Understanding Rural Mortgage Lending

In our new Fannie Mae Working Paper, we use both public and Fannie Mae data to provide a set of facts on the rural single-family conventional mortgage lending market as well as highlight key differences and trends between urban and rural lending. Although there are multiple definitions of what constitutes a rural area, this work makes use of a single definition: the Federal Housing Finance Agency 2015 Proposed Duty to Serve (DTS) rule definition.¹

Under the above definition, rural areas account for one fifth of total single-family conventional mortgage loan originations in the U.S., by loan number. House prices in rural areas are lower than in urban areas, yet they fluctuated less during the housing crisis. On average, rural borrowers are older and have lower incomes than urban borrowers, yet, given rural loans are typically for smaller amounts, back-end debt-to-income ratios are similar across the two groups.

Our findings illustrate how rural mortgage lending may face a different set of challenges when compared with mortgage lending in an urban setting. We also confirm certain well-known facts regarding rural housing, namely, that rural mortgaged properties are more likely to be manufactured homes and have larger lot sizes. However, we highlight how rural markets are heterogeneous, indicating that one approach will not suffice if lenders are to effectively target all rural areas.

Our study presents an analysis across five key areas. Key findings from those sections include the following:

Differences in the economic and demographic environment across urban and rural areas

• The rural share of the U.S. population is decreasing and aging at a faster rate than the urban population.
• Rural area incomes are lower and the poverty rate is higher in these areas. However, rural areas experienced a less dramatic decrease in incomes stemming from the Great Recession.
• Rural employment rate and establishments per capita have been falling relative to urban areas since 2000. On the other hand, for those who have a job, rural wages have been growing relative to urban.
• However, rural employment is more concentrated in fewer industry groups and may therefore be more susceptible to industry-specific shocks to employment.
• Rural home prices rose more and had a less severe drop post-2008 than urban home prices.

Rural conventional mortgage market sizing
Using Home Mortgage Disclosure Act (HMDA) data, we estimate that:

• In 2014, rural mortgage loans account for 20 percent of total single-family conventional mortgage loans and 14 percent of loan amount.
• Rural mortgage lending had a less pronounced downturn during the housing crisis.
• Rural markets are unevenly distributed across the U.S. and are more concentrated in less populous states – i.e., rural loans account for a greater share of total mortgage loans in these areas.

Differences between urban and rural mortgage lending
Using a richer loan dataset of Fannie Mae acquisitions from 2004 to 2015, this report shows that:

• On average, rural borrowers have lower incomes, are more likely to be self-employed workers, and are less likely to be first-time buyers.
• Rural mortgaged properties are more likely to be manufactured housing and second homes, and more likely to have a low appraisal relative to purchase price.
• In addition, rural mortgaged properties are less likely to be investor properties, and tend to have larger lot sizes.
• A greater share of rural mortgaged properties have been built in the last decade when compared with urban properties, suggesting that fewer supply constraints exist in these areas.
• Rural mortgage loans tend to be for smaller amounts, are less likely to be adjustable-rate mortgages, more likely to be fixed-rate mortgages with terms shorter than 30 years, and have marginally higher note rates and spreads than urban loans.

Differences across rural areas

• States where rural loans account for a greater percentage of total state originations have younger borrowers with better credit scores rural borrowers, and have more manufactured housing rural loans.
• States with both a high rural share and a large volume of total U.S. rural mortgage loans have lower incomes, loan amounts, and back-end debt-to-income (DTI) ratios (the ratio of total monthly debt to income).
• Although rural loans are on average more likely to be for manufactured housing, there is a clear geographic concentration of such loans in the South and Southwest.
• The share of rural loans for owner-occupied homes is highest in Midwestern states.

Trends in rural lending differences since 2004

• A number of changes in the relative differences in mortgage lending across the urban/rural divide occurred post-2008, namely:
  • Rural first-time buyer share fell as second home buyer share increased relative to urban.
  • Rural borrower incomes fell and back-end DTI increased relative to urban.
  • Gross property living area differences diminished.
• At the same time, differences in mortgage lending across rural areas diminished post-2008.
• While the aforementioned changes were largely influenced by the housing market collapse, changes in relative borrower age between urban and rural (rural aging relative to urban) and across rural areas (age differences widening across rural areas) have been ongoing throughout the last decade.

Read the Fannie Mae Working Paper “Rural Mortgage Lending Over the Last Decade” for the full analysis and findings.

Nuno Mota
Economist
Economic & Strategic Research Group

October 27, 2016

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic & Strategic Research (ESR) Group included in these materials 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 these materials 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.