Rural Mortgage Activity Declines
While the number of loans for rural home purchases grew slightly from 2012 to 2013, refinance loans dropped by 23% in rural America. Rural counties continue to have a disproportionate share of higher-interest-rate loans, according to analysis by the Housing Assistance Council.
The number of home loans in rural areas declined by 14.1% between 2012 and 2013, according to the most recent Home Mortgage Disclosure Act (HMDA) data. The drop-off in lending is largely related to refinance activity. Gradually increasing interest rates and tighter underwriting criteria have slowed mortgage refinancing nationally, as well as in rural communities. Refinance lending in rural and small town communities declined by 23% in 2013 from 2012 levels.
Rural home purchase lending, on the other hand, increased by 2.3% from 2012. After reaching a 10-year low in 2011, rural home purchase loans increased for the past two years to 440,489 in 2013.
While these trends suggest an improvement in home sales, rural and small town home purchase loans remain 52% below the pre-recession levels of 2006. Home purchase loans continue to make up a smaller portion (35%) compared to refinance loans (57%) of all rural lending activity.
Conventional Lending Continues Slow Rebound
The federal government’s role in home lending grew substantially in the wake of the housing crisis through the Federal Home Administration (FHA) mortgage insurance program, the Department of Veterans Affairs (VA), and Department of Agriculture’s (Farm Service Agency or Rural Housing Service) loan guarantee programs. Up to 90% of first-lien home purchase loans involved a conventional loan before the recession, but had declined to just over 50% by 2009. (The study restricted data to first-lien home purchase loans to focus on home purchase activity. In addition, removing second liens helps remove piggyback loans and mitigate double counting.)
Over the last three years, conventional home purchase lending has steadily grown as government assisted lending decreased. Rural and small-town conventional home purchase originations increased by 14% while government supported originations declined by 17%. The overall level of conventional lending, approximately 282,000 originations in 2013, is still just 41% of what it was in 2004, two years before the pre-recession peak of 2006.
High Cost Mortgages Remain Elevated in Rural America
Rural borrowers are more likely to have higher interest rates than their urban or suburban counterparts. Approximately 11% of rural home purchase originations were classified as “high-cost” loans, or having an interest rate at least 1.5 percentage points higher than the annual percentage rate offered on prime mortgage loans of comparable type for first liens. (Subordinate-lien loans such as second mortgages are considered high cost if they have an annual percentage rate 3.5 percentage points higher than comparable loans.) The incidence of high-cost lending in rural areas is considerably higher than the suburban or urban level, at 7%. 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 half of rural manufactured home purchase originations reported through the Home Mortgage Disclosure Act in 2013 were classified as high-cost loans.
Gaps and Limitations in Rural Mortgage Reporting
While Home Mortgage Disclosure Act data are a critical resource to understanding lending trends, there are distinct limitations of these data in rural areas. There are two major exemptions related to the location and asset size of banks that limit rural coverage. The Consumer Financial Protection Bureau (CFPB) is currently proposing new rules on the amount of information banks must report, but some crucial gaps in rural reporting would remain. Ultimately, a better understanding of mortgage performance for the entire United States, including rural areas, is essential for returning to healthy housing and mortgage markets, according to the Housing Assistance Council. HAC is a Washington-D.C. based rural housing nonprofit.
More information on rural mortgage trends is available on the Housing Assistance Council’s website.
Keith Wiley is a research associate at the Housing Assistance Council.