section 6
SECTION 6 CRA IN METROPOLITAN AREAS Mortgage lending patterns will differ from one market area to the next. These differences emerge, in part, from historical variation in the spatial pattern of housing and economic development in particular areas, as well as the history of state and local legislation and regulations governing this development. While regulation of mortgage lending is largely a federal matter, state and local government intervention into mortgage and housing markets has also been important. This is particularly true of historical variation in the laws relating to bank branching and to mergers and acquisitions. Local laws governing housing construction and land use have similarly been important. Recognizing the diversity of experiences across markets, this study conducted group discussions and in-depth interviews with lenders, community advocates, government officials and housing market experts around the U.S. This section begins reporting the findings of this more qualitative portion of the study by documenting metropolitan- and tract-level variation in housing and mortgage markets. It then explores variation in the impact of CRA in the four metropolitan areas selected for detailed review and assessment and presents spatial analysis of lending data at the census tract level. The next section examines trends in lending from a rural perspective. The final two sections focus on CRA issues, first from the perspective of lenders in each of these metropolitan areas, and then from the perspective of community-based organizations operating there.
MSA LEVEL CHARACTERISTICS OF HOUSING AND MORTGAGE MARKETS Reflecting a key difference between housing markets, several California lenders interviewed for this study noted that some Metropolitan Statistical Areas (MSAs) simply do not have housing stock that is affordable to well qualified, credit- and homeownership-counseled, lower-income prospective borrowers. Accompanying this housing market variability is similarly significant variation in metropolitan area financial services markets. These differences are a result of the long-term economic performance of the area, the strength and national ambitions of locally-based lenders, demand for mortgage credit, and state-level banking regulations, among other factors. From a CRA perspective, there are two important implications of metropolitan area variation in housing and financial services markets. First, CRA-eligible lending is significantly more challenging for lenders in some MSAs than others. Second, vastly different shares of lending pass through the CRA regulatory apparatus in some places than others. Consequently, CRA’s effect from one MSA to the next varies substantially based on MSA characteristics and the MSAspecific structure of the mortgage industry there. A. Variation Across Metropolitan Areas The demand for mortgage credit depends in part on the relationship between home prices and incomes in a given area. In areas where housing costs are high relative to income, there may be little opportunity to lend to lower-income families. At the same time, because larger metropolitan areas tend to have a more diverse income mix, they may present lenders with greater opportunities to serve CRA-eligible borrowers. Conversely, smaller MSAs with more tightly bunched income distributions may have more CRA-eligible lending, because CRA-eligible
borrowers in these places have incomes that are, in absolute terms, relatively close to the average, presenting lenders in these places with lower risk profiles. Exhibit 32 sheds some light on this issue by examining the distribution of CRA-eligible lending and assessment area lending by MSA size. It shows a weak negative relationship between CRAeligible share and MSA size for all but the very largest MSAs (those with populations exceeding four million). The assessment area share results decline steadily from 36 percent for the smallest MSA to 26 percent in those metropolitan areas whose population is between two and four million, before settling up near the average for the largest MSAs. Exhibit 32: CRA-Eligible and Assessment Area Shares of Home Purchase Lending Vary by MSA Size
MSA Size (thousands) 4,000 Total
Source: Joint Center Enhanced HMDA Database
Keeping in mind the structure of the mortgage lending industry is helpful in trying to make sense of these figures. Larger markets offer economies of scale to participants, making them attractive to independent mortgage companies and affiliates of depositories looking to expand their activities. These places are therefore likely to be more competitive, and to draw the most successful players in the mortgage lending industry, the activities of which are often not covered by CRA. In light of the growth of out of area activities of CRA-regulated institutions noted throughout the report, it seems likely that their presence is the factor pushing CRA-regulated share down in these larger markets. Smaller markets offer limited economies of scale and are consequently more likely to be left to indigenous depository lenders. Exploring the notion of cross-MSA variability further, Exhibit 33 looks at the share of lending that goes either to lower-income borrowers or areas (‘CRA-eligible share’) in all 301 MSAs examined in this study. The exhibit indicates that lower-income lending can account for as little as one-in-five or as much as half of all home purchase loans originated in individual MSAs. CRA-eligible share, in fact, ranges from 19 percent in New York City, to 55 percent in Decatur, Alabama, with a median value of 36 percent (in Tulsa, Oklahoma). These figures appear to fit loosely with the typology described above, where small MSAs have larger shares of lowerincome lending and large ones have smaller shares. Pursuing MSA-level variability at a finer grain, however, indicates that places with few lowerincome loans are not particularly homogeneous with respect to population (Exhibit 34). Instead, lower-income share is more directly related to income and housing costs, as CRA-eligible lending shares tend to be lowest in higher cost MSAs in California and in the New York metropolitan area. In contrast, most of the ten MSAs with the highest shares of lower-income borrower and area lending are located in affordable areas in the Midwest. Interestingly, many of the MSAs
Exhibit 33: CRA-Eligible Share of Home Purchase Lending Varies Widely Across MSAs
80
Number of MSAs
70 60 50 40 30 20 10 0
MSA LEVEL CHARACTERISTICS OF HOUSING AND MORTGAGE MARKETS Reflecting a key difference between housing markets, several California lenders interviewed for this study noted that some Metropolitan Statistical Areas (MSAs) simply do not have housing stock that is affordable to well qualified, credit- and homeownership-counseled, lower-income prospective borrowers. Accompanying this housing market variability is similarly significant variation in metropolitan area financial services markets. These differences are a result of the long-term economic performance of the area, the strength and national ambitions of locally-based lenders, demand for mortgage credit, and state-level banking regulations, among other factors. From a CRA perspective, there are two important implications of metropolitan area variation in housing and financial services markets. First, CRA-eligible lending is significantly more challenging for lenders in some MSAs than others. Second, vastly different shares of lending pass through the CRA regulatory apparatus in some places than others. Consequently, CRA’s effect from one MSA to the next varies substantially based on MSA characteristics and the MSAspecific structure of the mortgage industry there. A. Variation Across Metropolitan Areas The demand for mortgage credit depends in part on the relationship between home prices and incomes in a given area. In areas where housing costs are high relative to income, there may be little opportunity to lend to lower-income families. At the same time, because larger metropolitan areas tend to have a more diverse income mix, they may present lenders with greater opportunities to serve CRA-eligible borrowers. Conversely, smaller MSAs with more tightly bunched income distributions may have more CRA-eligible lending, because CRA-eligible
borrowers in these places have incomes that are, in absolute terms, relatively close to the average, presenting lenders in these places with lower risk profiles. Exhibit 32 sheds some light on this issue by examining the distribution of CRA-eligible lending and assessment area lending by MSA size. It shows a weak negative relationship between CRAeligible share and MSA size for all but the very largest MSAs (those with populations exceeding four million). The assessment area share results decline steadily from 36 percent for the smallest MSA to 26 percent in those metropolitan areas whose population is between two and four million, before settling up near the average for the largest MSAs. Exhibit 32: CRA-Eligible and Assessment Area Shares of Home Purchase Lending Vary by MSA Size
MSA Size (thousands) 4,000 Total
Source: Joint Center Enhanced HMDA Database
Keeping in mind the structure of the mortgage lending industry is helpful in trying to make sense of these figures. Larger markets offer economies of scale to participants, making them attractive to independent mortgage companies and affiliates of depositories looking to expand their activities. These places are therefore likely to be more competitive, and to draw the most successful players in the mortgage lending industry, the activities of which are often not covered by CRA. In light of the growth of out of area activities of CRA-regulated institutions noted throughout the report, it seems likely that their presence is the factor pushing CRA-regulated share down in these larger markets. Smaller markets offer limited economies of scale and are consequently more likely to be left to indigenous depository lenders. Exploring the notion of cross-MSA variability further, Exhibit 33 looks at the share of lending that goes either to lower-income borrowers or areas (‘CRA-eligible share’) in all 301 MSAs examined in this study. The exhibit indicates that lower-income lending can account for as little as one-in-five or as much as half of all home purchase loans originated in individual MSAs. CRA-eligible share, in fact, ranges from 19 percent in New York City, to 55 percent in Decatur, Alabama, with a median value of 36 percent (in Tulsa, Oklahoma). These figures appear to fit loosely with the typology described above, where small MSAs have larger shares of lowerincome lending and large ones have smaller shares. Pursuing MSA-level variability at a finer grain, however, indicates that places with few lowerincome loans are not particularly homogeneous with respect to population (Exhibit 34). Instead, lower-income share is more directly related to income and housing costs, as CRA-eligible lending shares tend to be lowest in higher cost MSAs in California and in the New York metropolitan area. In contrast, most of the ten MSAs with the highest shares of lower-income borrower and area lending are located in affordable areas in the Midwest. Interestingly, many of the MSAs
Exhibit 33: CRA-Eligible Share of Home Purchase Lending Varies Widely Across MSAs
80
Number of MSAs
70 60 50 40 30 20 10 0
