Small Victories: Mortgage Denials for Blacks, Hispanics Less Frequent in 2014
- Denial rates for conventional mortgage loan applications in 2014 dropped significantly from 2013, down 1.2 percentage points to 12.4 percent according to 2014 Home Mortgage Disclosure Act (HMDA) data.
- The drop in denial rates is especially pronounced among black and Hispanic applicants.
- Denial rates for FHA-backed mortgages fell more modestly, by only 0.8 percentage points, to 16.6 percent.
Denial rates for primary mortgage applications were down across the board last year compared to 2013, particularly for black and Hispanic borrowers, according to the most recent data released under the Home Mortgage Disclosure Act (HMDA). Shrinking denial rates can likely be attributed in large part to less strict mortgage lending standards, which have eased considerably over the past few years.
The biggest declines in denial rates came from conventional mortgage applications, with denials falling even as overall conventional mortgage application volume rose. The number of conventional mortgage applications nationwide increased to 2,107,500 in 2014 from 2,004,100 in 2013, but the overall denial rate fell to 11.2 percent from 12.4 percent in 2013.
Among black and Hispanic applicants for conventional mortgages, denial rates were down 5.1 and 3.1 percentage points, respectively, compared to 1 and 1.1 for white and Asian applicants. But while blacks and Hispanics are getting denied less often, a welcome sign of progress, their denial rates are still much higher than their white and Asian counterparts. Blacks and Hispanics were denied a conventional mortgage 23.5 percent and 18.8 percent of the time, respectively, in 2014, compared to just 9.4 percent of the time for whites and 12.2 percent for Asians (figure 1).
Unlike conventional loan applications, the number of completed applications for FHA loans dropped by almost 60,000 in 2014 from 2013, to 791,090 applications. However, FHA loan denial rates are also lower, albeit to a lesser degree and more uniformly among racial and ethnic groups. FHA denial rates for all applicants fell 0.8 percentage points, to 16.6 percent.
Fewer mortgage denials are probably the byproduct of mortgage underwriting standards that have steadily gotten progressively easier in recent years. According to the Zillow Mortgage Access Index (ZMAI), credit eased considerably between mid-2013 and mid-2014. While we cannot evaluate the creditworthiness of applications from HMDA records alone, easing credit very likely opened the door – even marginally – for those previously locked out of the conventional loan market.
For example, those with lower credit scores made up a larger share of those approved for a Fannie Mae-backed loan in 2014 compared to 2013. The 10th percentile credit score (the maximum credit score of the lowest 10 percent of all approved applications) for Fannie-approved loans in July 2013 was 694. By July 2014, this cutoff had dropped to just below 680. Similarly, in July 2013, those with credit scores between 600 and 640 received only 23.7 quotes on Zillow per 100 received by those with a credit score of 760 and higher. By July 2014, this had increased to 58.3 quotes per 100 received by those with the highest credit scores (figure 2).
But despite the progress made in lowering denial rates and easing credit access, there’s a lot of left to be done to ensure full, equal access to homeownership and its central role as part of the American Dream across races. Blacks and Hispanics represent 12.3 percent and 17.3 percent of the population, respectively, but only account for 3 percent and 6.1 percent, respectively, of the conventional mortgage market. And while blacks and Hispanics are better represented among applications for FHA loans, stark differences in homeownership rates remain. Only 41.2 percent of black households and 45 percent of Hispanic households own their own home, compared to a 71 percent homeownership rate for whites and 57.5 percent for Asians (figure 3).
These gaps in homeownership have persisted for decades, and are likely to continue despite these most-recent modest improvements.