Fed study shows 2005 jump in non-prime mortgages
WASHINGTON – U.S. mortgage lending data show sharp growth in the use of higher-priced “non-prime” mortgages for home purchases in 2005 over 2004, and even steeper gains in the incidence of such loans among blacks and Hispanics, a Federal Reserve study.
The mortgage data, gathered from lenders under the Home Mortgage Disclosure Act, shows more buyers were pushed out of the most favorable loan categories as they stretched to buy homes at the height of the U.S. housing boom. Home prices in many markets peaked in the third quarter of 2005.
The Fed study showed higher-priced first-lien mortgages, which it described as three percentage points over Treasury yields of comparable maturities, made up 24.6 percent of conventional home purchase loans on owner-occupied homes, compared with 11.5 percent in 2004.
Among blacks, such loans made up 54.7 percent of 2005 home purchase loans, compared with 32.4 percent in 2004. Among whites, the incidence of such loans was 17.2 percent in 2005, compared with 8.7 percent in 2004, while among Hispanics, it was 46.1 percent in 2005 compared with 20.3 percent in 2004.
The incidence of such “sub-prime” and “near-prime” loans among Asians was 16.6 percent in 2005 compared with 5.9 percent in 2004, the Fed said.
Blacks also were the most likely to be denied a home purchase mortgage loan in 2005, with a denial rate of 27.5 percent, compared with 18.0 percent for Hispanics, 15.8 percent for Asians and 12.3 percent for whites.
The study said the jump in higher-priced lending was driven partly by a flattening of the Treasury yield which pushed up home mortgage rates, particularly for adjustable rate loans.
Consequently, loans with the same risk characteristics would have had higher interest rates in 2005 and more of them would have been categorized as non-prime under the Home Mortgage Disclosure Act.
It also said borrower-specific risks generally increased, pushing more buyers into non-prime categories.
“Evidence indicates that changes in risk characteristics varied across geographic regions, largely because of substantial house-price appreciation in some locals, and likely caused more borrowers to stretch financially to obtain loans,” the Fed said.
Piggy-back lending — the use of second-lien mortgages to allow buyers to buy homes with down payments less than 20 percent, also grew substantially in 2005 and accounted for more than half the increase in the number of higher-priced loans.
The study considers a non-prime second-lien loan to be five percentage points over comparable Treasuries.