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ESSAYS ON ISSUES

THE FEDERAL RESERVE BANK
OF CHICAGO

MAY 1997
NUMBER 117

Chicago Fed Letter
Mortgage trends in
targeted markets
Although the fair lending laws and
the Community Reinvestment Act
(CRA) were enacted in the 1960s
and 1970s, the 1990s have seen the
most rigorous enforcement.1 There
are a number of reasons for the recent increase in regulatory aggressiveness, including the availability of
detailed lending data, public disclosure of said data and ratings, and
a new commitment by the Justice
Department to seriously pursue potential violations of lending guidelines.
In addition, the Federal National
Mortgage Association (Fannie Mae)
and Federal Home Loan Mortgage
Corporation (Freddie Mac), two large
purchasers of mortgages in the secondary market, have been encouraged to increase their purchase of
low-income loans. Thus, the regulatory environment in the 1990s is typically thought to be more effective at
channeling mortgage credit toward
targeted markets, including low-income individuals, or areas, and minority groups or neighborhoods.
In a recent study, we discussed the
evolution of fair lending regulations,
reviewed the economic literature that
serves as a basis for this regulation,
and analyzed recent mortgage lending trends by depository institutions
and their affiliates in response to recent enforcement of the regulation.2
In this Chicago Fed Letter, we summarize the findings from that study and
expand upon them by looking at more
detailed lending patterns for selected
metropolitan statistical areas (MSAs)
in the Seventh Federal Reserve District.
There has been much written recently in the popular press concerning
surges in mortgage lending to targeted groups.3 This is typically attributed
to stricter enforcement of the CRA

and fair lending laws and is measured
as increased lending to low-income
individuals, low-income neighborhoods, and/or minority groups. For
example, data presented in figure 1
suggest that the annual number of
mortgage originations to these targeted
groups increased significantly between
1990 and 1995.4 Originations to both
low- and moderate-income neighborhoods or individuals approximately

preclude this. We can, however, evaluate lending patterns and check for
trends that appear consistent with
the goals of the regulations. To do
this, we compared aggregate lending
trends before and after the recent
changes in regulatory enforcement,
changes in home ownership rates
across minority groups over time,
and the degree of lending to targeted
versus nontargeted groups.

1. Mortgage originations by depository institutions, 1–4 family
By tract income
thousands
240
Moderate
Low
160

By personal income
thousands
600
Moderate
Low
400

80
0

200

1990

’91

’92

’93

’94

’95

By race
thousands
375

1990

’91

’92

’93

’94

’95

’93

’94

’95

By tract minority
thousands
150
>75% minority
50-75% minority
100

Other minority
Black
250
125
0

0

50

1990

’91

’92

’93

’94

’95

0

1990

’91

’92

Source: D. Evanoff and L. Segal, “CRA and fair lending regulations: Resulting trends in
mortgage lending,” Economic Perspectives , Federal Reserve Bank of Chicago, Vol. 20,
No. 6 (November/December 1996), pp. 19–46.

doubled between 1991 and 1995 (the
most recent year for which we had
data). However, there is significant
disagreement in the industry about
the effectiveness of the CRA and fair
lending regulations and whether recent trends can actually be attributed
to regulation.
A full assessment of the success of the
CRA and the fair lending programs
would require a comprehensive cost–
benefit analysis. Data limitations

To analyze the effect on the aggregate level of mortgage activity, we
estimated the relationship between
the quarterly growth rate of the dollar
value of mortgage originations and
variables thought to explain this
trend (e.g., gross domestic product
growth, changes in mortgage rates,
the growth rate of the Consumer
Price Index, and variables to capture
intra-year seasonal effects) from 1970
to 1995. We found no evidence to
support the contention that mortgage

originations were stronger following
the CRA and fair lending regulatory
changes in the 1990s.
To assess the extent to which the supply of mortgage credit to minorities
increased in the 1990s, we examined
home ownership rates over time. The
potential relaxation of credit constraints
induced by the new regulatory environment should have caused minority
mortgage originations and the minority home ownership rate to increase.
Figure 2 displays home ownership
rates from 1976 to 1994. While there
are slight fluctuations, there are no
large changes. The home ownership
rates for minority groups for the 1990s
are similar to (or lower than) those
observed in the mid- to late-1980s.
Although blacks have experienced
the largest growth in mortgage originations during the 1990s, this apparently has had little effect on home
ownership rates.
Although we found no significant
evidence of a shift in the aggregate
lending trend or in home ownership
rates, the new regulatory environment
could still have significantly affected
lending behavior toward the targeted
groups. If the targeted groups constitute a relatively small share of total
mortgage activity, lending increases
may have a minor influence on aggregate activity. There may also have been
a redistribution of lending activity
toward these groups that would not
be observable in the aggregate data.
Yet, this shift would be consistent
with the intent of the regulation.
2. Home ownership rates
percent
75

White
65

Minorities
55

45

Black
35
1976

’79

’82

Source: See figure 1.

’85

’88

’91

’94

To check for such changes, we analyzed growth rates in mortgage originations by neighborhood income.
During the 1980s we found growth
rates in low- and moderate-income
neighborhoods were typically lower
than in high-income areas. Although
at times during the decade the growth
in originations to low-income areas
was quite high (even exceeding
that in the 1990s), it consistently
lagged the growth in more affluent
neighborhoods.
After 1991, mortgage origination
growth was relatively high in low- and
moderate-income neighborhoods.
This is consistent with the contention
that financial institutions responded to
the more vigorous enforcement of
the CRA and fair lending regulations.
We found similar patterns in mortgage application data. This is important because, in addition to being
criticized for not extending credit in
lower-income areas, banks were accused of discouraging (or not encouraging) applications from individuals
in these neighborhoods. However,
the evidence is also consistent with a
strong economy and low interest rates
having a more than proportional
impact on lending to the targeted
groups. At issue, then, is whether
the regulatory changes caused the
increased lending.
In addition to evaluating trends by
income groups, we analyzed recent
mortgage activity based on the race
of the applicant. Although neither
the CRA nor the fair lending laws
explicitly require lenders to change
underwriting criteria and actively
pursue minority mortgage business,
bankers may believe such efforts help
avoid charges of discrimination and
would be viewed favorably during
regulatory examinations. We found
relatively high growth of minority
applications and originations after
1991, particularly among blacks.
We also evaluated denial rates for
ethnic groups. A common question
raised in the literature and popular
press is why minorities typically have
higher denial rates than other applicants. Is it driven by economic differences or lender discrimination? Has

3. Mortgage denial odds ratio
2.8

odds ratio

2.4

Black
2.0

Minorities
1.6
1990

’91

’92

’93

’94

’95

Source: See figure 1.

this difference changed over time,
particularly in the new regulatory environment? Based on the loan decision, after accounting for income and
loan value, we derived the odds of a
minority applicant being denied a
loan relative to those of a nonminority applicant.5 An “odds ratio” with a
value greater than one corresponds
to a higher denial rate for minorities.
The odds ratios for the 1990s, presented in figure 3, suggest that the
odds of a minority applicant being
denied a mortgage are about twice
those of a nonminority applicant.
The declining trend in the ratio suggests a change in the relative treatment
of minorities from 1990 to 1995, i.e.,
lenders became more accommodative to minorities. These results are
consistent with more stringent regulations producing a change in lender
behavior. We should be careful, however, about attributing the change
entirely to such adjustments in lender behavior. There may be additional
factors which need to be considered.
Given these findings, an obvious
question is whether or not the new
regulatory environment has been
effective at channeling credit to underserved areas. Based on growth
rates to targeted groups, one could
argue that the findings appear to be
consistent with a deliberate effort by
banks to alter lending behavior. The
absolute numbers, however, are less
impressive. For example, looking at
the year for which loan growth to
low- and moderate-income neighborhoods was greatest (1993), even if we

ignore economic forces and attribute
the entire growth in depository institution mortgage activity for the year
to the new regulations, it translates to
just over 100 loans and approximately
$8 million per MSA. Similarly, looking at home ownership rates, during
the 1990s approximately 113,000 new
loans would have been required to
move the black ownership rate a single
percentage point. In 1993 mortgage
originations among blacks increased
by approximately 23,000. Again, when
viewed in absolute terms, the changes
are less impressive.
One criticism of our earlier analysis
was that the averages we presented
may have obscured significant lending changes in individual markets.
For example, in response to the
statement that loan growth during
a particularly large growth year represented, on average, 100 loans and
$8 million per MSA, it was argued
that this level of activity would be a
welcome addition in certain smaller
markets.6 To provide more detailed
information, we further analyzed the
mortgage origination data for selected
MSAs in the Seventh Federal Reserve
District (see figure 4). It suggests that
for the MSAs selected (which are large
relative to the national average), growth
rates varied significantly across markets and, in certain markets, exceeded the national average of 31%.
Whether this change should be considered significant is difficult to say.
In Chicago, for example, the 1,600
“new” loans must be put in perspective. Those loans were made to a total market of over six million people
with a low- to moderate-income market of nearly two million people and
600,000 households. Smaller markets
showed significantly smaller absolute
gains. It should be emphasized, however, that this analysis attributes the
entire growth in mortgage activity to
regulatory-induced changes in lender
behavior and ignores any influence
from the business cycle.
Conclusion
Overall, our results are rather mixed.
We found some evidence of changes
in lending patterns which were

4. Changes in mortgage lending: Selected Seventh District MSAs (1992–93)
To low- and moderate-income
neighborhoods
MSA

Number

Chicago, IL

Million dollars

To low- and moderate-income
individuals
Number

Million dollars

1,602 (38.7%)

162.4 (46.7%)

3,370

(31.4%)

268.4

(38.2%)

Indianapolis, IN

704 (45.4%)

36.0 (44.8%)

2,367

(69.1%)

155.1

(89.0%)

Detroit, MI

611 (27.8%)

26.2 (27.0%)

2,833

(32.9%)

145.3

(34.5%)

Milwaukee, WI

392 (29.1%)

19.5 (32.1%)

1,165

(41.1%)

71.7

(51.9%)

Grand Rapids, MI

299 (57.6%)

9.0 (37.7%)

Des Moines, IA

155 (82.9%)

6.6 (99.2%)

393

(42.7%)

18.8

Springfield, IL

103 (43.6%)

2.0 (26.7%)

620

(97.6%)

27.2 (107.7%)

District average
per MSA

138 (33.2%)

9.1 (38.3%)

504

(44.2%)

30.0

1,759 (109.1%)

68.7 (100.1%)
(48.2%)

(52.0%)

Source: HMDA data. MSAs are as defined in the 1993 data.

consistent with changes in bank lending behavior encouraged by the new
regulatory environment. However,
when viewed in absolute terms of number or dollar value of loans instead of
growth rates, the changes appear less
impressive. It should be emphasized
that we have also said nothing about
the cost of implementing the regulations relative to the benefits. Ideally,
we would quantify both the benefits
and costs of regulatory changes. Data
limitations do not allow for such a detailed analysis. Future analysis should
monitor trends in targeted markets
and attempt to distinguish between
market-driven and regulatory-induced
mortgage activity.
—Douglas D. Evanoff
and Lewis M. Segal

1
See Government Accounting Office,
Community Reinvestment Act: Challenges
Remain to Successfully Implement CRA (1995),
and J. Macey and G. Miller, “The Community Reinvestment Act: Economic analysis,”
Virginia Law Review (March 1993).
2
D. Evanoff and L. Segal, “CRA and fair
lending regulations: Resulting trends in
mortgage lending,” Economic Perspectives,
Federal Reserve Bank of Chicago, Vol. 20,
No. 6 (November/December 1996),
pp. 19–46.
3
See, for example, L. Lindsey, “Home
ownership opportunities in a deregulatory
environment,” Marketwise, Federal Reserve
Bank of Richmond (1996).

4
The data are for loans on one to four
family owner-occupied residences in MSAs
by depository institutions or their affiliates.
Details concerning the data are in Evanoff
and Segal (1996), particularly notes 33
and 40.
5
There could obviously be additional factors beyond income and loan amount
which drive the underwriter’s decision.
6
See Dean Anason, “Was CRA really behind
minority lending gains?,” American Banker
(January 7, 1997), p. 2.

Michael H. Moskow, President; William C. Hunter,
Senior Vice President and Director of Research;
Douglas Evanoff, Assistant Vice President, financial
studies; Charles Evans, Assistant Vice President,
macroeconomic policy research; Daniel Sullivan,
Assistant Vice President, microeconomic policy research;
William Testa, Assistant Vice President, regional
programs; Anne Weaver, Manager, administration;
Helen O’D. Koshy, Editor.
Chicago Fed Letter is published monthly by the
Research Department of the Federal Reserve
Bank of Chicago. The views expressed are
the authors’ and are not necessarily those of
the Federal Reserve Bank of Chicago or the
Federal Reserve System. Articles may be
reprinted if the source is credited and the
Research Department is provided with copies
of the reprints.
Chicago Fed Letter is available without charge
from the Public Information Center, Federal
Reserve Bank of Chicago, P.O. Box 834,
Chicago, Illinois 60690-0834, tel. 312-322-5111
or fax 312-322-5515. Chicago Fed Letter is also
available on the World Wide Web at http://
www.frbchi.org.
ISSN 0895-0164

Tracking Midwest manufacturing activity
Manufacturing output indexes, 1992=100
132

Manufacturing output indexes
(1992=100)
CFMMI
IP

Feb.

Month ago

Year ago

125.3
119.8

124.0

119.4
114.8

118.9

CFMMI
122

Motor vehicle production
(millions, seasonally adj. annual rate)
Feb.

Month ago

Year ago

6.1

6.0

6.1

Light trucks 6.0

6.1

5.6

Cars

IP

112

Purchasing managers’ surveys:
net % reporting production growth
Mar.

Month ago

Year ago

MW

64.3

60.1

50.5

U.S.

56.8

59.5

47.2
102

For the first time since June 1996, all sectors of the CFMMI posted positive
monthly growth. In addition, with the exception of the machinery sector, all
other sectors in the region’s index outperformed the nation’s index. The
growth in the region’s machinery sector has lagged that of the nation for the
past six months. The industrial machinery and equipment component, in particular, has underperformed its national counterpart for a year.

1997

Sources: The Chicago Fed Midwest Manufacturing
Index (CFMMI) is a composite index of 16 industries,
based on monthly hours worked and kilowatt hours.
IP represents the Federal Reserve Board’s Industrial Production Index for the U.S. manufacturing
sector. Autos and light trucks are measured in annualized units, using seasonal adjustments developed by the Board. The purchasing managers’
survey data for the Midwest are weighted averages
of the seasonally adjusted production components
from the Chicago, Detroit, and Milwaukee Purchasing Managers’ Association surveys, with assistance
from Bishop Associates, Comerica, and the University of Wisconsin–Milwaukee.

Chicago Fed Letter

The Chicago Midwest Manufacturing Index (CFMMI) rose 1.1% in February to
a record level, rebounding from January’s 0.2% decline. The Federal Reserve
Board’s Industrial Production Index for manufacturing increased by a slightly
slower 0.8% for the same period.

1996

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1995

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