Where are the lower-credit borrowers?

by Ryan Smith14 Feb 2017

Mortgage credit availability is on the rise, according to most observers. The Mortgage Bankers Association found that mortgage credit availability increased 1.1% last month and 0.6% in December. According to traditional methods of measuring credit availability, it should be easier to get a mortgage now than it was before the housing crisis.

But a new report from the Urban Institute says that’s not the case. The report, by Laurie Goodman, Bing Bai and Bhargavi Ganesh, studied the mortgage application denial rate with a specific focus on low-credit-profile applicants and found that it’s harder to get a mortgage today than it was before the crisis.

“Our ‘real’ denial rate also exposes an important truth behind these numbers: mortgage denial rates have decreased slightly in recent years only because lower-credit applicants are choosing not to apply for mortgages,” the authors wrote.

The authors analyzed application rates for low-credit borrowers in four ethnic groups: white, African-American, Asian and Hispanic. While they found that the gap in denial rates between whites and minority borrowers with low credit had narrowed since 2007, it did find that the share of lower-credit borrowers even bothering to apply for mortgages had plummeted.

“For all four racial groups we studied, the share of lower-credit applicants is well below precrisis levels,” they wrote. “Tight credit conditions have discouraged consumers with less-than-perfect credit from applying for a loan, and many of these consumers are likely being filtered out in the preapproval process prevalent in today’s market.”

According to the Urban Institute, letting more lower-credit borrowers into the mortgage market isn’t inviting another housing crisis. The study indicated that “risky products, not risky borrowers, were the major contributors to the housing crisis.”

“Lending only to borrowers with perfect credit prevents too many borrowers who can pay their mortgages from sharing in the advantages of homeownership,” the authors wrote. However, they acknowledge that lending without regard for credit risk leads to “an unacceptably high level of defaults.”

The authors suggest going back to the lending standards under which the market operated in 2001. Between 2001 and 2003, the default risk standard was around 12.5%.

“Using the standards from (2001) for comparison, we know that the increased reluctance to lend to borrowers with less-than-perfect credit killed about 6.3 million mortgages between 2009 and 2015,” the authors wrote. “That’s too many families missing out on homeownership.”

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