Working Paper 942 1 UNDERSERVED MORTGAGE MARKETS : EVIDENCE FROM HMDA DATA

The 1992 Housing and Community Development Act directed the two government-sponsored housing enterprises -Fannie Mae and Freddie Mac -to increase their lending in "underserved areas" and where there are "unmet housing needs." Unfortunately, Congress did not specify how unmet mortgage needs were to be measured or how underserved areas were to be identified. To shed light on this issue, we use data collected under the Home Mortgage Disclosure Act to provide a baseline evaluation of the variation in mortgage credit flows from all lenders across different types of neighborhoods. These data represent a virtual census of all mortgage loan applications in metropolitan areas for the years 1990 and 1991. Variations in both loan application and lender denial rates are examined separately, recognizing that loan originations depend on both processes. An attempt is made to isolate the effect of neighborhood characteristics by controlling for other factors, such as the borrower's income and race, market effects, and lender behavior. After other factors are controlled for, the study concludes that the racial composition of a neighborhood appears to have little impact on either the likelihood that a loan application will be denied or the rate at which applications are made. On the other hand, the race of the applicant appears to have a strong impact on loan denial. Black applicants, in particular, have unexplainably high denial rates. The income of a neighborhood does appear to impact both denial and application rates, with neighborhoods below a median income of $20,000 being particularly disadvantaged. Finally, once other factors are controlled for, the fact that a neighborhood is in a central city appears to have little impact on credit flows. The study cautions that although these data represent the most comprehensive information available, questions remain about both the coverage of the dataset and the impact of many omitted variables, such as applicant credit history and property valuation. clevelandfed.org/research/workpaper/index.cfm