Low-Credit Applicants Face Lending Obstacles

The denial rate for lower-credit mortgage applicants is higher than generally accepted, according to a new report by the Urban Institute released Tuesday.

According to the report, the accepted method for gauging rates of denial‒‒the observed denial rate, or ODR‒‒is fundamentally flawed. ODR, the institute states, is calculated by dividing the number of denied applications by the total number of applications, and by doing so “fails to consider the variation in applicants’ credit. This calculation can produce misleading conclusions on credit accessibility.”

Based on what Urban Institute calls the real denial rate, or RDR, which excludes high-credit-profile borrowers who will never be denied a mortgage and considers only those low-credit-profile applicants who might be denied, denial rates among lower-credit borrowers are higher than what are accepted by conventional ODR methods. Interestingly enough, while ODR and RDR have both dropped significantly since the late 1990s, the gap between the percentage of borrowers denied when looking at ODR and those denied by looking at RDR has increased.

In 1998, for example, ODR put the denial rate at 24 percent. Meanwhile, the RDR was twice that, at 52 percent. The overall percentages of denials dropped steadily until 2007, but the difference remained relatively consistent‒‒RDR was typically around twice what ODR was.

But after 2007, the gulf increased from twice to thrice as high. Observed denial rates remained between 13 and 17 percent from 2007 until 2015, but RDR remained between 30 and 39 percent. From 2011, the difference was 13 percent to 38 percent.

Also according to the report, by RDR, white borrowers are least likely to be denied, compared to black, Hispanic, and Asian borrowers. In 2015, black applicants had 1.2 times the denial rate of white applicants, Hispanic applicants had 1.1 times the denial rate, and Asian applicants had 1.5 times the denial rate. The gaps have remained almost exactly consistent as denial rates have fluctuated since 2000.

“In 2015, the average share of lower-credit applicants was 63 percent for black applicants, 56 percent for Hispanic applicants, 41 percent for white applicants, and 37 percent for Asian applicants,” the report stated. “Recent findings show a small improvement in access to credit in the mortgage market. This success is likely because of the strides the GSEs and the FHA have made in expanding credit, as well as the increases in the market share of nonbank lenders.”


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