Analyzing Trends in Subprime Originations and Foreclosures: A Case Study of the Atlanta Metro Area

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area Cambridge, MA Lexington, MA Hadley, MA Bethesda, MD Washington, DC Chicago, IL Cairo, Egypt Johannesburg, South Africa February 2000 Prepared for The Neighborhood Reinvestment Corporation Abt Associates Inc. 55 Wheeler Street Cambridge, MA 02138 Prepared by Debbie Gruenstein Christopher E. Herbert

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area NEIGHBORHOOD REINVESTMENT CORPORATION, THE NEIGHBORWORKS NETWORK AND THE NEIGHBORWORKS CAMPAIGN FOR HOME OWNERSHIP 2002 This report was supported by the Neighborhood Reinvestment Corporation NeighborWorks Campaign for Home Ownership 2002. The authors presented their findings at a Neighborhood Reinvestment Corporation Training Institute on February 23, 2000 at the NeighborWorks Predatory Forum in Atlanta, Georgia. Neighborhood Reinvestment Corporation was established by an act of Congress in 1978 (Public Law 95-557). A primary objective of the Corporation is to increase the capacity of local communitybased organizations to revitalize their communities, particularly by expanding and improving housing opportunities. These local organizations, known as NeighborWorks organizations, are independent, resident-led, nonprofit partnerships that include business leaders and government officials. All together they make up the NeighborWorks network. The NeighborWorks Campaign for Home Ownership 2002 is the largest national initiative of its kind: a joint effort by private industry and government working with community-based NeighborWorks organizations to bring more families into home ownership. NeighborWorks organizations participating in the campaign use the NeighborWorks Full-Cycle SM system. Under this system, prepurchase education, innovative loan products and early-intervention delinquency counseling are combined into a system that helps create successful homebuyers who take charge of their neighborhoods as well as their homes.

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area Executive Summary lending for home mortgages has grown rapidly during the 1990s, with recent estimates indicating that this market segment accounted for about $200 billion in new loans by the end of the decade. On the positive side, the growth in subprime lending expands borrowing opportunities for those with impaired credit, and may increase homeownership opportunities for those who might otherwise not qualify for a conventional or perhaps any mortgage. However, subprime loans carry higher interest rates and therefore create a greater payment burden for the borrower. And the rise in subprime lending has also been associated with a growth in predatory lending practices, in which lenders use misleading or fraudulent means to lure borrowers into loans with high interest rates and high fees that rob owners of their equity and threaten their ability to maintain ownership. lending is also much more prevalent in low-income and minority communities, threatening the stability of these communities. However, while awareness of predatory lending practices has grown, there is little systematic data available to evaluate the magnitude and trends in the origination of these loans and resulting foreclosures. This study uses available data to examine the growth of subprime lending and foreclosures in the Atlanta metro area. Analyzing Trends in Originations by Lenders Data reported under the Home Mortgage Disclosure Act (HMDA) can be used to analyze trends in home loan origination at the local level. Unfortunately, the HMDA data do not include direct information for identifying subprime loans. But the Department of Housing and Urban Development has identified the lenders in HMDA that are primarily originating subprime loans, using industry sources and other data. Unfortunately, the HMDA data excludes a not-insignificant portion of the subprime market since lenders are not required to report second mortgages or home equity credit lines other than those used expressly for home improvement. Despite this flaw, HMDA can provide valuable information on subprime lending trends at the neighborhood level. Analysis of HMDA data for the Atlanta area for the period 1994 to 1998 finds that: Loan originations by subprime lenders grew by 150 percent between 1994 and 1998, compared to a growth in all loan originations of 111 percent. The share of all originations accounted for by subprime lenders reached 12 percent in 1997. While the number of subprime loans continued to increase in 1998, the market share declined to 9 percent due to the conventional refinancing boom. The growth in subprime lending was much more significant for properties in low-income and minority neighborhoods than other kinds of neighborhoods. Between 1994 and 1998, subprime lending grew by 440 percent in very low-income neighborhoods (where the median household income is less than 50 percent of the metro area median). In the same period, subprime lending grew by 317 percent in majority minority neighborhoods (where more than half the residents are minority group members). In very low-income neighborhoods, subprime lenders accounted for 37 percent of all originations in 1997 3 times the subprime market share in the Atlanta area overall. In majority minority areas, subprime lenders accounted for 30 percent of all originations in 1997 2.5 times the share for the entire metropolitan area. February 2000 ii

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area Analyzing Trends in Foreclosures by Lenders Data on home loan foreclosures from June 1996 through December 1999 were obtained from the Atlanta Foreclosure Report, a local company that publishes monthly listings of properties to be sold at foreclosure auctions. The database includes the name of the lender pursuing each foreclosure, and we matched these names to the list of HMDA reporters to identify subprime lenders. Aside from the name of the lender, subprime loans among the foreclosures can be identified using information on the interest rate the loans carry. Specifically, we compared the interest rates on the loans in foreclosure to the 30-year Treasury bill rate at the time the loans were made, to identify loans with high interest rate premiums or spreads (defined as those 4 percentage points or more above the Treasury bill rate). Unfortunately, only one-quarter of the sample includes interest rate information. An examination of foreclosures of high interest rate loans found the following: Only a small share (8 percent) of loans attributable to non-subprime lenders have high interest rates, while among subprime lenders 44 percent of loans bear high interest rates. The share of high interest rate loans in foreclosure grew rapidly for all lender types over the period 1996 to 1999. Among HMDA reporters that are not primarily subprime lenders, the share of foreclosures with high interest rates grew from 2 to 22 percent, while among subprime lenders the share increased from 26 to 57 percent, and among non-hmda reporters the share went from 9 to 38 percent. While subprime lenders have the highest share of high interest rate loans, almost half of high interest rate foreclosures were by other kinds of lenders. In fact, the three lenders with the largest numbers of high interest rate foreclosures were depository institutions. This finding may reflect the fact that some conventional lenders service subprime loans originated by other lenders, but it may also reflect a growing involvement by conventional lenders in this market segment. An analysis of Atlanta area foreclosures started by subprime lenders reveals: The overall volume of foreclosures declined by 7 percent between 1996 and 1999, but the volume of foreclosures started by subprime lenders grew by 232 percent. Among lenders reporting under HMDA, the share of foreclosures attributed to subprime lenders now exceeds their share of originations. Originations by subprime lenders peaked at 12 percent of all originations in 1997, while foreclosures by these lenders accounted for 16 percent of all foreclosures in 1999. And while the share of originations by subprime lenders declined in 1998, the share of foreclosures by these lenders continued to rise. The share of foreclosures by subprime lenders grew rapidly in Atlanta neighborhoods of all income levels. But like their originations, foreclosures by subprime lenders were highest in very low-income neighborhoods. Foreclosures by subprime lenders were also most common in majority minority neighborhoods. In 1999, the share of foreclosures in these areas attributable to subprime lenders was 16 percent, about twice as high as the share in all other areas. By 1999, the share of foreclosures by subprime lenders in majority minority areas had exceeded these lenders share of originations. Unlike the subprime share of originations, which had declined in 1998, the share of foreclosures by subprime lenders was still rising as of 1999. February 2000 iii

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area Introduction One of the most striking features of home finance in the late 1990s was the rapid growth of the subprime lending. The term subprime generally refers to loans made to borrowers who have low credit ratings, but also includes very high loan-to-value loans. Prior to the 1990s there were few borrowing options for homeowners with impaired credit. Fannie Mae and Freddie Mac (the government-sponsored secondary market enterprises or GSEs) would not purchase loans that did not meet their underwriting standards, and portfolio lenders were generally reluctant to take on the greater risks of such loans. But with the advent of securitization of all types of financial assets, mortgage bankers were able to tap the broader financial markets for funds to make loans that did not meet the conventional underwriting criteria of the GSEs or depositories. Estimates by the Mortgage Bankers Association indicates that subprime lending grew from $80 billion in 1993 to $210 billion in 1998, an increase of 162 percent. One of the characteristics of subprime loans is that they bear higher rates of interest than prime (or conventional) loans. This higher rate of interest is due both to the greater credit risk of these loans and the fact that most conventional loans benefit from more favorable interest rates available through the GSEs. At the same time that subprime lending has been growing, the mortgage industry has also been developing more sophisticated methods for assessing the degree of credit risk associated with different loan and borrower characteristics. lending is thus also related to the development of risk-based pricing, where borrowers theoretically will be charged an interest rate that is appropriate for the risk associated with their loan. There are both positive and negative aspects to the development of the subprime mortgage market and of risk-based pricing generally. On the one hand, these developments have increased options for borrowers who do not qualify for conventional loans. Many industry observers have touted the advent of risk-based pricing as a way of expanding homeownership opportunities for borrowers who otherwise would be excluded from the market. On the other hand, the ability to charge borrowers much higher interest rates introduces greater possibilities for unscrupulous lenders to take advantage of borrowers. The term predatory lending has been coined to describe the abusive practices used by some lenders to lure borrowers into loans that charge excessive interest rates and fees and leave borrowers with such unmanageable financial burdens that they are likely to end up losing their homes. 1 While not all subprime lending is predatory, subprime and predatory loans share the distinction of charging borrowers interest rates that are higher than conventional rates. Thus, even subprime loans that are not marked by excessive costs or deceptive practices will expose borrowers to higher risks than conventional loans due to the higher financial burden they entail. Housing and community advocates have become increasingly alarmed as they have seen more and more borrowers lose their homes as a result of predatory lending practices. In many cases, these 1 For a thorough discussion of lender actions that may be defined as predatory see Deborah Goldstein, Understanding Predatory : Moving Toward a Common Definition and Workable Solutions, Neighborhood Reinvestment Corporation and the Joint Center for Housing Studies of Harvard University, October 1999. February 2000 1

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area lenders appear to have targeted low-income and minority areas. 2 As a result, the foreclosures are not just wrecking havoc on the lives of individual borrowers, they are also destabilizing low-income and minority communities. While there is a strong evidence of the growth of subprime and predatory lending, there has been little systematic information on the degree of the resulting problems. To address this shortage of systematic empirical data, the National Training and Information Center (NTIC) recently conducted a study of trends in foreclosures by subprime mortgage lenders in the Chicago area. 3 NTIC found that between 1993 and 1998 foreclosures nearly doubled, with subprime lenders accounting for a large share of this increase. Interestingly, the rise in foreclosures was even sharper in suburban areas than in the city. The present study attempts to replicate the NTIC study for the Atlanta metro area. 4 Relying on Home Mortgage Disclosure Act (HMDA) data on loan originations and local foreclosure data, this study is intended to provide empirical information on the following questions: What has been the trend in the volume of subprime originations in the Atlanta area? How concentrated has subprime lending been in low-income and minority neighborhoods? What has been the trend in foreclosures? How have subprime loans contributed to recent foreclosure trends? Have subprime loans come to account for a greater share of foreclosures than of loan originations (indicating a greater failure rate of these loans)? Have low-income and minority neighborhoods being disproportionately affected by subprime foreclosures? It is important to note that, while the concern about subprime lending is largely focused on predatory lending practices, it is not possible with the data available to distinguish between prudently employed risk-based pricing and predatory lending. However, based on a characterization of lenders principal lending activities and some information on the size of interest rate premiums, we can to some degree identify subprime loans. As a result, while this study is motivated by concerns about predatory lending, it focuses more generally on subprime lending. The report is divided into two principal sections. The first section presents an analysis of subprime originations based on HMDA data. The second section then analyzes trends in foreclosures relying on a local source of information on listings of foreclosure sales. 2 For a discussion of the concentration of subprime lending in low-income and minority communities see Daniel Immergluck and Marti Wiles, Two Steps Back: The Dual Mortgage Market, Predatory, and the Undoing of Community Development. Woodstock Institute, Chicago, IL, November 1999. 3 Preying on Neighborhoods: Mortgage Lenders and Chicagoland Foreclosures, NTIC, September 1999. 4 The NTIC study actually includes three sections: one providing a quantitative analysis of data on foreclosures and originations, another providing a case study of one inner-city neighborhood, and a third profiling the experiences of individual borrowers who were victimized by predatory lenders. The current study only replicates the first section, quantitative analysis presented in the NTIC study. February 2000 2

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area I. Trends in Originations A. Using HMDA Data to Track Our analysis of loan originations relies on data collected under the 1974 Home Mortgage Disclosure Act (HMDA). HMDA mandates that lenders disclose certain information on their home mortgage applications, including the race, census tract, and income of borrowers and the action taken on the application. However, not all financial institutions are required to report this information. HMDA compliance is compulsory only for lenders that meet certain annual loan volume and asset size requirements, and that originate loans in metropolitan areas. 5 In addition, reporting of borrower information is not mandated for all types of loans. While lenders must disclose information for first mortgages, refinancing of first mortgages, and home improvement loans, second mortgages and home equity loans 6 are not subject to HMDA reporting requirements. loans may be first mortgages used either to purchase a home or to refinance an existing first mortgage (and possibly consolidating other consumer debts into the new first mortgage). But many subprime loans are second mortgages used to tap home equity for purposes other than home improvements. As a result, it is likely that many subprime loans are not reported in HMDA. Nonetheless, HMDA is the best available information on lending activity at a local level. Identifying subprime loans from HMDA data is not a straightforward task. One simple definition of a subprime loan is whether it meets the underwriting criteria used by the GSEs. 7 Another method of identifying a subprime loan would be based on the interest rate or fees charged. Unfortunately, HMDA does not contain the information needed to assess either of these factors. As a result, loans can only be categorized as subprime or non-subprime based on lender, rather than loan, characteristics. Using information from a variety of sources, the Department of Housing and Urban Development (HUD) has identified the lenders reporting under HMDA that specialize in subprime lending. This study uses the HUD list of subprime lenders reporting in HMDA to identify subprime loans. 8 This method appears to capture a significant portion of subprime loans reported in HMDA, but it certainly does not identify all subprime loans. Many primarily conventional lenders have entered the subprime market. The method used to identify subprime loans for this study will not encompass these subprime loans made by conventional lenders. 5 For a thorough discussion of HMDA reporting requirements see A Guide to HMDA Reporting: Getting it Right!, Federal Financial Institutions Examination Council, 1998. 6 HMDA reporting of second mortgages and home equity loans are required if they are used for purchase or home improvement and are carried on lender s books as such. However, if the lender does not classify these loans as home improvement or purchase, they are not subject to HMDA reporting requirements. 7 A loan may not meet the GSEs underwriting criteria because it exceeds the GSE limit on the size of loans they can purchase. Of course, loans which exceed the GSE loan limits ( jumbo loans) may in all other respects be considered prime loans and so would not be counted as subprime. 8 For a thorough discussion of the methodology used by HUD to identify subprime lenders see Randall M. Scheessele, 1998 HMDA Highlights, Appendix D, U.S. Department of Housing and Development, Office of Policy Development and Research, Housing Finance Woring Paper Series HF-009, 1999. In short, Scheessele developed annual lists first by using trade magazines and industry sources to identify subprime lenders. Next, he created a set of lender characteristics (such as high-denial rates, high refinance rates, large amounts of missing data, low percentage of FHA originations or GSE sales, etc) to screen HMDA data for possible subprime lenders. Finally, Scheessele attempted to speak with each of these potential subprime lenders to verify the characterization of their lending activity. Scheessele classified institutions as subprime if 50 percent or more of originations were subprime. February 2000 3

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area Scheessele (1999) uses the HUD annual lists of subprime lenders to identify home purchase and refinance loans originated by subprime lenders between 1994 and 1998. 9 lending grew at striking rates for both purchase and refinance (330 percent and 520 percent, respectively) over the four-year period. Refinance loans account for most subprime lending, comprising over 75 percent of all subprime lending. More importantly, although all lending activity increased significantly between 1994 and 1998, the dramatic increase in volume of subprime loans increased the subprime share of all HMDA lending from 3 percent to 9 percent. While HMDA data no doubt underestimate the total size of the subprime market, it does appear to accurately reflect the growth in this market over time. One indication of the degree to which the HMDA data accurately reflect trends in subprime lending is to compare measures of market share from HMDA data to other estimates that cover the entire mortgage market. The Mortgage Bankers Association (MBA) provides annual estimates in dollar terms of the total mortgage market, including all lenders and all types of mortgages, as well as the volume of B&C loans representing the subprime market. As would be expected given its broader coverage, the MBA estimates indicate that B&C loans account for a consistently larger share of the mortgage market than is evident in HMDA (Exhibit 1). The MBA estimates that, from 1994 to 1998, total home lending dollars rose from about $800 billion to $1.5 trillion (an increase of 96 percent), while B & C loans rose from $86 billion to $210 billion, an increase of 143 percent. As a result, the share of total home lending dollars comprised of B and C loans increased from 11 percent 1994 to 14 percent in 1998. Despite differences in the structure and content of the MBA data, both analyses show similar upward trends in subprime lending from 1994 to 1997 with a decline in 1998. 10 B. Findings 1. Overall Trends in Atlanta Our analysis for the Atlanta Metropolitan Statistical Area (MSA) shows that subprime lenders have increased their market share slightly and now account for nine percent of all loan originations. Between 1994 and 1998, HMDA-reported lending in Atlanta increased by over 110 percent (Exhibit 2). At the same time, subprime originations increased from 7,623 to 19,076, an increase of 150 percent. These disparate growth rates resulted in a rise of the subprime share of all originations, from 7 percent in 1994 to almost 12 percent in 1997. The share did decrease to about 9 percent in 1998, in part due to the conventional refinancing boom. Compared to national trends, subprime lending has grown less rapidly in Atlanta, but the share of loans made by subprime lenders started at a much higher level in Atlanta than for the rest of the country. As a result, the 1998 subprime share is roughly 9 percent for both Atlanta and the nation as a whole. 9 Of note, home improvement loans reported in HMDA are not included in this report. 10 HMDA reports the loan amount, and so can be used to analyze either the number of loan originations or the dollar value of these originations. Exhibit 1 uses the number of loan originations as Scheessele (1999) only reports the number of loans originated and not the dollar value. This study will focus on the number of subprime originations and not the dollar volume. February 2000 4

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area 25% Exhibit 1 Share of Mortgage Originations: Two Estimates of National Trends 20% 15% 10% 5% 0% 1994 1995 1996 1997 1998 MBA Estimate HMDA Note: HMDA data shown include only loans used for purchase and refinance, while MBA data include second mortgages and home equity lines of credit. MBA share is measured in dollars, while HMDA share is measured in number of loans. Exhibit 2 Lenders' Share of HMDA Loans, 1994-1998 (Atlanta MSA) Year Total HMDA Share 1994 103,189 7,623 7.4% 1995 96,754 8,476 8.8% 1996 128,757 12,589 9.8% 1997 139,323 16,551 11.9% 1998 217,548 19,076 8.8% % Change 111% 150% 19% Source: Abt Associates Inc. tabulations of HMDA data. February 2000 5

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area 2. Trends in by Income Level Analysis at the neighborhood level shows that growth in subprime lending is strongest in low- and very low-income neighborhoods. In addition, subprime lenders share of all lending is highest and growing fastest in low-income areas. One of the concerns about the subprime market is that lenders have targeted their marketing efforts on low-income neighborhoods. 11 In order to determine lending activity within various types of communities, we combined HMDA data, which include tract information by loan, with Census data on median income by tract. Loans were then divided into four categories based on median income: High-income tracts are those with a median income greater than 120 percent of the median income of the entire Atlanta MSA.; 12 Moderate-income tracts have median incomes between 80-120 percent of the MSA median income; Low-income tracts have median incomes between 50-80 percent of the MSA median; and Very low-income tracts have incomes less than 50 percent of MSA median income. A small share (5 percent) of HMDA loans could not be matched with income information, either due to missing tract information in HMDA or because the tract numbers that were listed in HMDA were not recognized by the Census database. One interesting feature of trends in subprime lending is that growth was very high in each neighborhood income category (Exhibit 3). Between 1994 and 1998, the volume of subprime lending in high- and moderate-income neighborhoods increased by 117 percent and 130 percent respectively. But subprime originations in low-income neighborhoods grew even faster, with lending activity up by 238 percent in low-income tracts and 440 percent in very-low income tracts. In addition, the subprime growth rates are much higher than the total lending growth rates within the low- and very-low income neighborhoods. As a result, subprime lenders share of total originations has grown significantly in these two categories (Exhibit 4). This is especially true in very low-income neighborhoods where both the level and growth in market shares of subprime lenders were particularly high. lenders share of originations in very low-income tracts went from 13 percent (the highest of the four neighborhood types in 1994) to 37 percent in 1997, and then fell to 32 percent in 1998. The subprime market share was the next highest in low-income neighborhoods, starting at 10 percent in 1994 and ending at 16 percent by 1998. The subprime market share remained fairly stable in moderate and high-income areas during this period. 11 HMDA does report the borrower s income, so it would also be possible to analyze trends in subprime lending to borrowers of different income levels. 12 Based on a 1989 median income of $36,051 from the 1990 Decennial Census. February 2000 6

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area Exhibit 3 Growth in Loan Originations by Neighborhood Income Level 1994-98 (Atlanta MSA) 500% 450% 440% 400% 350% 300% 250% 238% 200% 150% 130% 117% 100% 50% 0% Very Low (<50%) Low (50-80%) Moderate (80-120%) High (>120%) Tract Median Household Income as Percent of Metro Area Median Source: Abt Associates Inc. analysis of HMDA data. Exhibit 4 Share of Originations by Lenders by Neighborhood Income Level (Atlanta MSA) 40% 35% 30% 25% 20% 15% 10% 5% 0% Very Low (<50%) Low (50-80%) Moderate (80-120%) High (>120%) Source: Abt Associates Inc. analysis of HMDA data. Tract Median Household Income as Percent of Metro Area Median 1994 1995 1996 1997 1998 February 2000 7

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area 3. Trends in, by Racial Composition As with income, both the growth rate of subprime originations and the subprime market share of all lending are highest in neighborhoods with high concentrations of minorities. The same methodology that allowed us to categorize loans into income groups allowed for classification by racial composition. Based on census tract information on population by race, we created four categories of racial composition: high, moderately high, moderately low, and low. 13 High minority tracts are defined as any tract with minorities making up more than 50 percent of the population. The moderately-high minority category includes tracts with a 15-50 percent minority population. The moderately-low and low categories are defined as between 5-15 percent minority and less than 5 percent minority, respectively. While the level of subprime originations grew substantially in each racial composition category, subprime lending activity grew by more than 158 percent in the moderately high minority tracts and by 317 percent in the high minority tracts (Exhibit 5). In addition, the market share of total loan originations comprised by subprime lenders was much higher and grew faster in neighborhoods with high proportions of minority residents (Exhibit 6). While subprime lending remained between 6 percent and 9 percent of all lending in low and moderately-low minority communities, the subprime share of lending in high-minority neighborhoods climbed from 12 percent in 1994 to 30 percent in 1997, before dropping to 25 percent in 1998. Therefore, despite the decrease in 1998, the share of subprime lending doubled in high-minority communities. During the same time, the subprime share of total lending in moderately-high minority neighborhoods increased from 9 percent to 11 percent. II. Trends in Foreclosures A. Using Data on Foreclosures in the Atlanta Area to Track Foreclosures The foreclosure analysis is based on data obtained from the Atlanta Foreclosure Report (AFR). 14 This database contains the following information for properties that have been listed as being offered at a foreclosure auction: Street address, city, and zip code of the property; Deed book and page number where the security deed is recorded in the county courthouse; Land lot, district, and zoning of the property; Year the property was built; Tax assessed value or previous purchase price; 13 Minorities are defined here as any non-whites, including whites of Hispanic origin. 14 The Atlanta Foreclosure Report is a monthly publication by EquiSystems LLC of Atlanta. See their web site at http://www.equisystems.com/afrintro.htm for a description of this publication. February 2000 8

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area Exhibit 5 Growth in Originations 1994-98 by Neighborhood Racial Composition (Atlanta MSA) 350% 300% 317% 250% 200% 150% 100% 158% 84% 117% 50% 0% High (>50%) Moderately High (15-50%) Moderately Low (5-15%) Low (<5%) Tract Percent Minority Source: Abt Associates Inc. analysis of HMDA data. 35% Exhibit 6 Share of Originations by Lenders by Neighborhood Racial Composition (Atlanta MSA) 30% 25% 20% 15% 10% 5% 0% High (>50%) Moderately High (15-50%) Moderately Low (5-15%) Low (<5%) Source: Abt Associates Inc. analysis of HMDA data. Tract Percent Minority 1994 1995 1996 1997 1998 February 2000 9

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area Original principal balance of the loan; Mortgage type (FHA, VA, construction, etc.); Year of origination; Interest rate; Original mortgagor (person who originated the loan); Current mortgagee (lender who is foreclosing); Any prior mortgages or bankruptcies that the loan may be subject to; Foreclosing attorney's name and phone number; and Current owner's name and if they occupy the property. There are several issues with this data that are worth noting. First, AFR provides monthly advertisements for foreclosure sales. As a result, the data include properties that may yet avoid foreclosure, and so they may overstate the true level of completed foreclosures. However, trends in foreclosure advertisements should serve as reasonably good proxy for the actual trends in foreclosures. Second, AFR only advertises properties located in 12 of the 20 counties that comprise Atlanta s MSA. 15 In comparing trends in originations to foreclosures, we will limit the HMDA data to these 12 counties. Finally, because the AFR provides monthly listings of advertised sales and since properties can be advertised in multiple months, duplicate listings for properties had to be removed from the database relying on borrower names and property addresses. Slight differences in the names or addresses from month to month (including errors and typos) may have prevented every duplicate record from being removed. Historical data were available only from June 1996 to December 1999. While it would be ideal to have foreclosure data back to January 1994 for comparison to trends in loan originations, three and a half years of data are adequate to conduct some trend analyses. Moreover, analyzing foreclosure data that are more recent than the origination data is reasonable, because trends in foreclosures lag trends in lending by at least one year, and generally by two or more years. There are several challenges to identifying subprime lenders in AFR. First, whereas both the HUD list of subprime lenders and the HMDA origination data contain lender identification numbers to facilitate matching of these lists, the AFR data contain this identifier. Thus, in order to determine whether each mortgagee in the AFR data was a subprime lender, we had to compare each mortgagee s name as it appeared in the property listing to a list of HMDA reporters and to HUD s list of subprime lenders. Aside from the shear volume of mortgagees listed (in excess of 5,000), this process was hampered by inconsistencies and errors in lender names. Second, AFR does not list the originating lender, only the current mortgagee servicing the mortgage. Since loan servicing is routinely acquired by other lenders after origination, the servicing mortgagee is not necessarily the originating mortgagee. Consequently, there is no way of knowing the exact role of the mortgagees listed in the AFR. It is possible that some of these lenders did not originate the loans on the foreclosed property causing loans to be misclassified as subprime or non-subprime. Since nonsubprime lenders may service loans originated by subprime lenders (and, therefore, be listed as the 15 The twelve counties are Bartow, Cherokee, Clayton, Cobb, Dekalb, Douglas, Fayette, Forsyth, Fulton, Gwinnett, Henry, and Rockdale. February 2000 10

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area mortgagee in AFR), it is possible that the levels and shares of subprime foreclosures are biased downward. 16 In addition, as shown in Exhibit 7, only about 70 percent of the mortgagees listed in AFR were identifiable as HMDA reporters. Another 14 percent of the cases listed lender names that appear to be mortgage companies or depositories not on the HMDA list. Some of the firms are known to be subprime lenders. However, to facilitate comparisons between trends in subprime originations in HMDA and the foreclosure data, we have not included these non-hmda reporters in the subprime category. Another 13 percent of AFR mortgagees seem to be individuals, partnerships, or company names rather than traditional mortgage originators or servicers. The remaining 4 percent of cases the mortgagee is a GSE, government agency, or private mortgage insurance (PMI) firm that has come to own the loan. Exhibit 7 Distribution of Foreclosures by Type of Mortgagee Type of Mortgagee at Foreclosure No. of Loans Share of Loans HMDA Reporters Non- 20,263 60.1% 2,625 7.8% Manufactured Home Lender 475 1.4% Total HMDA Reporters 23,363 69.3% Non-HMDA Reporters Mortgage Co/Bank 4,679 13.9% Other 4,353 12.9% Total Non-HMDA Reporters 9,032 26.8% Other GSE 822 2.4% Government Agency 490 1.5% PMI Firm 3 0.0% Total Other 1,315 3.9% Total 33,710 100.0% Source: Abt Associates Inc. analysis of Atlanta Foreclosure Report data. 16 For example, the NTIC study noted that court filings indicate that the Bank of New York commonly represents the interests of The Money Store in foreclosure proceedings in Cook County. February 2000 11

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area B. Findings 1. Interest Rate Spreads on Foreclosed Loans The number of loans entering foreclosure with high interest rate spreads (more than four percentage points above the 30-year Treasury bill rate) is highest among subprime lenders, but is growing rapidly among lenders of all types. In fact, most foreclosures with high interest rate spreads have non-subprime mortgagees. Unlike the HMDA data, the AFR data do contain information on interest rates at origination. By comparing the rate to the 30-year Treasury bond from the same year, we can determine which loans bore a high interest rate premium. We will use the interest rate spread or the difference between the 30-year Treasury bill rate and the loan interest rate to identify high interest rate loans. This provides some verification of how well our classification of lenders works, by allowing comparisons between the distribution of interest rate spreads for lenders classified as subprime or non-subprime. It is important to note, however, that interest rate spreads could only be determined for the one-quarter of listed foreclosures that contained both the year of loan origination and the interest rate at origination. Thus, the analysis of interest rate spreads on foreclosed loans includes only a quarter of the entire sample. As it turns out, the distribution of interest rate spreads on foreclosed loans appears to be consistent with our classification of lenders (Exhibit 8). Seventy-seven percent of foreclosures by HMDA nonsubprime lenders have interest rate spreads below 2 percentage points, and another 15 percent have premiums between 2 and 4 percentage points. Only 8 percent have spreads 4 points or higher. In comparison, 90 percent of loans owned by the GSEs, which are undoubtedly prime loans, have point spreads of less than 2 percentage points and an additional 9 percent of loans have premiums of between 2 and 4 points. On the other hand, only 28 percent of foreclosures by subprime lenders, had origination spreads equal to or less than 2 percent, while 44 percent had premiums of 4 points or higher. Foreclosures listed for non-hmda reporting mortgagees appear to be mainly non-subprime, but they do include a greater share of high spread loans than HMDA non-subprime reporters. In our analysis of the foreclosure data, we will group lenders into four categories: HMDA reporters that are not primarily subprime lenders (including manufactured home lenders); HMDA reporters that are primarily subprime lenders; Non-HMDA mortgage companies or banks; and Other (which includes the GSEs, government-owned loans, and loans owned by privatemortgage insurers). February 2000 12

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area Exhibit 8 Interest Rate Spreads on Foreclosed Loans by Type of Lender (Share of all foreclosures reporting interest rates) Percentage Points Over 30-Year T- Bill Conventional HMDA Reporter Non-HMDA Reporter Other Manuf. Housing Mortgage Co. / Bank Other GSEs Other <=2 76.9% 28.4% 50.0% 57.3% 56.0% 90.4% 93.1% 2-4 15.0% 27.2% 27.3% 21.1% 24.9% 8.5% 6.0% 4-6 6.2% 34.5% 18.2% 16.5% 12.7% 1.1% 0.9% 6+ 1.9% 9.9% 4.5% 5.0% 6.4% 0.0% 0.0% TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Abt Associates Inc. analysis of Atlanta Foreclosure Report data. Interestingly, loans with high interest rate spreads have increased as a proportion of foreclosures for all categories of lenders (Exhibit 9). In fact, although subprime lenders have a much higher proportion of foreclosures with high interest rate spreads at origination than other lenders, most foreclosures with high premiums have a reported mortgagee that is not a primarily subprime lender (Exhibit 10). In other words, the actual volume of foreclosures with underlying high-spread loans is much higher for non-subprime lenders than for subprime lenders. This finding is consistent with the fact that more traditional lenders are entering subprime market. 17 However, this finding may also may reflect the fact that non-subprime lenders are servicing loans originated by subprime lenders. High levels of high-interest rate lending by traditional lenders are also evident in Exhibit 11, which shows the 25 lenders with the largest numbers of high-spread foreclosures in the Atlanta area over the period 1996-99. While we identified many of the lenders on this list as subprime, two-thirds were classified otherwise. In fact, about one-third including the three lenders with the most highspread foreclosures are HMDA reporters who have not been identified as predominantly subprime lenders. Roughly another third are mortgage companies, banks, or other institutions/individuals that do not report to HMDA. Of these, a few are known to be subprime lenders, such as Household Financial Services and NationsCredit Financial Services. The lenders having the largest number of foreclosures with high interest rate spreads in the Atlanta area are First National Bank of Chicago, Bankers Trust, and Norwest Bank of Minnesota. 17 See Raising the Roof on Riskier : Morgtgage Practices by Banks and Finance Firms Draw Federal and State Scrutiny, by Kathleen Day, The Washington Post, February 6, 2000, page H1. This article discusses how bank regulators are considering regulatory controls to address the growth of subprime lending by depositories. February 2000 13

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area 70% 60% 50% 40% Exhibit 9 Share of Each Lender Type's Foreclosures Having High Interest Rate Spreads by Year (Atlanta Region) 43% 57% 38% 30% 20% 10% 0% 2% 2% 8% 22% 26% 21% 9% 12% 24% HMDA, Non- HMDA, Non-HMDA 1996 1997 1998 1999 Source: Abt Associates Inc. analysis of Atlanta Foreclosure Report data. Note: "High interest rate spread" refers to loans with interest rates 4 percentage points or higher than the rate on the 30-year Treasury bill at the time of origination. "Atlanta Region" refers to the 12 counties of the Atlanta MSA that are reported in the Atlanta Foreclosure Report (see text for list). Exhibit 10 Share of High Interest Rate Foreclosures by Type of Lender and Year (Atlanta Region) 60% 50% 44% 49% 54% 45% 40% 30% 20% 10% 32% 33% 12% 20% 29% 27% 25% 26% 0% HMDA, Non- HMDA, Non-HMDA Lender Type 1996 1997 1998 1999 Source: Abt Associates Inc. analysis of Atlanta Foreclosure Report data. Note: "High interest rate spread" refers to loans with interest rates 4 percentage points or higher than the rate on the 30-year Treasury bill at the time of origination. "Atlanta Region" refers to the 12 counties in the Atlanta MSA that are reported in the Atlanta Foreclosure Report (see text for list). February 2000 14

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area Exhibit 11 Lenders with Highest Volume of High-Spread Foreclosures (Atlanta Region) Number of Loans by Point Spread Mortgagee Type of Lender Under 2 Between 2 and 4 Over 4 Rate Missing 1 First National Bank of Chicago 1 23 61 104 124 312 2 Bankers Trust/ Bankers Trust of CA 1 274 48 93 486 901 3 Norwest Bank Minnesota NA 1 5 35 87 156 283 4 WMC Mortgage Corp 2 1 4 52 7 64 5 IMC Mortgage Co 2 1 15 39 255 310 6 Companion Mortgage Co 3 1 19 36 63 119 7 ContiMortgage Corp 2 2 14 32 390 438 8 The Bank of New York 1 11 41 33 216 301 9 Ameriquest Mortgage Co 2 4 19 22 24 69 10 Chase Bank of Texas 3 5 9 21 51 86 11 Aames Captial Corp 2 0 12 20 83 115 12 LaSalle National Bank 1 12 10 20 39 81 13 Aurora Loan Services Inc 1 36 13 17 50 116 14 Residential Funding Corp 1 4 3 17 27 51 15 US Bank/ US Bank Trust NA 1 2 3 17 84 106 16 The Chase Manhattan Bank 1 8 9 16 81 114 17 Lehman Capital 3 0 7 14 3 24 18 United Companies Corp 2 4 6 13 132 155 19 Long Beach Mortgage Co 3 1 2 12 5 20 20 NationsCredit Financial Svcs 3 0 1 12 95 108 21 New Century Mortgage Corp 2 0 1 12 8 21 22 National Loan Investors L P 3 3 3 11 13 30 23 Green Tree Financial Servicing 3 0 7 10 164 181 24 Option One Mortgage Corp 2 1 6 10 8 25 25 Household Financial Services 3 0 5 9 14 28 26 Household Realty Corp 3 0 1 8 70 79 27 Bank One 1 1 5 7 35 48 28 FT Mortgage Companies 1 38 25 6 199 268 29 TCF Consumer Financial Svcs 3 1 0 6 0 7 30 The Money Store 2 0 1 5 11 17 31 Ocwen Federal Bank FSB 2 134 34 5 144 317 32 Southern Pacific Funding Corp 2 0 1 5 1 7 33 Bank of New York 1 2 1 2 14 19 Type of Lender: 1 = HMDA, non-subprime 2 = HMDA, sub-prime 3 = Non-HMDA reporter Source: Abt Associates Inc. analysis of Atlanta Foreclosure Report data. Note: Atlanta Region refers to the 12 counties of the Atlanta MSA included in the Atlanta Foreclosure Report (see text for list of counties). Total February 2000 15

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area 2. Age of Loan at Foreclosure The median age of foreclosed loans is only two years for subprime loans, compared to four to five years for most other lenders, which is consistent with the greater risk of these loans at the time of origination. Another indication of a subprime loan can be the age of the loan at foreclosure. Due to the highrisk nature of subprime loans, we would expect the time between loan origination and foreclosure to be shorter for subprime loans than for prime loans. By comparing the year of foreclosure to the year of origination, we can approximate the age of the loans listed in the Atlanta Foreclosure Report. 18 As expected, the median age of a foreclosed loan among the subprime lenders is lower than for other lenders (Exhibit 12). The median foreclosed loan age among subprime lenders was 2 years, compared to 4 years for non-subprime HMDA reporters, and 3 years for non-hmda reporters. Foreclosures on loans held by GSEs or other government agencies had a median duration of 7 years. Overall, the age of Atlanta-area loans at foreclosures has declined over the four-year period studied from 4 years in 1996 to 3 years in 1999. This decline is attributable both to the rising share of foreclosures accounted for by subprime lenders and to declines in the duration of forecloses by nonsubprime HMDA reporters and non-hmda reporters. While the younger age of foreclosed loans among non-subprime lenders may indicate a growing proportion of subprime loans among their activities, it is also the case that the strong refinancing boom of recent years has greatly lowered overall average loan age. As a result, even without an increase in subprime lending, we would expect to see some decline in the age of foreclosed loans. Exhibit 12 Median Age of Loans at Foreclosure (Atlanta Region) (Years since origination) Year All Lenders Non- HMDA Reporters HMDA Reporters Non-HMDA Reporters Other 1996 4 5 2 4 8 1997 4 4 2 4 8 1998 3 4 2 3 6 1999 3 3 2 2 5 All Years 3 4 2 3 7 Source: Abt Associates Inc. analysis of Atlanta Foreclosure Report data. Note: "Atlanta Region" refers to the 12 counties in the Atlanta MSA that are reported in the Atlanta Foreclosure Report (see text for list). 18 Since AFR provides only the year and not the day or month of origination, the duration calculation is a somewhat crude approximation of the age of the loan. February 2000 16

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area 3. Overall Trends in Foreclosure While overall foreclosures were declining by 7 percent between 1996 and 1999, subprime foreclosures increased by 232 percent. As a result, the share of foreclosures accounted for by subprime lenders rose from 3 to 11 percent. When just lenders reporting in HMDA are considered, the share of foreclosures by subprime lenders reached 16 percent in 1999 more than 4 percentage points higher than subprime lenders peak share of loan originations. The annual number of foreclosures has decreased by about 7 percent in Atlanta since 1996 (Exhibit 13). 19 However, this overall decline masks very different trends in subprime and non-subprime foreclosure rates. An overall decrease of 1,406 in non-subprime foreclosures coincided with an increase in subprime lender foreclosures over the same period of 732, an increase of 232 percent. As a result, the share of all foreclosures by subprime lenders increased from 3 percent to 11 percent during this period. As both the level and share of foreclosures attributable to subprime lenders have risen, their share has started to rise above their share of loan originations (Exhibit 14). The subprime lenders share of originations fell to 9 percent in 1998. But their share of foreclosures has continued to rise, reaching 13 percent in 1998 and 16 percent in 1999. Combined with the fact that it takes several years for newly originated loans to reach foreclosure, it looks as if foreclosures by subprime lenders are becoming disproportionately high compared to their overall share of lending activity. 19 Since 1996 data was only available for June-December, the 1996 foreclosure levels were annualized by multiplying the 1996 volumes by 12/7. February 2000 17

Analyzing Trends in Originations and Foreclosures: A Case Study of the Atlanta Metro Area Exhibit 13 Trends in Foreclosures 1996-1999 (Atlanta Region) Year Total Non- Percent Lenders Lenders 1996 9,871 9,555 315 3% 1997 9,610 9,087 523 5% 1998 9,147 8,276 871 10% 1999 9,196 8,149 1,047 11% Change 1996-99 -675-1,406 732 Pct Change 1996-99 -7% -15% 232% Source: Abt Associates Inc. analyses of data from Atlanta Foreclosure Report. Note: 1996 figures are annualized estimates based on June-December data. "Atlanta Region" refers to the 12 counties in the Atlanta MSA that are reported in the Atlanta Foreclosure Report (see text for list). Exhibit 14 HMDA Reporters' Share of Originations and Foreclosures (Atlanta Region) Percentage of total originations and foreclosures by HMDA reporters only 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 7% 9% 10% 5% 12% 8% 9% 13% 1994 1995 1996 1997 1998 1999 Originations Foreclosures Source: Abt Associates analysis of data from HMDA and the Atlanta Foreclosure Report. Note: HMDA data cover the 12-county area for which foreclosure data is available. Foreclosure data only include lenders that report under HMDA. "Atlanta Region" refers to the 12 counties in the Atlanta MSA that are reported in the Atlanta Foreclosure Report (see text for list). 16% February 2000 18