Report Says Traditional Mortgage Denial Metrics ‘Flawed’

The Mortgage Bankers Association has long-held that traditional analyses of Home Mortgage Disclosure Act data too often fail to paint an accurate picture of denial rates, particularly for African-American and Hispanic mortgage applicants. Now, a new report from the Urban Institute appears to support that premise.

MBA has countered claims that HMDA data showing higher denial rates for African-American and Hispanic borrowers result from racial discrimination in mortgage lending. MBA has said that HMDA data do not account for all factors that lenders take into account to extend credit, including, for example, the creditworthiness of applicants.

The Urban Institute report (https://www.urban.org/urban-wire/traditional-mortgage-denial-metrics-may-misrepresent-racial-and-ethnic-discrimination), Traditional Mortgage Denial Metrics May Misrepresent Racial and Ethnic Discrimination, uses a different set of metrics to demonstrate that traditional mortgage denial metrics are flawed because they don’t control for the creditworthiness of applicants.

Authors Laurie Goodman and Bing Bai use a recently developed metric, the “real denial rate,” (https://www.urban.org/sites/default/files/publication/98823/real_denial_rates_2.pdf) that acknowledges a gap between denial rates of non-Hispanic white borrowers and black and Hispanic borrowers, but notes the gap is smaller than that of the traditional metric. Goodman and Bai describe the real denial rate as a better way to look at mortgage denial rates and discrimination.

The paper notes the traditional method of determining mortgage denial rates, called the “observed denial rate,” divides the total number of denied applicants by the total number of mortgage applications. The observed denial rate shows that the denial rate for black families was 2.0 times that of whites in 2017, which looks “alarmingly high,” the authors said.

“While the observed denial rate can be useful, it can’t provide evidence that equally qualified applicants are being treated differently because of race or ethnicity,” the report said. “To see disparate treatment by race or ethnicity, we must also consider applicants’ credit profiles. The real denial rate method divides owner-occupied purchase borrowers in two groups: higher-credit-profile applicants (strong applicants that have virtually no chance of being denied a mortgage) and lower-credit-profile applicants (weaker applicants that have some chance of being denied a mortgage.) We then compare the number of denials to the number of lower-credit-profile applicants.”

Whereas the observed denial rate was 9 percent in 2017 for non-Hispanic whites, 18 percent for non-Hispanic blacks, 13 percent for Hispanics and 11 percent for Asians, by using the real denial rate formula, the denial rate is 30 percent for whites, 37 percent for blacks, 33 percent for Hispanics, and 43 percent for Asians.

“The higher denial rates stem from the fact that we are looking at the same number of denied mortgages, but the denominator includes denied applicants plus lower-credit-profile borrowers only, rather than all borrowers,” the report said.

The report also noted since 2001, the black homeownership rate has seen the most dramatic drop of any racial or ethnic group, declining 5 percent compared with a 1 percent decline for whites and increases for Hispanic and others.

Additionally, the report said real denial rates are higher for small-dollar mortgages (up to $70,000) than for larger loans. The authors said this is especially true in the government channel, which is underrepresented in the small-dollar mortgage market.

“Proving the presence or absence of discrimination is difficult, but using the observed denial rate as a measure of discrimination is misleading,” the report concluded. “The real denial rate, though it has limitations of its own, paints a clearer picture and highlights the need for greater exploration of the large differences in credit profiles among different racial and ethnic groups.”