For millions of Americans hoping to buy or refinance a home, it's a crucial make-or-break question: Will the lender say yes to our mortgage application, turn it down or charge us a higher interest rate than we need?
Surprisingly, large numbers of loan applications don't make it. Roughly one of every nine loan applications (10.8 percent) to purchase a home — and more than one in four applications (26.4 percent) for a refinancing — were denied in 2017, according to a new analysis of lender data nationwide conducted by the federal Bureau of Consumer Financial Protection.
But these numbers look dramatically different when you dig down and check out the race and ethnicity of borrowers:
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- Black applicants were rejected at more than double the rate of non-Hispanic white applicants on all types of loans, including conventional mortgages originated for bank portfolios or for investors Fannie Mae and Freddie Mac, and government loans (FHA, VA and rural housing). The overall rate of denials of mortgage applications from blacks was 18.4 percent last year, with 13.5 percent for Hispanics and 10.6 percent for Asians. For non-Hispanic whites, it was 8.8 percent.
- On conventional home-purchase loans, the turndown differentials were starker: Black applicants received denials 19.3 percent of the time, while the rate for non-Hispanic whites was 7.9 percent. The overall rate of rejections for all groups on conventional loans was 9.6 percent. In the FHA/VA market, the turndown disparity was narrower: Blacks' applications were rejected at a 17.9 percent rate compared with whites' rate of 10.6 percent.
- Similar racial and ethnic differentials emerged in the refinancing market, but with far higher rejection rates. Blacks were rejected on 39 percent of their applications, Hispanic whites on 30.2 percent, Asians on 24.8 percent and non-Hispanic whites on 22.9 percent.
- Black and Hispanic applicants not only were rejected at higher rates than others but were charged higher interest rates more often. Nearly one in five home-purchase loans to blacks (17.9 percent) and Hispanics (19.3 percent) were "higher priced" as defined by the government, compared with 6.7 percent of loans to non-Hispanic whites and 4.2 percent to Asians. Higher priced means they carried annual percentage rates (APRs) that were at least 1.5 percentage points above the "average prime offer rate" for loans of a similar type.
Dramatic as these differences appear, lenders insist they are not evidence of illegal discrimination but instead reflect long-term economic and wealth disparities among racial groups and differing rates of disqualifying issues in applications. Under the federal Home Mortgage Disclosure Act, which requires annual collection of vast amounts of data on loan transactions nationwide, lenders can voluntarily provide up to three reasons for their turndowns and pricing. Seventy-two percent of the reporting lenders provided at least one reason for their denials on home-purchase applications.
- Blacks and Asians generally had the most frequent problems with debt-to-income ratios (DTIs). Denial factors for Asians were the highest among all groups on DTIs: 28.5 percent of applications had debt levels that lenders cited as reasons for rejections. Blacks had DTI issues in 25.1 percent of loan applications. Hispanic whites' rate was 24.3 percent and non-Hispanic whites' rate was 21.6 percent. Overall, DTI issues -- where applicants' existing debts plus projected monthly debt loads were deemed excessive -- represented the most frequent reason for denials.
- Credit issues were a close second. Problems with credit histories and scores were factors in 22.7 percent of turndowns for blacks, 14.9 percent for Hispanics, 16.8 percent for whites and 9.6 percent for Asians.
Civil rights groups and other critics say the disparate rates of denials for blacks and Hispanics go beyond the "reasons" provided by lenders. Lisa Rice, president and CEO of the National Fair Housing Alliance, told me they more accurately reflect deeper, historical "behavioral" and "structural" problems that have created a "dual credit market" — one for whites and a second, less favorable one, for persons of color. She cited a recent "matched pair" investigation her group conducted in the auto-finance field, where minority applicants with higher credit scores, lower DTIs and higher incomes generally were quoted worse financing terms than less-qualified whites.
Mortgage lenders vehemently defend their decision-making. Michael Fratantoni, chief economist for the Mortgage Bankers Association, says "the vast majority of lenders are interested in making as many high-quality loans as they possibly can and work with any borrower who comes in the door," irrespective of race or ethnicity.