Thursday, June 12, 2008

Exagerating subprime using HMDA rate spreads

Do you believe that the HMDA data's rate spread values define the mortgage as subprime?

You frequently find news articles and web sites that count mortgages containing an interest rate spread value in HMDA data as a subprime mortgage. Often, perhaps most of the time, these rate spread reportable mortgages are subprime mortgages. The goal of the federal regulators was to have rate spreads reported for subprime mortgages and avoid having lenders report rate spreads for prime mortgages in their HMDA data submission. Not all mortgages in the HMDA data base having rate spreads are subprime.

Here is an example where the volume of subprime mortgages is over reported. The authors state "In 2006 alone, subprime lenders refinanced more than 60,000 Ohio mortgages. "

This is going to get a little technical but it is important to be fair!

Since 2004, any mortgage having an annual percentage interest rate exceeding the rate on treasury securities of comparable maturity by a threshold (3% for first lien and 5% for subordinate lien) must report that rate spread in their HMDA data submission. So the OHIO report for 2006 containing all conventional refinance mortgages having a rate spread finds 60,072 mortgages.

While HMDA lacks data items such as credit scores and loan to value ratios wich impact costs of mortgages(hence interest rates and spreeads), they do provide indicators of home occupancy status, manufactured home status, and loan amount. Mortgages typically charge higher rates on non-owner occupied homes or manufactured homes. (They charge more on jumbos but I am leaving that out for now). Most of the news articles and web sites ignore all these attributes when reporting subprime mortgage volume from HMDA data.

An adjusted report for Ohio, excluds non-owner occupied mortgages and manaufactured home mortgages. This results in reporting about 7,500 fewer subprime mortgages from the report in the June 2nd Columbus Dispatch article.


Nick Bianchi said...

I think that you have a point that HMDA data can overestimate subprime loans when in fact some percentage of these relatively "high cost" loans where ratespread is reported could in fact be prime loans. However, using HMDA ratespread data in such a way poses an even bigger risk to UNDERCOUNT subprime lending. The reason: ARMs! HMDA ratespead data only uses the initial interest rates -so an ARM whose rate will go through the roof in 2 years looks no different than a 30 fixed loan. As a result, there are many subprime ARMs (as well as ballon loans, pay options ARMs) that have no ratespread reported. One would be very mistaken to assume all these loans are prime. Bottom line: HMDA data cannot accurately identify prime vs. subprime loans. This is not an accident. But the result of the Banking industry and the Fed refusing more regulation and public reporting. We are now all paying the price of this inaction.

MakeMe Smart said...

Where can I find a quality description of how the reportable rate spread is calculated for ARM mortgage loans?

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Tom Henry said...

Most of the news articles and web sites ignore all these attributes when reporting subprime mortgage volume from HMDA data.