Fed Report Shows One in Three Mortgage Apps Denied, Higher for Minorities
Nearly a third of all borrowers who applied for a home loan last year – including new homebuyers and existing homeowners looking to refinance – were turned down, according to the Federal Reserve’s recently released annual report on home-lending activity.
The U.S. central bank found that denials were even higher for minorities. The rejection rate for all home loans was about 32 percent last year – about the same as in 2007 – but when looking at just black and Hispanic borrowers, the Fed said the denial rate was more than twice as high as the rate for white borrowers.
The Federal Reserve said the 2008 numbers reflect a turbulent year in the mortgage market following the housing bust, as related losses prompted a pullback by investors and threatened to push many of the nation’s financial institutions into the distressed column.
Overall, reported loan application and origination volumes fell sharply from 2007 to 2008 – down by a third – after already dropping considerably from 2006 to 2007. Mortgage activity in 2008 was half the level reached in 2006, the Fed’s data shows.
As DSNews.com has previously reported, the Federal Housing Administration (FHA) has picked up the slack as private lending has slowed. The Federal Reserve’s report puts the FHA-share of mortgage activity at 21 percent of all loans made in 2008 – up from less than 5 percent as recently as 2006.
The FHA backed more than half of the loans issued to black borrowers in 2008, and 45 percent of those made to Hispanics – a finding that many consumer advocacy and fair lending groups find disconcerting.
The Federal Reserve said in its report that high-priced subprime loans – which reflect mortgages with rates at least 3 percentage points above the rate for prime loans – for the most part, disappeared from the market in 2008. Last year, about 17 percent of blacks and 15 percent of Hispanics received these so-called high-priced mortgages, compared with 7 percent of whites.
According to the Associated Press, the mortgage industry maintains that lenders are not discriminating by race, but are instead making adjustments based on borrowers’ risk profile – such as their credit score and the size of their down payments. The disproportionate numbers may also reflect larger ratios of minority borrowers who took out subprime loans during the housing boom and found themselves unable to refinance when property values crashed.
“You still have a certain degree of risk-based pricing in the market,” Jay Brinkmann, chief economist for the Mortgage Bankers Association, told the AP.
The Fed also reported that mortgages termed “piggyback,” in which borrowers use a second lien in place of a downpayment, have essentially died out. Only 98,000 of such loans were made last year, down from 1.3 million in 2006.
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