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How Could Housing Reform Affect Rural Mortgage Lending?

Barn farmhouseAccording to a new paper published by the Center on Regulation and Markets at the Brookings Institution, rural communities could be dealt a serious blow if housing finance and GSE reform fails to take into account the effect such reform could have on these communities, as well as smaller regional banks and credit unions.

With nearly 74 million people living in rural areas, and 20.9 percent of the rural population being people of color, the rural housing market isn’t something to be overlooked. In a paper entitled “Supporting Mortgage Lending in Rural Communities,” authors Michael Calhoun, Tom Feltner, and Peter Smith turn the spotlight on rural mortgage lending, which they report made up 17.5 percent of the mortgage loans originated in the United States during 2016. According to the report, lenders originated over 1.2 million mortgages in rural areas during 2016

The paper finds the landscape of rural mortgage lending to be fiercely competitive, “with the top ten lenders holding a 20.9 percent market share and 5,486 lenders making loans in rural areas.” While community banks and credit unions form a huge part of rural mortgage lending, the paper points out that the crucial role the GSEs play when it comes to mortgage financing among rural communities. According to the Brookings paper, the GSEs purchased 30.3 percent of all loans originated in rural areas in 2016.

“The percentage of loans sold to the GSEs exceeds the percentage of loans backed by Ginnie Mae in rural areas and among low- and moderate-income borrowers in rural areas,” the paper reads. “The GSE market share exceeded the market share of loans backed by Ginnie Mae nationally, in rural areas, among small lenders lending in rural areas and to low- and moderate-income borrowers in rural areas. Only among rural borrowers of color did loans backed by Ginnie Mae make up a greater share of the market.”

With nearly a third of rural mortgages originated by community banks and credit unions with less than $10 billion in assets, the paper explains that “the GSEs provide critical support to community bank lending in rural areas, purchasing 26.8 percent of all loans originated by community banks in 2016—over ten times the community bank and credit union lending backed by Ginnie Mae.”

According to the paper, in 2016, the GSEs purchased 100,151 purchase and refinance loans from community banks lending in rural areas, or 26.8 percent of the community bank market in rural areas.

The GSEs provide a cash window for community banks, allowing lenders the option of selling individual loans. Moreover, the paper explains that the GSEs do not require that servicing for the loans be transferred to a third party. Thus, the community banks and credit unions can maintain their relationship with the customer, rather than having to outsource the servicing of these mortgages.

According to the paper, “Proposed changes to the housing finance system could substantially reduce the ability of community banks to effectively access mortgage funding and serve consumers in rural communities. Thus, any reform must maintain the key features essential to providing community banks the means to compete effectively.”

You can read the full Brookings Institute paper by clicking here to download a PDF.

About Author: David Wharton

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