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USA Real Estate Blog

Loan Denial Rates and Credit Scores

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Recent data from the Home Mortgage Disclosure Act illustrates progress in the mortgage market. Loan denial rates are decreasing; loan originations are increasing, and the rate of mortgages made to minorities is rebounding, according to an analysis of the HDMA data conducted by the Urban Institute’s Housing and Housing Finance Policy Center.

However, “Our recent analysis of HMDA data shows that while the housing market has rebounded from the crisis in many respects, minority and low-income households lag significantly behind in the recovery,” said Bhargavi Ganesh, a researcher at the Urban Institute. A

Loan denial rates overall are declining, falling from 41 percent in 2013 to 32 percent in 2017, according to the Urban Institute’s analysis, which narrowed the view of denial rates to that among lower-credit profile borrowers. The Urban Institute argues that a broader view of denial rates ignores the fact that there are fewer lower-credit profile applicants in today’s marketplace.

Denial rates are higher among minority applicants, and they are “significantly higher” among applications for loans under $70,000, according to the Urban Institute. Denial rates for loans under $70,000 are 52 percent, in contrast to a 29 percent denial rate for loans over $150,000, according to the institute’s analysis.

At the same time that overall denial rates are down, mortgage credit availability experienced an uptick. In fact, the Urban Institute’s Housing Credit Availability Index has risen for three consecutive quarters and is now at its highest level since 2013.

The institute has noted before and noted again that “significant space remains to safely expand the credit box. If the current default risk were doubled across all channels, risk would still be well within the pre-crisis standard of 12.5 percent from 2001 to 2003.”

Most of the easing in credit has come from the GSEs and government channels, with a little help from nonbank lenders as well, according to the Urban Institute.

While the overall news for the market is good, the recovery is uneven, Ganesh said. Black and Hispanic households now account for 19.2 percent of the purchase loan origination market, which matches the level recorded between 2001 and 2003, a “period of reasonable lending standards,” according to the Urban Institute.

However, many large “high-growth” cities maintain a large gap between white, black, and Hispanic homeownership. For example, the Urban Institute recently reported that in Detroit, where the population is 84 percent black, the percentage of purchase originations was just 8 percent in 2016. This is down from 21 percent in 2006. While this is one of the more extreme examples, other cities are experiencing a similar trend.

With low-income and minority borrowers not experiencing the same recovery as other buyers, the Urban Institute suggests policymakers look at ways to expand lower-dollar mortgage loans and review “alternative forms of credit scoring and income verification.”

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