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Urban Institute: Minority loan-denial metrics are 'flawed'

Federal loan suggests that blacks are denied mortgages by lenders at twice the rate of whites, and the denial rate for Hispanics is 1.4 times higher. This discrepancy is often quoted in news reports as evidence of widespread discrimination.

But Home Mortgage Disclosure Act (HMDA) data is also misleading, wrote Urban researchers Laurie Goodman and Bing Bai in a recent paper. Real denial rates for blacks, Hispanics and Asians are higher than whites, but the gap is narrower than suggested by the often-quoted "observed denial rate" in the HMDA data, they say.

The standard method of establishing the denial rate is to divide the total number of denied applications by the total number of mortgage applicants. Blacks and Hispanics as groups, however, have a much larger share of people with weaker credit profiles than whites, and this skews up their denial rates relative to whites using the standard calculation, according to the paper. So, to compare apples to apples, the Urban Institute developed a model that evaluates the denial rates of people with similar credit profiles. 

mortgdenial“Traditional mortgage denial metrics are flawed because they don’t control for the creditworthiness of applicants,” the paper said. The researchers determined "the real denial rate" by measuring only the rates of those with poorer credit profiles.

“Proving the presence or absence of discrimination is difficult, but using the observed denial rate as a measure of discrimination is misleading,” the researchers wrote.

To separate out only those with weaker credit profiles, and thus people only likely to have been denied a mortgage last year, the study took into account credit scores, loan-to-value and debt-to-income (DTI) ratios, and also examined the loan-product types, such as Federal Housing Administration (FHA) and conventional Freddie Mac and Fannie Mae loans. The researchers used HMDA and a CoreLogic database to establish the credit worthiness. 

For black families, the mortgage denial rate is 1.2 times higher than whites; and for Hispanics, 1.1 times higher, according to the Urban analysis. Asians with poorer credit profiles held the highest mortgage denial rates relative to whites at 1.4 times higher.

The Urban study suggested this was likely the case because the pool of Asians with weaker credit profiles was much smaller than the other ethnic groups, skewing the Asian "real" denial rate up relative to whites among borrowers with weaker credit scores. Also, Asians tended to apply for tougher-to-obtain conventional loans and avoid FHA and other government loan programs that have looser criteria.

The paper emphasized that its modeling isn’t perfect. The model doesn’t capture borrower income or income variability. There is also no information on borrowers’ assets, such as savings accounts that can affect denial rates.

However, the researchers said their model could be used as a more accurate tool to assess racial discrimination in mortgage lending. As to the problem of the far lower homeownership rates of blacks and Hispanics and their higher relative denial rates, a growing body of research suggests the root of the problem lies in the weaker credit-risk profiles of ethnic minorities, according to the Urban Institute. 

“We have helped sound the alarm about the losses in black homeownership, mapping the black homeownership gap and discussing the issue in many forums,” the paper said. The researchers say there needs to be a deeper study into why ethnic minorities have weaker credit profiles.  

“Our analysis using the real denial rate adds to this body of work by showing how the generally lower credit scores among black and Hispanic borrowers is a significant factor in their higher denial rates,” the paper said. “Policy solutions need to focus on this disparity.” 


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