Urban Institute: Where have all the borrowers gone?

A new report on the shrinking borrower pool

A recent report from the Mortgage Bankers Association showed that mortgage credit availability is increasing, meaning it’s getting easier to get a mortgage and has been since 2011.

Or so it would seem…

A new report from the Urban Institute suggests that it’s actually more difficult to get a mortgage now than it was before the crisis.

In the report, Laurie Goodman, Bing Bai, and Bhargavi Ganesh write that mortgage denial rates are not declining – quite the opposite, in fact.

From the report:

Our “real” denial rate also exposes an important truth behind these numbers: mortgage denial rates have decreased slightly in recent years only because lower-credit applicants are choosing not to apply for mortgages.

Researchers and policymakers have used the mortgage denial rate to measure mortgage credit availability for more than three decades. Our new way of measuring the denial rate offers a more accurate barometer of credit accessibility by eliminating borrowers with perfect credit from the denial calculation, because these borrowers will never be denied credit.

Instead, we look at the denial rate for those with less-than-perfect credit.

To find that data, the Urban Institute analysts researched 2015 Home Mortgage Disclosure Act data to find information about 2014 and 2015 mortgages.

And what did their research show?

This research affirmed three findings from our original analysis (which used data through 2013):

  • The traditional way of measuring mortgage denial rates significantly underestimates denial rates
  • Gaps in denial rates between whites and minorities with less-than-perfect credit have narrowed since 2007 and remain narrow
  • It remains easier to qualify for a Federal Housing Administration loan than a conventional, government-sponsored enterprise loan

So, while is the Urban Institute’s denial rate higher? Their denial rate calculation “controls for applicants’ credit quality and can therefore distinguish between a reduction in mortgage lending due to lenders reduced willingness to lend versus a reduction due to an increase in the number of lower-quality applicants.”

So what does their data show?

Our real denial rate analysis shows it was harder for a lower-credit borrower to get a mortgage in 2014 and 2015 than it was before 2006, while a look at denial rates as ordinarily measured tells the opposite story. Why? Because fewer lower-credit borrowers have been applying for mortgages since 2007.  

The Urban Institute report shows that tight credit conditions “have discouraged consumers with less-than-perfect credit from applying for a loan, and many of these consumers are likely being filtered out in the preapproval process prevalent in today’s market.”

While many would argue that having fewer lower-credit borrowers in the mortgage markets means that the market is safer, has the pendulum swung too far in the other direction?

Again from the Urban Institute report:

Lending only to borrowers with perfect credit prevents too many borrowers who can pay their mortgages from sharing in the advantages of homeownership. On the other hand, lending to anyone regardless of credit risk creates an unacceptably high level of defaults. What’s the right balance?

The mortgage market operated under reasonable standards in 2001. Using the standards from that year for comparison, we know that the increased reluctance to lend to borrowers with less-than-perfect credit killed about 6.3 million mortgages between 2009 and 2015. That’s too many families missing out on homeownership.

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