances in technology and data processing, the degree to which there is a burden associated with complying with HMDA reporting is questionable.
The cost burden associated with similar Community Reinvestment Act (CRA) federal filing requirements has been estimated at an average of 10 burden hours per year. Similarly, the proportional costs for small bank CRA compliance are estimated to be 0.039 percent of an institution’s assets. Ultimately, the ability to understand mortgage lending activity for all communities outweighs these cost concerns.
Minimal Manufactured Home Reporting in HMDA
Manufactured homes are an important source of housing, particularly in rural areas. Nationwide, approximately 7 percent of occupied housing units are mobile or manufactured homes. In rural areas the prevalence of manufactured housing is more than twice the national rate, as manufactured homes make up 16 percent of rural homes.
While many physical and structural attributes of manufactured housing have improved, issues related to financing and the investment value of this type of housing have not progressed as well.
For manufactured home residents who do not own their homes outright, financing generally falls within one of two major types: personal property or mortgage financing. Personal property, or “chattel,” loans are generally used when the manufactured home is purchased separately from the site.
These personal property loans generally involve lower down payment costs. However, this loan type typically carries a higher interest rate and shorter term than a conventional real estate mortgage.
The Federal Reserve enhanced HMDA to include reporting that identifies manufactured home loans in 2002. However, the level of information on personal property lending for manufactured homes in HMDA is largely unknown.
With the prevalence of personal property lending and the importance of this financing to manufactured housing, reporting of these specific loans should be required and publicly available through HMDA. Additionally, manufactured home loans and applications should indicate whether the loan/application was a personal property or real property (mortgage) loan. The inclusion of these updated and enhanced manufactured home data would provide a much more complete assessment of lending activity nationwide, and particularly in rural areas.
The Murkiness of Rural Foreclosure
Today, the foreclosure crisis is devastating financial markets, local communities, and individual homeowners across the nation. Foreclosures have impacted rural America too, yet it is difficult to determine the extent and scope of housing distress in rural areas due to a lack of quality data on home mortgage markets and lending activity.
Estimates on the number of foreclosures in rural areas vary widely among data sources. Differences in the scope and methodology of data collection contribute to the incongruence in rural foreclosure rates. Most data sources simply do not provide comprehensive foreclosure data for rural communities. As a result, a definitive estimate of the number of rural households experiencing housing foreclosure cannot be specified at this time.
The recently enacted Dodd-Frank consumer protection bill contains a provision that will create a new default and foreclosure database to be jointly administered by HUD and the new Consumer Financial Protection Bureau (CFPB). While details of the proposed database are currently limited, it is hoped that this resource will provide much needed information on the foreclosure situation in rural America. The Dodd-Frank bill also mandates improvements to HMDA.
Improving Mortgage Reporting in Rural America
Ultimately, financial and mortgage market information is vital to understanding and improving affordable and appropriate lending activity.
It is clear that the Home Mortgage Disclosure Act, as well as foreclosure reporting, must be enhanced to better capture home lending activities, especially in rural communities.
Specifically, Home Mortgage Disclosure Act data should require reporting from all lending institutions, even small banks located in rural communities.
Enhanced reporting of manufactured home loans to include information on personal property lending should also be incorporated into HMDA data.
Additionally, comprehensive loan delinquency and foreclosure data should be made available for communities nationwide.
These improvements in data collection would greatly advance our understanding of rural home credit markets and help ensure that all residents have access to fair and affordable credit.