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The Lending Gap

When it comes to applying for a mortgage, gender matters. Lenders are working to close the divide.

By Becky Walzak

In the ongoing discussion of gender equality, the pay gap between men and women gets a good deal of attention. From construction to financial services, the difference between what men and women earn for the exact same job is a hot topic. While this gap is not new, more and more families are dependent on a woman’s income to live.

The pay gap between the sexes has far-reaching consequences, ones that should cause the industry to sit up and take notice—the primary two being the opportunity to make more loans and Fair Lending issues.

This article takes a look at how big a factor the disparity in income levels is in mortgage lending decisions, and considers what other factors may be at play.

Exploring the HMDA Database

David Moffat, president of Mortgage TrueView, Inc., analyzed Home Mortgage Disclosure Act (HMDA) data on women and mortgages. The MTV database contains HMDA data results from the years 2009 to 2013, the latest HMDA data available. There are many things this data cannot tell us, so it is impossible to make absolute statements about approvals and denials, but the data did provide some interesting information.

Of the total applications during this four-year period, excluding those that were identified as “purchased from other lenders,” 13,619,961 listed female as the primary applicant and 47,626,541 listed male as the primary applicant. Using the information provided resulted in a 2.5 to 1 ratio of male to female applicants.

The data was then broken down by race to determine if there were any particular races where female applicants were disproportionate to male applications. Table 1 shows female and male applications by race.

Slightly over 45 percent of all black applicants are women, while just over 27 percent of white and Asian applicants are females. While this finding requires additional review and analysis, it does raise the possibility that this may be one of the reasons why blacks are 2.5 times as likely to be denied mortgages as whites.

One issue always at play is income: it is expected that income would be a major factor in the difference between male and female applicants. In fact, we would expect to see more females denied than males across the board, as well as by race. By analyzing the Mortgage TrueView HMDA database for this information, it is easy to determine if it’s true. One complication in conducting this analysis was the fact that not all lenders were required to provide applicant income at the time this data was submitted. As a result, 8 percent of the applications had to be excluded from this piece of the analysis.

Using the data available, Mortgage TrueView found that in aggregate, 17.7 percent of all applications were denied during this four-year period. The results of the study based on incomes reveals that there is a slightly higher rate of denials for females than males. In aggregate, females are denied at a rate of 20 percent of applications while males are denied at a rate of 16 percent.

To further identify where these denials occurred, the Mortgage TrueView data was divided into four income groupings, as shown in chart 2. The chart also shows the denial rates for applications where gender was unknown.

While there are many reasons that the gender was not provided, it is clear that having that information could give us greater insight into the drivers of denials as the percentage differences in the “no gender provided” group are consistently higher than the groups where the gender is known.

Applicants in the lower income groups—those earning $75,000 or less per year—have either identical denial rates or nearly identical rates. Yet for the two higher income levels, females are denied more frequently than males. This variance tells us that there is likely something other than income behind the disparity between the number of denials for female and male applicants.

The outcome changes, however, when we add race into the mix. When we look at black female applicants with annual income between $0 and $50,000, we find that 43 percent of these loans were denied, while for black males in the same income group, 41 percent of them were denied. For whites in this same income group, 18 percent of females were denied while only 15 percent of white males failed to gain approval for their mortgage. A similar result is found within Asian applicants. Of the females who applied, 17 percent within this income group were denied while only 14 percent of the Asian males were denied.

So what does all this tell us? Based on the information provided by this data there is clear evidence that females are denied more frequently than males. This problem is exacerbated when race is added into the equation, particularly for blacks. However, income does not appear to be the primary driver of this problem.

Income isn’t the only issue

Of course income levels matter, but research into the areas of female income and wealth show that the underlying issues are much broader than simple income inequity. What is evident is that income issues also create gaps in overall wealth for women which causes them much more financial harm than the resulting income inequity. According to Dr. Mariko Chang, as outlined in her book Shortchanged, while the income gap is slowly declining, women have only 36 percent as much wealth as men. Wealth, as defined by Dr. Chang, includes liquid and non-liquid assets. Interestingly enough, these very items are among the information requested on a borrower’s loan application.

In addition to just the accumulation of these assets, she emphasizes that these assets are not simply static values. Many of these assets are 401Ks, IRAs or Retirement plans. However, because of the income differences between genders and fewer years of contributions for women, the total value of these assets is smaller for women. She calls these assets “wealth escalators” and they translate into the accumulation of wealth at a faster rate than seen as the result of normal salary increases. Dr. Chang also asserts that women are more likely to suffer from a larger debt burden due to a variety of issues including: child care, social norms and lower pay. As a result, women have far less disposable income to contribute to wealth escalators, such as savings and investments. In part this may explain why the denial rates for women are higher at the higher income levels.

Dr. Chang also looked at wealth by race. According to her, black and Hispanic households (whether headed by a male or female), “hold significantly less wealth than white households.” Furthermore she found that, ”Asians and other racial groups have the highest wealth …” Hispanic households were found to have the least wealth, even lower than that of blacks. Overall, the wealth gap for women is substantially greater than the income gap that deprives them of obtaining financial security.

Can mortgage lenders make an impact?

As mortgage lenders, we are interested in making as many sensible mortgages as we can because it improves the bottom line. In addition, because we recognize the positive impact that homeownership has on individuals, communities and the nation, we accept the moral responsibility of making loans whenever it is financially sound.

It is clear from the variances between male and female denial rates that income is not the overall driver. While further research is needed, the identification of the wealth gap between men and women most likely plays a part.

What changes can we make to approve more loans for women? For one thing, we can hire more female loan officers and reach out to women’s groups and other largely female populations to source applications.

Are there changes to the current credit criteria possible? One thought is to allow women to receive the benefit of the reduction in taxes from the mortgage tax deduction as a “gross-up” in calculating income and qualification so that rather than using just gross income, we would add an amount equal to their tax benefit when calculating the income and DTI ratio. We allow this for such items as Social Security and other non-taxable income, so why not consider it in this case?

Additional products could also be considered. For example, the industry could consider bringing back the “buy-down” loans that were commonly used when interest rates escalated to 17 and 18 percent. Although the notes on these loans carried the 17 percent interest, there was an agreement that this amount would be reduced for a number of years, increasing 1 percent each year. The difference between the note payment and the reduced payment came from a reserve funded by another party. In this case however, the buy-down could be funded not only by a third party, but by the lender, who could be rewarded by some other type of incentive, such as a reduction in reserve requirements.

As mortgage lenders we have to realize that business from women can be an opportunity to expand the number of loans we make. We must acknowledge, however, that despite the struggle to achieve equity, loan applications made by women may require changes in our credit culture to overcome the financial discrepancies built up over time.

Editor's note: This select print feature appears in the August 2015 edition of MReport magazine, available soon.

About Author: Rebecca Walzak

Rebecca “Becky” Walzak is the president of rjbWalzak Consulting, an innovative leader in operational risk management programs in all areas of the consumer lending industry. Her expertise is in loan quality assurance and risk management, with more than 30 years’ experience in the financial services industry. She is also EVP, director of regulatory compliance with Mortgage TrueView, a data-driven business intelligence and risk management solutions provider for loan originators and servicers.
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