Hearing on HMDA Reforms

The Federal Reserve will hear the first round of testimony next Thursday on the construction and dissemination of data provided for by the Home Mortgage Disclosure Act. The meeting will be held at the Atlanta branch of the Federal Reserve. Three other meetings are scheduled in the following weeks for Washington, DC, Chicago, and San Francisco.

HMDA data is freely distributed each fall through the Federal Financial Institutions Examination Council (FFIEC). The HMDA data is the best source of free information made available to the public on mortgage lending. That is part of the problem, unfortunately. HMDA data is the best source of information, and it is somewhat incomplete.

The makeup of HMDA data was largely determined before the era of subprime lending, and it still reflects assumptions that were current in that era but which are incredibly outdated now. That’s probably a reflection of the same problem in the existing language within the Community Reinvestment Act. The CRA seeks to encourage banks to make credit available across all portions of the communities where those banks and thrifts are located. The CRA rewards quantity. HMDA data measures quantity. Neither is particularly sensitive to quality, however. True, new indicators in 2004 required banks to indicate when loans bore interest rates that were substantially above prime lending rates. However, that law defined interest rate on the date of origination. It had no way to distinguish between a teaser rate and a fixed rate.

Indeed, there were all kinds of problems that were unresolved, even after the 2004 fix. Going back to the issue with interest rates: it wasn’t just that analysts couldn’t see if an interest rate was temporary or permanent. They couldn’t even see if a loan was adjustable or fixed.

The larger problem is that there is a disconnect between the questions that users want to ask about mortgage lending, and the information that HMDA data is able to provide. More often than not, questions about lending focus on the quality of loans. Advocates have been more worried about subprime lending than about mere quantity for at least the last 8 years. The banks know it, too. That undermines the dialogue that can come from the data. Everyone knows that underwriting has changed. Credit scoring is fundamental to loan review, as are metrics like loan-to-value and debt-to0 income.

That simple interest rate number bears the entire load for defining subprime. However, we know that subprime comes in all kinds of flavors: stated-income, interest-only, balloon, prepayment penalty, 40-year term, cash-out refinance…the innovations of the last decade are endless. Unfortunately, they’re also destructive. Left out of the daylight that should have been created by HMDA, we have a nation of homeowners that are in foreclosure.