Fannie Mae economists uncover hidden strengths in rural areas
The 2016 presidential election underscored differences in culture, income, and demographics among voters — including wrestling with distinctions between urban and rural communities. For lenders and servicers, rural housing will be an increasingly important market in the coming years.
The Federal Housing Finance Agency (FHFA) finalized its Duty to Serve rule in December. The rule directs Fannie Mae and Freddie Mac — “the enterprises” — to increase the amount of investment capital for mortgage financing for very low-, low-, and moderate-income households. The FHFA is encouraging particular focus on three underserved markets: manufactured housing, affordable housing preservation, and rural areas.
The enterprises need to target rural areas to reach these households. There is a need for additional data about the rural housing market to provide a “broader picture” for the industry.
There is a knowledge gap on what the issues are in these areas and on the simple facts. For example, there is no requirement for some smaller lenders to report lending activity as part of the Home Mortgage Disclosure Act (HMDA). These smaller lenders more often operate in rural areas. Also, there is no requirement for lenders operating exclusively outside of metropolitan areas to report to HMDA. Both these factors contribute to a lack of data on mortgage markets in rural areas.
Conventional wisdom suggests that people in rural communities bore the brunt of the 2008 financial crisis and the Great Recession — including heavy job losses. However, new research by Fannie Mae’s Economic and Survey Research (ESR) Group suggests that rural communities are economically resilient. And the people who live in rural areas tend to approach the housing market in strikingly different ways than the typical urban borrower.
In our working paper — “Rural Mortgage Lending Over the Last Decade” — we studied U.S. government publications for differences between urban and rural communities. We then examined loans Fannie Mae acquired between 2004 and 2015 in these areas.
We found there’s still a lot to learn.
According to the FHFA’s definition, “high-needs” rural regions and populations include middle Appalachia, the lower Mississippi Delta, Colonias, Native American communities in reservations, and agricultural workers.
There are a lot of different challenges across these areas. And since first proposing the Duty to Serve rule, the FHFA has changed its definition. Under the new definition, the rural population is slightly smaller.
The FHFA defines a “rural area” as:
1) A census tract outside of a metropolitan statistical area (MSA). That’s according to the Office of Management and Budget’s designation.
2) Or a census tract that the Department of Agriculture designates as being outside an MSA’s Urbanized Areas and that is outside of tracts with a housing density of more than 64 housing units per square mile.
The definition decreased the number of exurban and suburban areas classified as rural.
Differences between Rural and Urban Economies
The rural U.S. population is falling and it is aging faster than the urban population. The working paper notes that people living in rural areas fell from a 24.8 percent share of the U.S. population to 23.0 percent from 2010 to 2014. And the median age in rural areas rose from about 37 in 2000 to about 41 in 2014.
Median income is lower in rural areas and poverty is higher. But the 2007-2008 recession has had a less adverse impact on these metrics in rural areas. In addition, the wages of rural workers have been growing faster than those of workers in urban areas.
Also, home prices rose more in rural areas than in metropolitan areas during the 2000s but did not experience a greater dip from the recession, the white paper notes.
Even so, rural employment remains more susceptible to shocks to specific industries because of a higher concentration of jobs in certain sectors. This includes manufacturing and construction.
Challenges and Lessons
Rural areas account for only about 20 percent of national mortgage volume, according to the white paper. These areas tend to have more manufactured housing loans, smaller loans, and shorter-term loans — such as 15- or 20-year mortgages instead of 30-year. That is in line with the fact that loans in rural areas tend to be for smaller amounts. And they tend to be fixed-rate instead of adjustable-rate.
The research did not find a significant difference in borrower back-end debt-to-income (DTI) ratios. That’s “because one method through which smaller loan amounts would generate similar back-end DTI ratios is through shorter mortgage terms,” the paper says. Also, rural borrowers typically have both lower incomes and loan amounts than urban borrowers.
Appraisal discrepancies present a challenge for rural lenders. Rural properties are more likely to have an appraisal that comes in below 95 percent of the purchase price. In a rural setting, there are fewer comparable properties nearby. That makes it more difficult to measure the home value. And there are more variations in land.
Fannie Mae is working on researching appraisal issues such as these.
Understanding Rural Borrowers
While there’s a need for more research, lenders should be aware of significant differences among rural borrowers across states. For example, populations in rural areas are aging in general. But states such as North Dakota and South Dakota have younger borrowers — with higher credit scores — than the average rural population.
In North Dakota — one of the states with the highest rural shares of loans — the average borrower between 2013 and 2015 was 37 and had a FICO credit score of 752. In Vermont — another state with one of the highest rural shares — the average borrower was 45 and had an average score of 751.
Lenders might not expect to find high-scoring younger buyers in rural areas. But they are attractive prospects, and worth seeking out.
And in rural areas that run truer to form, an aging population will present opportunities for home improvement or home renewal loans.
There’s really not one prescription for lenders. That’s why it’s important to figure out the various needs of these communities.
Estimates, forecasts, and other views expressed in this article should not be construed as indicating Fannie Mae’s expected results, are based on a number of assumptions, and may change without notice. How this information affects Fannie Mae will depend on many factors. Neither Fannie Mae nor its Economic & Strategic Research (ESR) Group guarantees that the information in this article is accurate, current, or suitable for any particular purpose. Changes in the assumptions or underlying information could produce materially different results. The ESR Group’s views expressed in this article speak only as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.