Targeting the Underserved: An Evaluation of State MRB Programs

Author: Stephanie Moulton

Dissertation School: Indiana University

Pages: 60

Publication Date: 05/2009

Availability:
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Access Number: 5032

Abstract:

Public initiatives supporting homeownership for low- and moderate-income homebuyers typically reflect dual purposes: to provide access to homeownership for otherwise underserved populations, and to ensure sustainable homeownership. The extent to which both purposes are realized depends in part on the actors on the ground implementing the initiatives. In particular, mortgage lenders can play a substantial role in both access to homeownership and mortgage sustainability. Research has found that mortgage lenders can be significant determinants of affordable, sustainable lending, as through Community Reinvestment Act lending (Avery, Bostic, Calem, and Canner 1999; Ding et al. 2008; Schwartz 1998; Shlay 1999); however, recent research on subprime mortgage loans also suggests that lenders can contribute to the uptake of high cost loans and increased mortgage delinquencies and foreclosures (Alexandar et al. 2002; Ashton 2008; Lax et al. 2004).

This analysis focuses on the role of private mortgage lenders originating loans through one particular public homeownership initiative: the Mortgage Revenue Board (MRB) program. MRBs are tax-exempt private activity bonds issued by state or local housing finance agencies (HFAs). HFAs sell the bonds to investors at reduced interest rates (because the interest earned is tax-exempt), and use the savings to buy down the interest rate on private mortgages to low-income borrowers. Recent legislation passed by Congress in 2008 and administrative actions by the U.S. Treasury in 2009 have the potential to increase both the demand and supply of MRB subsidized mortgages (H.R. 3221; U.S. Treasury 2009). It is thus critical to evaluate the factors that contribute to the ability of the MRB program to provide access to underserved "needy" homebuyers and to ensure sustainable homeownership. While the MRB loan product is targeted to low- and moderate-income homebuyers, there has been significant controversy over the years about the ability of the program to serve a truly "needy" group of borrowers (Cooperstein 1992; Durning 1992). Further, in light of the recent mortgage crisis, there is concern that affordable loan programs, like the MRB program, will become the next "subprime" strategy if access to homeownership is provided without sufficient emphasis on long-term sustainability.

In many states, MRB mortgages are provide to low- and moderate-income homebuyers through private lending institutions. Thus, the ability of the MRB program to serve a needy group of borrowers and to ensure mortgage sustainability depends in part on the practices of the participating lenders implementing the program "on the ground." However, while recent studies suggest that "lenders matter" (Alexander et al. 2002; Ashton 2008; Ergungor 2007a; 2007b; Stegman et al. 2007; Williams and Nesiba 1997), little is known about the specific lending characteristics that contribute to mortgage outcomes. This analysis seeks to build on this research to investigate specific lender characteristics that help explain variation in borrower outcomes between lending institutions. In particular, which lender characteristics are more significantly associated with serving needy borrowers and/or ensuring mortgage sustainability - both at the institutional level (including lending structure and lending patterns) and at the loan originator level (including originator marketing and homebuyer education practices)?

Through a mixed-methods research design, this analysis evaluates the relationship between originating lender characteristics and borrower outcomes (need and sustainability) in the MRB program in three states (Florida, Indiana, and Ohio) from 2004-09, providing mortgages to more than 58,000 borrowers through more than 300 lending institutions during the study period. The quantitative, multi-level analysis combines three levels of data through hierarchical linear modeling (HLM): 1) individual level data on MRB borrower characteristics and mortgage payment performance from the state housing finance agencies, including controls for both the individual and the neighborhood of home purchase; 2) loan originator level data collected through a survey of loan originators participating in the MRB program in the three states, including information on the homebuyer education and marketing practices; and 3) lending institution level data on the lending practices of the participating lending institutions as a whole in the state, compiled largely through publicly available Home Mortgage Disclosure Act (HMDA) data. The findings of the quantitative analysis are discussed with insights from qualitative, face-to-face semi-structured interviews with representative (both administrators and loan originators) from 12 of the participating lending institutions in the three states.

This manuscript proceeds as follows. First, background on the MRB program is provided. Second, a brief review of previous research highlights this potential importance of both lending institution characteristics and loan originator characteristics for borrower outcomes. Third, data sources, key variables and methods are discussed for both the quantitative and qualitative analyses, followed by a presentation of the results. Finally, the manuscript concludes by discussing the key findings, and implications for policy and practice moving forward.

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