Mortgage Denials Point to Much Tighter Market

Reinforcing concerns of a too-tight credit market, a new measure of mortgage application denials suggests getting a loan might be even tougher for lower-credit borrowers than previously thought.

In a report released Tuesday, researchers at the Urban Institute (UI) say that previous "traditional" observations of mortgage denial rates (calculated by dividing the number of denied mortgages by the total number of applications) provide an inaccurate look at credit availability because they include applicants with near-perfect credit profiles—those who are unlikely to be turned down for most products, in other words.

"Because it conflates those with near perfect credit with those who might actually be denied a mortgage, the traditional method fails to accurately reflect mortgage market trends," researchers Laurie Goodman and Wei Li wrote.

By excluding those high-credit applicants, they say they can piece together a more accurate picture of how willing lenders are to accept applicants that might pose some risk.

Using the adjusted calculation, UI found that 43 percent of borrowers with "less-than-perfect" credit were denied in 2013, nearly triple the unadjusted estimate of 14 percent and up from 25 percent in 2004 (though Goodman and Li admit that "the terms of many loans made in 2004 were not favorable to borrowers.")

Furthermore, the study suggests that the gap in denial rates between white and minority applicants has been exaggerated by inaccurate reporting. While the observed denial rates for black and Hispanic applicants over the last 16 years have been nearly double that of white applicants, that disparity is narrower when looking only at low-credit profile Americans: 45 percent for black applicants, 41 percent for Hispanics, and 34 percent for whites.

The slight gap comes as no surprise to Goodman and Li, who note that across their 16-year study period, the share of low-credit applicants has been consistently higher among the black and Hispanic groups than in the Asian and white groups.

"Therefore, the latest [real denial rate] numbers show that racial gaps are not the major challenge on credit accessibility," they wrote. "The key challenge is that the mortgage market is excluding half the borrowers with weaker credit profiles, including minorities."