Examining the Gaps in Loan Application Denials

Sometimes it may seem like a tougher market out there for black and Hispanic homebuyers. However, according to a report from the Urban Institute, there may not be as large a gap as previously believed. Laurie Goodman, Vice President, Housing Finance Policy at Urban Institute and Bing Bai, Research Associate with Urban Institute explain in an Urban Wire post that the traditional method for measuring denial metrics, called the “observed denial rate”, does not account for the creditworthiness of mortgage applicants.

In order to account for creditworthiness, Goodman and Bai developed a metric called the “real denial rate”. While the traditional “observed denial rate” divides the total number of denied applicants by the total number of mortgage applications, the real denial rate account for credit by dividing owner-occupied purchase borrowers into two halves: higher-credit-profile applicants and lower-credit-profile applicants.

According to the “observed denial” data for 2017, the denial rate was nine percent for non-Hispanic whites, 18 percent for non-Hispanic blacks, 13 percent for Hispanics, and 11 percent for Asians. However, the “real denial rate”, accounting for creditworthiness, shows much higher denial rates for all races: 30 percent for whites, 37 percent for blacks, 33 percent for Hispanics, and 43 percent for Asians. Though these numbers are overall higher, the gaps between them are significantly smaller. Additionally, according to the “real denial rate”, Asians have the highest denial rate. Urban Institute notes that this is due in part to the low number of lower-credit-profile applicants in this group. Additionally, Asian borrowers are less likely to take advantage of government loans than other groups.

Still, the real denial rate is not perfect. It does not account for income or borrower's assets, but can still be used as a tool to understand discrimination problems in the housing market. According to the Urban Institute, black homeownership has dropped by five percent, while white homeownership has dropped by just one percent and Hispanic homeownership has increased. The real denial rate may help researchers and policymakers understand why.

Learn more about how servicers and government entities are realizing the business case for diversity; read expert opinions on combating implicit bias and get answers to how far have we come 50 years after the passage of the Fair Housing Act in the Diversity & Inclusion special issue of DS News, out this September.

Find more on the real denial rate at Urban Wire.