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Rethinking the Lending Landscape Implications for Community Development in Memphis

Rethinking the Lending Landscape Implications for Community Development in Memphis. 2009 HMDA Data for Shelby County, TN. Presented by CBANA in collaboration with the Community Development Council Supported by the City of Memphis Division of Housing and Community Development.

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Rethinking the Lending Landscape Implications for Community Development in Memphis

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  1. Rethinking the Lending LandscapeImplications for Community Development in Memphis 2009 HMDA Data for Shelby County, TN

  2. Presented by CBANA in collaboration with the Community Development CouncilSupported by the City of Memphis Division of Housing and Community Development Phyllis Betts, Director Center for Community Building and Neighborhood Action University of Memphis pbetts@memphis.edu Carol Gothe, Project Research Assistant

  3. Special thanks to • Carol Gothe for data preparation and analysis– some very heavy lifting! • Tk Buchanan for background research support • Jackson Gilman and Robert Brimhall for mapping

  4. Integrating Information to Create Actionable Knowledge • Home Mortgage Disclosure Act • Register of Deeds: sales, mortgages, foreclosures • Memphis Daily News and Chandler Report • HUD Market Reports • Census, Internal Revenue Service, and other government data

  5. Post-Meltdown Challenges to Community Development • Single family housing surplus at both ends of the income spectrum • Arthur C. Nelson: 22 million surplus large lot homes by 2025 • Multi-family surplus in Memphis (local survey) • 85% occupancy on tax credit properties (90% target) • 11/244 reporting properties less than 65% occupancy • Vacancy rates up • County USPS 9%: Running 15% in high foreclosure zipcodes • Within two year time frame ~25% foreclosures remain bank-owned

  6. Challenges to Community Development • Transition to rental market • 60% of foreclosures going rental county-wide • 60-80% in high foreclosure zip codes • 2010 estimate: 25% single family homes now rental • Foreclosures continue to cycle through with some slowing but no dramatic decline in notifications ~13,000 > 10,000 2009-2010 • Stagnant population and households doubling up • 7,000-10,000 households doubled up from 2006 bubble to 2009

  7. Challenges to Community Development • HMDA purchases 10% investor – but gap between home sales suggested by HMDA and property transfers recorded by Register of Deeds suggests for every HMDA-recorded sale there is an additional cash sale transaction • Virtually all of these are going to be investors: how motivated are they to work with community development vision?

  8. Opportunities Amidst Challenge • Opportunity: improve housing for lower income people because there is more to choose from • Opportunity: selective rebuilding of depopulated and dilapidated neighborhoods – perhaps mixed income style on the periphery of already redeveloped areas • Consideration: policy to emphasize “moving to opportunity” or revitalization “in place” • Challenge: financing community revitalization strategies of whatever stripe

  9. What is the mortgage market in Memphis telling us about opportunities and challenges? • New business model for mortgage operations emerging • Racial disparities are increasingly evident • Model increasingly selective and incompatible with spirit of CRA? • Cities like Memphis have national policy interests that may or may not be compatible with national thinking: future of GSEs

  10. 2009 HMDA Data Overview • Applications & Originations • Down from 2006 Bubble but up slightly from 2008 • Subprime Lending • Gone! • Conventional Lending • Fading! • Piggy Backed Loans at Origination • None!

  11. Applications & Originations • 2006 • 83,988 Applications • 37,180 Originations (44%) • 2009 • 34,565 Applications • 19,399 Originations (56%) Who drops out?

  12. Subprime Lending • 2006 • 36% of all originated loans were subprime • 2009 • 5% of all originated loans are now subprime • Definition for subprime changed on Oct 1, 2009 • Rate is now reported if 1.5 percentage points over benchmark • Formerly based on Treasury yield rates • Now Average Prime Offer Rate, calculated weekly Who drops out?

  13. Conventional Lending • 2006 • 94% of originations were conventional mortgages • 2009 • 62% of originations were conventional mortgages What happens if GSEs go away?

  14. Piggy Backed Loans at Origination • 2006 • 26% * • 2009 • 1% * Is there a role for closely monitored piggy backs with first time buyers in high cost cities? * Number of 2nd lien loans at purchase over the number of first lien loans

  15. New Home Purchase Loans • 2006 • 48% of applications were for home purchase loans • 63% of originated mortgages were purchase loans • 2009 • 30% of applications were for home purchase loans • 40% of originated mortgages were purchase loans Sluggish market: who is active?

  16. Implications for CRA: Who are the Borrowers? • 2006 • 44% origination yield • 37% denial rate • 1.41 Black/White application index • 0.90 Black/White origination index • 2009 • 56% origination yield • 27% denial rate • 0.51 Black/White application index • 0.29 Black/White origination index

  17. 2009 Borrowers • By Race • 73% White • 21% African American • 6% Hispanic/Other • By Income • 54% had incomes 120% of the median* and above • Above $69,000 • 25% had incomes 80% of the median* and below • Equal or below $46,000 * Median HUD Income for 2009 was $57,800. HMDA data reports amounts in $1,000s, so cut points are truncated.

  18. Implications for CRA:Reasons for Denial? • 2006 • 7.4% Debt to income ratio • 17.4 Credit history • 9.5% Collateral • 42.7% Missing • 2009 • 12.5% Debt to income ratio • 24.7 Credit history • 23% Collateral • 23.9% Missing

  19. Implications for CRA: the Neighborhoods • 2006 • 44% of originated mortgages in Zone 2 • 42% of originated mortgages in Zone 3 • 2009 • 25% of originated mortgages in Zone 2 • 70% of originated mortgages in Zone 3

  20. Emerging Market Model: Little or No Risk (Really) • Mortgage lending largely supported by federal role post-bubble • FHA insurance • Loan Purchases by GSEs • Some purchases have resulted in loan buybacks by lenders who sold loans that failed to meet GSE requirements • Purchases by other lenders who then sell purchased loans to GSEs

  21. Market Model: Little or No Risk • 2006: 17% lending federal-driven • 6% originated loans were other than conventional • 65% originated loans sold in same year they were originated • 18% originated loans sold to GSEs • 2009: 64% lending federal-driven • 38% of originated loans were other than conventional • 79% originated loans sold in same year they were originated • 33% of originated loans sold to GSEs

  22. Does the Model Sustain Recovery? • Lowered risk translates to highly circumscribed financing especially for low-moderate African Americans and their neighborhoods • Same neighborhoods stressed by foreclosure, poverty, social risk factors receiving little assistance form redevelopment financing as market evolves • If GSEs phase away?

  23. Begging the Question: Where do we stand with the traditional bricks and mortar oriented community development for home ownership model?

  24. Prospects for Recovery? • National trend: 2nd wave foreclosures • Unemployment and underemployment from economic downturn • From subprime to prime: 87% of delinquencies are prime (CoreLogic 2010) • Subprime 2.5 times as likely to be delinquent, but subprime now only 5% of outstanding mortgages • Estimated 1/5 mortgage holders “at risk” (Amherst 2010) • Underwater loans driving factor in 2nd wave • New “Hardest Hit” foreclosure mitigation in TN with focus on 2nd wave, but . . .

  25. How is Shelby County Faring? • Marginal buyers dominate • Shelby County 1st wave pattern remains strong and is being mistaken for 2nd wave • Housing bubble driven locally by marginal buyers in modest neighborhoods • Marginal buyers continue to fuel foreclosure • REO inventory: discretionary foreclosure • Slow local pipeline from notification to courthouse sale • Resets played out? Probably , but • Slow pipeline will continue to supply REO inventory • Fallout from marginal homeownership will continue to play out • Demand ultimately likely to fall back to pre-bubble level: the new normal

  26. Recovery? • Yes, for well-qualified buyers • But numbers remain low • Mortgage loan origination rate up from 44% to 56% 2008 2009 (for ~20,000 HMDA-reporting loans) • Niche recovery will support more upscale market, but . . . • Existing housing stock and inventory on market is a product of the bubble, including mostly modest properties left behind • Number of households in Shelby County is not growing but declining: economic downturn and structural re-alignment /chronic low wage economy • In the absence of effective demand on the part of low-mod buyers, real estate market will “correct” to pre-bubble levels leaving devitalized neighborhoods in its wake • If mortgage market simply moves on?

  27. How do we work with the local mortgage market to maximize community development opportunities?

  28. Market Model: Transactions and Servicing • Some Shelby County Lenders buy mortgages as key part of their business model • In 2006, the number of purchased loans was equal to 49% of mortgages originated • 47% of originated dollar volume • In 2009, the number of purchased loans was equal to 75% of mortgages originated • 67% of originated dollar volume

  29. Top Lenders Note: Mortgages not sold by the end of the year are reported as ‘retained’. Disbursement of 2009 Shelby County Originated Loans by Type of Purchaser

  30. Market Model: Profiting from Transactions Disbursement of 2009 Shelby County Purchased Loans by Purchaser, Sorted by Amount Sold To GSEs, Descending

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