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FEATURE of REO onto the market for the purpose of renting out the prop- erties, I believe the competition for single-family homes in these markets will pick up and create a floor for housing prices." "We are a long way from realizing a recovery in the U.S. mortgage market because we are a long way from a recovery in the U.S. housing market," Badal said. "It is also important to remember that, in recent years, the consumer has accounted for two-thirds of the U.S. economy. But much of that performance was based on being able to use their homes as ATM machines, by refinancing out cash to spend on other things. With the tremendous loss of eq- uity in housing over the last four years, the consumer not only does not have equity to borrow, many consumers are in negative equity territory. Plus, many lenders are no longer interested in cash-out refinances or have initiated much more conservative loan under- writing standards for these loans." Whether small mortgage banking companies will flourish or founder in today's mortgage lending environment remains to be seen, Cecala said. "Clearly, the legacy firms that did no servicing and relied on serving as a broker or correspondent to large lend- ers are an endangered species. But a new breed of mortgage company that can deal directly with Fannie, Freddie, and Ginnie and can manage a small servic- ing portfolio could be the wave of the future. Time will tell," he said. "There seems to be little reason for optimism as far as any near-term recovery of the mortgage market goes. There are just too many factors—rang- ing from a depressed housing market, very tough underwriting standards, and the lack of a non- agency secondary market—work- ing against it." The key to housing, according to Badal, is jobs. "Another problem affecting the housing and mortgage industries is the unemployment level in the U.S.," he said. "Without a job, how does one qualify for a mortgage to buy a home? Obviously, they don't. And the actual unemployment rate is a great deal larger than the rate published by the federal govern- ment. By leaving out those people no longer looking for a job, the un- employment rate statistic is forced lower than it should be. Whether a person is or is not looking for a job, he or she still can't qualify for a mortgage to buy a home." Neighborhood Stabilization Program (NSP) to provide emergency assistance to state and local governments trying to support neighborhoods experiencing high levels of property abandonment and foreclosure. The funding was tar- geted to households or individuals with incomes less than 120 percent of the broader area median income. In December 2010, federal bank regulatory agencies revised the regula- tions for the Community Reinvestment Act (CRA) to support the stabilization of communities hard hit by a jump in foreclosures by encouraging covered institutions to support the NSP with loans and investments and by provid- ing services to support NSP activities. Under the December 2010 initiative, banking institutions would receive CRA consideration for activities in NSP-targeted neighborhoods, with ad- ditional incentives for these institutions to leverage government funds targeted to these areas and populations. Funds may be used for the purchase or rehabilitation of abandoned or foreclosed properties, the demolition of unsafe structures, and the redevel- opment of demolished or vacant prop- erties. NSP funds can also be used to help homebuyers purchase properties. Though a nationwide program, NSP participation requirements may differ across states and cities. Keeping Score I estimates which neighborhoods are likely to be experiencing high rates of foreclosure and mortgage delinquen- cies. The model assigns an NSP score ranging from 1 to 20 to each census tract. Census tracts with NSP scores in the top quintile ("high-NSP tracts"), those with scores of 17 to 20, are eligible for aid. "Lower-NSP tracts," those with scores below 17, are not generally eligible for aid unless they are in states that have very few tracts with NSP scores above 17, in which case the state is permitted to use a lower-threshold NSP score for identi- fying areas eligible for NSP funds. By its nature, though, the NSP scoring identifies areas that may be a higher risk for lenders. The HMDA data can be used to evaluate mortgage activity across all areas scored for the NSP program. It is possible, according to Fed re- searchers Robert B. Avery, Neil Bhutta, Kenneth P. Brevoort, and Glenn B. Canner, that recent loan flows may have been affected by the NSP program. "Substantial differences between n deciding which neighborhoods to target, HUD relied on a statistical model—built with HMDA data—that high-NSP tracts and lower-NSP tracts existed long before the recent difficulties in mortgage and housing markets emerged," they noted. "In the 2000 census, high-NSP tracts were characterized by higher minority concentrations and lower relative- income levels than lower-NSP tracts. Similarly, lending activity in these tracts before the subprime crisis was notably different." Lending in the high-NSP tracts, they observed, was characterized by elevated rates of loan denial; larger incidences of higher-priced loans, piggyback loans, and non-owner- occupant lending; and smaller shares of lending by lenders subject to the CRA. New homebuyers in areas with high-NSP tracts, they said, "also tended to have lower credit scores than buyers in other areas." Lending activity in high-NSP tracts, they added, "has fallen faster than in lower-NSP tracts," using 2005 as a benchmark. "In 2005, more home-purchase loans were extended in high-NSP tracts than in tracts in any of the other NSP score quintiles," they found. "Since 2005, declines in home- purchase lending volumes have been particularly steep in high-NSP neigh- borhoods. In 2010, home-purchase lending in high-NSP tracts was down 75 percent from 2005 levels. This decline was much more rapid than that experienced in the other NSP quintiles. As a result, in 2010, fewer loans were originated in the high-NSP tracts than in any of the other NSP quintiles, a reversal of the pattern observed in 2005." The steeper decline in home- purchase lending in the high-NSP neighborhoods may have been affected by the role of the "sand states" (Arizona, California, Florida, and Nevada), they said. "House price declines have been particularly steep in these states, and previous HMDA analyses have shown that mortgage lending has fallen more steeply in these states since the height of the housing boom," the analysts wrote. High-NSP tracts are more likely to be located in sand states, they observed, adding the declines in lend- ing volumes that are observed for the high-NSP tracts do not simply reflect geographic differences." They also found a difference in owner occupancy in high-NSP tracts, which they said could have contrib- uted to the steeper price declines. "Since non-owner-occupant lending has fallen more rapidly than lending for owner-occupied proper- ties across the board, this finding can help explain some of the more rapid decline in the lending activity in high- NSP neighborhoods," they said. The "steeper decline" in lending in high-NSP neighborhoods appears to be broadly based in that it is not limited to non-owner-occupant lend- ing or lending in specific states. It reflects, they added, relying on the HMDA data, "a changing pattern of home-purchase activity by higher- income borrowers." Loans to lower-income borrowers dropped more slowly between 2005 and 2010 in high-NSP tracts (31 per- cent) than in lower-NSP tracts (36 percent), while in high-NSP tracts, loans to higher-income borrowers were 84 percent lower than they had been in 2005. "This changing income pattern of homebuyers suggests a challenge that efforts like the NSP confront in attempting to stabilize neighbor- hoods," they concluded. THE M REPORT | 29