Rural Foreclosures: The Hidden Heartland Inventory

By Steve Cook Real Estate Economy Watch   |   Dec. 6, 2010 at 10:10 AM   |   0 comments

Ever heard of the Shadow Inventory? There's also anventory of Heartland foreclosures that is completely hidden.

Nobody knows how many rural homeowners are facing foreclosure or have lost their homes during the housing crisis because we don't collect data from small lenders or lenders that operate exclusively in rural areas. Nor do we know trends in defaults and delinquencies.

The Federal Reserve expects 2.25 million foreclosure filings this year, same number again next year and about 2 million more in 2012, according to Fed Governor Elizabeth Duke. Those estimates, however, are based on data that does not don't include a large chunk of rural America, according to a recent report from the Housing Assistance Council.

As a result, the scope of the national foreclosure crisis may be significantly larger than estimated and we don't know what's going on with homeowners in the heartland as they struggle with many of the same factors that plague urban and suburban owners: unemployment, falling values, underwater mortgages, difficulties obtaining credit and shrinking numbers of buyers. The heartand's foreclosure inventory is invisible.

The Federal government relies upon data gathered under the authority the Home Mortgage Disclosure Act (HMDA), which requires mortgage lending institutions to collect and publically disclose information on home loan applications and purchases. HMDA disclosures are used to help determine whether institutions are adequately serving their communities' housing finance needs, to facilitate enforcement of the nation's fair lending laws, and to inform investment in both the public and private sectors. In 2009, HMDA provided information on almost 19.5 million loan records from 8,124 lending institutions.

However, HMDA exempts lenders that operate exclusively in nonmetropolitan areas and lenders with assets less than $39 million in 2010, 70 percent of which are headquartered in rural counties and likely represent one of the only sources of credit in some communities. Approximately 81 percent (over 3,000) of all institutions headquartered in nonmetropolitan counties in 2009 had less than $250 million in assets.

Even the Federal Reserve Board's own economists state, "While HMDA coverage for MSAs is quite complete, reporting exceptions lead to significant distortions in the coverage of rural areas in HMDA. For these reasons, rural areas are often dropped from analysis of HMDA."

The most widely used source of data on foreclosure filings and sales is RealtyTrac, a web site that sells subscriptions to foreclosure buyers, primarily investors. RealtyTrac obtains data on only 2200 of the 3,143 counties and county-equivalents in the United States. The missing counties are generally less populous, more rural and less profitable for RealtyTrac to cover. RealtyTrac's foreclosure data has been used by the Federal Reserve, FBI, U.S. Senate Joint Economic Committee and Banking Committee, U.S. Treasury Department, and numerous state housing and banking departments to help evaluate foreclosure trends and address policy issues related to foreclosures.

Another reason our understanding of rural foreclosures is reporting on lending for manufactured homes, which are an important source of housing, accounting for 7 percent of occupied housing units nationally. In rural areas manufactured housing makies up 16 percent of rural homes, more than twice the national rate.

In 2002, HMDA was expanded to include manufactured homes whose credit risks tend to be higher than for site-built homes, and consequently carry relatively high interest rates. Yet, data has not been consistent. By 2006, however, 83 percent of the reported manufactured home loans were reported by just ten lenders.

In light of the skimpy data, estimates on the number of foreclosures in rural areas vary widely. As a result, a definitive estimate of the number of rural households experiencing housing foreclosure cannot be specified at this time.

The recently enacted Dodd-Frank consumer protection bill contains a provision that will create a new default and foreclosure database to be jointly administered by HUD and the new Consumer Financial Protection Bureau (CFPB).

"While details of the proposed database are currently limited, it is hoped that this resource will provide much needed information on the foreclosure situation in rural America. The Dodd-Frank bill also mandates improvements to HMDA," says the Housing Assistance Council, which advocates that enhanced reporting of manufactured home loans to include information on personal property lending should also be incorporated into HMDA data and comprehensive loan delinquency and foreclosure data should be made available for communities nationwide.

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