The Federal Financial Institutions Examination Council (FFIEC) released the new Home Mortgage Disclosure Act records for 2008 this week. The data, referred to as "HMDA data," covers 14.2 million mortgage loan applications and another 2.9 million mortgage loan purchases on the secondary market. Want to see what I am talking about? You can download the data here.
The HMDA data is released to help citizens understand how banks and other lenders are working in their neighborhoods. It was legislated through the Home Mortgage Disclosure Act, and it dovetails within the broader aims of the Community Reinvestment Act.
New legislation is on the table in DC that would counter the shortcomings of this data. HMDA is broken.
It can't track subprime lending. That has not been a concern in the minds of the public in the past, but this recession makes evident why we need tools to empower "the wisdom of crowds" in our mortgage lending system.
About the HMDA data: its makeup and its purpose
HMDA data is the best source of publicly available information for understanding what is happening in our mortgage markets.
There are better data sets. Those are run by private vendors like Loan Performance or McDash (now in LPS). Those data sets include some important information that is exclude from HMDA: Borrower FICO, loan-to-value, and debt-to-income are all examples of important descriptors that are excluded from HMDA but still available if you have the cash to purchase it.
The HMDA data does not record when loans are cut into collateralized debt obligations or other exotic transactions that occur downstream. It only covers the creation and inititial securitization.
Banks often fuss about providing the information. They argue that it represents a costly regulatory burden, or that it harms the privacy of their clients. Both of those statements are readily discounted: even the biggest lenders rarely have to devote more than one FTE to the data. Most banks indicate that their annual costs are in the ballpark of $50,000. That is chump change when they are rewarding employees with bonuses in the millions. The privacy complaint is even more two-faced. Read any disclosure document from a bank and you will see that they reserve the right to sell your information. The banks don't care about your privacy. They just want to make sure that they can generate some cash off of your information.
Going back to the earlier description of what is not in the HMDA data, it is worth stating that the purpose of the original Act would be served by a redesign of the data structure. The HMDA Act was passed in the 70s. Back then, mortgage lending was a homogenous product. Most loans were fixed, with reasonable loan-to-value assumptions. Banks didn't resell mortgages on the secondary market - they held the loans in their portfolio. That staid and sane model worked. The HMDA data was designed with those conventions in place.
Enter subprime lending. Mortgage lending morphed in the 90s with the advent of all types of exotic instruments. Financial innovation, as it sychophants at the Fed referred to it, brought new products: interest-only, pick and pay, negative amortization, to name a few. The idea that a loan would come with a down payment became optional, and lenders broke from the notion that income should be the basis for loan amount.
This got us into a lot of trouble. Yet for people attempting to characterize the soundness of our system, the HMDA data lagged.
The CRA Modernization Act would update the HMDA data. Here is a link to a full paper (download available) on the subject, published by the Federal Reserve in February 2009. Here are some enhancements:
interest rate: Fixed or Adjustable. Would indicate if a loan begins as interest-only, if it has negative amortization, or other like features.
- loan-to-value: would also flag loans with a cash-out feature.
- debt-to-income. Would also indicate if lender used stated income underwriting.
- borrower descriptions: age.
- terms: length of loan.
There are other data enhancements in the bill. The general principle seems to be that the public should have some ability to do its own monitoring of how lenders are impacting their community. The swaths of foreclosures are silent, if graphicly demonstrative, arguments for this change. If more people could had been able to show the true character of subprime lending, then perhaps regulators would have felt more need to actually do their jobs.
Prospects for the Legislation
Does it need to be said that banks don't want this bill to pass? Of course they don't - they have responded to this crisis by denying any substantive movements toward accountability. They want your money (TARP, TALF, et al) and then they want to go back to business as usual.
Nonetheless, more than 50 Congressmen have signed on to support the bill, which is sponsored by Eddie Bernice Johnson (D-Tx). Mel Watt (D-NC) picked apart one critic during the hearings - it was hilarious.
Plenty of Congressional leaders appear to be ready to give them that chance. At the CRA Modernization Act hearings, half of the conversation focused not on the specifics of the bill, but on ACORN. There are some splits in their armor, though. The Act would put independent mortgage companies (Wells Fargo Finance, IndyMac, Countrywide, Ownit.Com) on the same footing as regular banks (Wells Fargo, N.A., Citi, Bank of America). The bankers like that idea.