Small Balance Loan Originations in Rural and High-Needs Areas

Fannie Mae is dedicated to supporting homeownership in some of the country's toughest markets, including rural markets that face unique challenges. In our most recent white paper, focused on rural and high-needs rural areas (rural tracts in Lower Mississippi Delta, Middle Appalachia, and Persistent Poverty counties) identified in the Federal Housing Finance Agency's Duty to Serve rule, we highlight the key role these areas play in the origination of small balance loans, defined as loans below $100,000 for this analysis.

According to Home Mortgage Disclosure Act (HMDA) data for 2012 to 2017, small balance loan originations account for an above-average share of single-family site-built home loan originations in all rural and high-needs rural areas. As seen in the figure below, this makes it so that these areas' market shares for small balance loans are nearly double their overall market shares for site-built home mortgage originations. For example, for site-built home purchase mortgages, rural areas account for 17% of the overall market but account for 32% of the small balance purchase mortgage market. For mortgages for manufactured homes, where small balance loans account for the bulk of originations (81% of purchase and 63% of refinance originations), the rural market has a comparable share of loans that are small balance to the market overall, while high-needs areas still exhibit above U.S. average small balance shares. Note that HMDA data includes loans for manufactured homes that are chattel (personal property) loans as well as real estate mortgage loans.

We also find that denial rates are higher for mortgage applications for site-built homes in rural and high-needs areas. This is partly because denial rates tend to increase as loan amounts decrease, and, as shown above, a greater share of loans in these areas are small balance loans. However, even within narrow loan amount ranges, we find that denial rates for site-built home mortgages in these markets are above U.S. averages. Borrowers in these areas tend to have lower credit scores and incomes, both of which correlate with higher denial rates, potentially making these driving factors. By contrast, denial rates for mortgages for manufactured homes in these markets tend to be lower than the U.S. average for this period.

We also found that the rural market is the least concentrated and, more generally, our analysis shows that loans in these areas are more likely to be originated by smaller lenders and commercial banks than in the market overall. In addition to these general market concentration statistics, the paper also provides detailed lists of the top 10 lenders in these areas, per HMDA 2012-2017 data, as well as their share of originations in these markets that are small balance loans. These are useful in identifying the key players in these markets and enabling Fannie Mae to better serve these areas.

Read the full white paper to see our detailed findings.

Nuno Mota
Economist, Economic and Strategic Research

January 23, 2020

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic & Strategic Research (ESR) Group or of research participants reflected in the referenced white paper or this commentary should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in this commentary is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.