Public 2018 HMDA reveals little variation in debt ratios across metro areas

Mortgage professionals, policy makers, homebuyer’s, real estate agents, and prepurchase housing counselors will be curious to know about mortgage affordability in a neighborhood, city, county, or metro area. Fortunately, the public HMDA data provides a plethora of debt ratio information for home purchase loans that closed in 2018. Using the debt ratios, I will attempt to answer one research question: Is there substantial variation between metro areas in debt ratios?

This blog focuses in particular on loans meeting the following parameters:

• Conventional
• First lien
• Home purchase
• Owner occupied as a principal or second residence
• Site-built 1-4 family properties
• Closed-end loans

The table below includes the top 50 MSAs and Metropolitan Divisions for this mortgage “pseudo-product”. Together, these metros account for 53% (1.28 million of 2.40 million) loans within the pseudo-product.

The table shows that there’s very little variation across metro areas in the share of loans where the debt ratios exceed 36% and 45%. This illustrates that, within the sample, borrower debt profiles are very similar. The probable explanation is that most of the loans included would have been underwritten according to the same GSE guidelines.

San Jose MSA has the highest share of loans (53.2%) where the debt ratio exceeds 36%. The lowest is Kansas City MSA at 49.3%. This is a 3.9% difference. There is also a 2.6% difference between the top and bottom metros in terms of the share of loans where the debt ratio exceeds 45%.

The 36% and 45% thresholds are used because of Fannie Mae’s guidance on maximum debt ratios:

For manually underwritten loans, Fannie Mae’s maximum [debt] ratio is 36% of the borrower’s stable monthly income. The maximum can be exceeded up to 45% if the borrower meets the credit score and reserve requirements reflected in the Eligibility Matrix.

Notes:

1. Debt ratios are not reported: on home purchase loans that closed prior to 2017, where the debt ratio was not used in underwriting, or where the reporting lender claims a debt ratio reporting exemption under Senate Bill 2155.
2. In the context of this blog, the term “debt ratio” is used to refer to back-end ratios computed as housing expense plus other obligations (e.g., payments on student loan debt, car loan debt, etc.), divided by income.