Loan App Opt-Outs a Telling Sign of Minority Mortgage Exclusion

Are minorities opting out of the mortgage process, causing their homeownership rates to fall? New data says no.

Recently released Home Mortgage Disclosure Act data for 2013 strongly suggests that the reason minority homeownership rates are falling since the beginning of the recession isn't because minorities are opting out of the mortgage process, but because they're being excluded.

Mortgage applications by blacks, Hispanics and Native Americans increased between 2012 and 2013, HMDA data show, with Asians the only minority category showing an appreciable decrease in apps. This was while the total number of applications was declining by a more than a million year to year, from 15.5 million to 14.2 million.

In addition, the 2013 data show there is a huge disparity between the denial spread of whites versus minorities and the "fallout" spread between the two categories. Fallout refers to mortgage applications that do not result in a closed loan for reasons other than a denial, such as the borrower withdrawing the app or not completing it.

The spreads between 2013 white and minority denial rates vary by up to 1,500 basis points, while fallout spreads vary by only 300 basis points. This means minorities are staying the course to approval or denial status in roughly the same proportion as whites, while at the same time are being denied in much higher percentages.

Denials in 2013 ranged from a low of 17.45% for whites, to a high of 32.44% for blacks. Fallout apps ranged from 17.64% for whites to 20.81% for Native Hawaiians, according to a report from LendingPatterns, an analysis product of vendor ComplianceTech. Native American applicants had the lowest fallout rate for minorities, 19.4%.

Maurice Jourdain-Earl, managing director of ComplianceTech, acknowledged that apps and closed loans for blacks and Hispanics were up in 2013, which doesn't support an opt-out explanation, but added the overall numbers are a double-edged sword.

The gap between lending to whites and minorities "is shocking to me," and it has persisted "over a considerable period of time," he said.

According to LendingPattern's HMDA overview, nearly 72% of mortgage approvals went to whites in 2013, followed by Hispanics (7%), Asians (5.3%), blacks (4.5%), Native Americans (30 bp) and Native Hawaiians (28 bp). "Unknown" accounted for most of the rest.

But the gap grows even wider, Jourdain-Earl said, when cases where the applicants’ race is unknown are factored out, to 80.8% of approvals going to whites, 5% to blacks, 7.5% to Hispanics and 6% to Asians. And his similar analysis of conventional lending (Fannie Mae- and Freddie Mac-owned mortgages) shows an even wider gap, 82.5% for whites on purchase loans and 83% for refinancings — underlining what he called "a consistent pattern of lack of access to credit" for minorities.

Total originations for the year came to $1.9 trillion according to HMDA data, roughly in line with the Mortgage Bankers Association's estimate of $1.8 trillion.

Overall, mortgage credit tightened last year, according to the data. In all, about 39% of 14.2 million mortgage applications did not get funded last year. That's up from 37% in 2012, but in line with what was registered in 2011 (40%) and 2010 (38%).

It's important to remember that the unfunded rate is not the same as the denial rate, something that has engendered a lively debate this year over lending to minorities. According to HMDA data sorted by Arlington, Va.-based LendingPatterns, 20% of total applications were denied last year, while another 19% went unfunded due to being incomplete, approved but then rejected by the applicant, or withdrawn by the applicant (the "fallout" category).

By the numbers, 61% of total applications (8.7 million) were funded, 20% (2.8 million) were denied, and 19% (2.7 million) fell out in 2013. Loans granted by race ranged from 65% for whites down to 47.3% for blacks.

On the gender side, denials were lowest for apps with a male as the primary applicant, and highest for single-female applicants. Fallout was also lowest for male-primary applications, but was higher for single-male applicants than for single-females.

Just two lenders, Wells Fargo and JPMorgan Chase, reported originations of more than $100 billion, according to the HMDA numbers. Wells made $198 billion in mortgages, while Chase had an even $100 billion. Bank of America was ranked third, with $85 billion.

Wells was the only lender to have at least a 10% share of the market, at 10.4%, while Chase was the only other lender to have at least a 5% share, at 5.3%.

In addition, 22 lenders reported making more than $10 billion in mortgages in their 2013 HMDA reports.

About 80% of originations were conventional loans, followed by the Federal Housing Administration, (12.7%), the Department of Veterans Affairs (6.2%) and Farm Service/Rural Housing loans (1.6%) according to the ComplianceTech report.

Fannie Mae was the biggest investor of mortgages, at 25%, trailed by Freddie Mac, at 13.7%, and Ginnie Mae with 10.5%.

Refinancings still dominated mortgage lending last year, at nearly 60% of originations. Purchases accounted for 36% and home improvement loans 5%.

Conforming mortgages dominated the market last year, with a 93.6% share. Jumbos trailed far behind, at 6.4%. The average dollar amount of a first-lien mortgage was $226,000 last year, while subordinate liens averaged $60,000.

Not many lenders, just 4.7%, reported the spreads on their loans, but of those who did, first-lien spreads averaged 2.52%, while margins on subordinate liens were twice that, at 4.99%.

Mark Fogarty, Editor at Large at National Mortgage News, brings more than 30 years of sector experience to his analyses of the mortgage market.