Just How Available Is Mortgage Credit?

Mortgage credit access is expanding but remains restrictive compared to pre-crisis days, as reported in the most recent Housing Credit Availability Index from the Urban Institute. However, the Home Mortgage Disclosure Act (HMDA) data for 2017 revealed a denial rate of 11 percent in 2017, down from 18 percent in 2006 before the housing crisis, which according to the Urban Institute “runs counter to our expectations.”

So just how easy is it to get a mortgage these days, and who are getting mortgages? The Urban Institute set out to answer these questions in a report titled, “Real Denial Rates: A Better Way to Look at Who Is Receiving Mortgage Credit.”

The report revealed three significant findings: First, conventional mortgages have higher real denial rates than government mortgages; second, disparities in denial rates among different races and ethnicities are inflated in most reporting; and third, denial rates are noticeably higher for smaller mortgage loans.

Urban Institute researchers started with the premise that, “If denial rates were a good measure of credit availability, it would suggest that credit was tighter in 2007 than it has been in recent years, which we know is not the case.”

To more accurately assess credit availability, the Urban Institute limited its observation of loan denial rates to only those applicants with low credit profiles.

The researchers found that there were far fewer low-credit-profile applicants today than before the housing crisis.

Controlling for this difference, the report found the denial rate between 2011 and 2017 was 36 percent, similar to the 37 percent between 1998 and 2004.

Comparing different loan channels, HMDA data would imply that government channels had a lower denial rate before the financial crisis but a higher denial rate today. Once again, the report limited its observation to just low-credit-profile applicants to offer a clearer picture.

The researchers explained that after the financial crisis, conventional loan channels engaged in risk-based pricing deterred many low-credit-profile applicants. Government channels, on the other hand, do not participate in risk-based pricing and continue to attract applicants with lower credit profiles.

Well before the financial crisis, in 1998, low-credit-profile applicants accounted for 57 percent of government loan applicants and 44 percent of conventional loan applicants, the report indicated. Today, the government’s share of low-credit-profile applicants is still a little more than half, 52 percent, while the percentage of low-profile-credit applicants in the conventional market has dropped to just 20 percent.

With far fewer low-credit-profile applicants, the conventional market has fewer borrowers to deny.

When it comes to racial and ethnic disparities, the report found that while they do exist, they are not as prevalent as a first glance at the data would suggest. The traditional denial rate for 2017 reveals a rate twice as high for black applicants, 1.4 times higher for Hispanic applicants, and 1.2 times higher for Asian applicants than for white applicants.

This has led to allegations of redlining, which the research says “is a gross oversimplification.”

Instead, “the differences in denial rates across groups primarily reflect differences in credit characteristics,” the researchers reported.

When controlling for credit characteristics, the report concluded the denial rate for black applicants is 1.2 times higher rather than twice as high. For Hispanic applicants, the denial rate is 1.1 times higher, and for Asian applicants, the denial rate is 1.4 times higher. The researchers suggested the higher denial rate for Asian applicants may be because “Asians frequent the conventional channel more than other groups, and the conventional channel has higher denial rates.”

Lastly, while raw HMDA data appears to exaggerate racial disparities, it seems to understate the difference in the denial rate between large- and small-dollar loans. HMDA data revealed an 18 percent denial rate for small-dollar loans. However, because there is not a sharp difference in the makeup of applicants across different dollar-sizes of loans when comparing just low-credit-profile applicants, the report found a 52 percent denial rate for loans up to $70,000 and a 29 percent denial rate for loans more than $150,000.