Fed Uncovers Sharp Drop in Lending in Foreclosure-Ridden Areas

Mortgage lending has declined sharply in neighborhoods with high levels of foreclosures, according to the Federal Reserve.

The U.S. central bank looked at what the Neighborhood Stabilization Program (NSP) identified as “highly distressed” census tracts. NSP provides funding to help communities deal with neighborhood blight caused by vacant foreclosed homes. Based on information gathered under the Home Mortgage Disclosure Act (HDMA), the Fed found that home-purchase lending in these highly distressed tracts was 75% lower in 2010 than it had been in these same tracts in 2005. This decline was notably larger than that experienced in other census tracts, according to the Fed, and appears to primarily reflect a much sharper decrease in lending to higher-income borrowers in highly distressed neighborhoods.
The Federal Reserve study uncovered a similar fall off in lending to investors. Officials stressed that individuals who buy homes either for investment purposes or as second or vacation homes are an important segment of the housing market in general, and in some areas of the country, they are particularly important. “In the current period of high foreclosures and elevated levels of short sales, investor activity helps reduce the overhang of unsold and foreclosed properties,” the Fed said.  As the boom in housing emerged in the first half of the past decade, Fed officials says HMDA data showed a sharp increase in non-owner-occupant lending for the purchase of one- to four-unit homes. The volume of non-owner-occupant lending then fell sharply beginning in 2007 and remained at comparably low levels through 2010.
In 2010, 76% fewer non-owner-occupant loans were extended than in 2005, according to the study. The post-2007 decline in non-owner-occupant lending has been more severe than that in owner-occupant lending, the central bank’s researchers note. HDMA data shows that overall, mortgage originations declined between 2009 and 2010 from just under 9 million loans to fewer than 8 million loans. Fed officials say most significant was the decline in the number of refinance loans despite historically low baseline mortgage interest rates throughout the year. Home-purchase loans also declined, but the drop was less severe than was seen in refinance lending.
The Fed estimates that, in the absence of home equity problems and underwriting changes, roughly 2.3 million more refinancings of first-lien owner-occupant loans would have been made in 2010, on top of the 4.5 million refinance loans that were actually originated. The 2010 HMDA data consist of information reported by more than 7,900 home lenders, including all of the nation’s largest mortgage originators. The Federal Reserve says the data represent the majority of home lending nationwide and thus are broadly representative of lending trends and characteristics in the United States.

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