Why a Twitter Fight Raises Important Questions About Credit Access
A battle over social media about how well the current housing finance system treats African-Americans and other minorities has spurred a critical discussion about racial disparities in the mortgage market.
The protracted fight erupted on Twitter last week and lasted for several days, centering on a statistic quoted by David Stevens, president and chief executive of the Mortgage Bankers Association, at an industry conference. Joshua Rosner, a prominent analyst at Graham Fisher & Co., challenged the validity of the data point, which suggested more than half of African American applicants are denied a conventional mortgage.
The dust-up sparked a larger debate about credit access while the two government-sponsored enterprises remain in conservatorship. Below we break down the details of the dispute, the limitations on industry data and the broader questions raised for the mortgage market.†
So, what happened?
Speaking at an MBA conference in New York on May 20, Stevens claimed that housing data show "a 56% denial rate on GSE purchase loan applications for African Americans." The statistic was part of a larger argument he made about the problems with the current housing market and why reform was necessary. The trade group has been vocal in supporting efforts to unwind Fannie Mae and Freddie Mac, including a recent Senate bill designed to bring more private capital into the market.
The data came from the Home Mortgage Disclosure Act database, the group said. The law requires financial institutions to collect detailed information from prospective borrowers who apply for a mortgage loan.†
Rosner sent his first shot soon afterwards, asking for details about the origins of the statistic, which launched a multiday back-and-forth between the two industry experts.
Others in the industry chimed in along the way as the fight gained increasing attention. Critics had difficulty reproducing the figure using the publicly available data and raised questions with how the statistic was calculated.
Even Fannie Mae jumped into the fray, citing its own concerns.††
"We believe there are serious flaws with how this HMDA data was analyzed and characterized," said Andrew Wilson, a spokesman for the enterprise. "We are committed to working with all stakeholders to ensure access to safe, affordable mortgage credit in every community."
A spokesman for Freddie Mac declined to comment.†
Stevens said in a statement on Thursday that the trade group "stands by its analysis of HMDA data," though the paragraph containing the statistic was removed from the text of the speech that now appears on MBA's website.
What exactly is up for debate?
The statistic has raised several questions about the methodology MBA used for calculating the denial rate.
Some pointed to earlier reports by the Federal Reserve and Zillow, which found significantly lower denial rates using the same 2012 dataset. The Fed reported a 32% denial rate for blacks seeking conventional loans, while Zillow found 25.4% of black applicants were denied.†
Critically, MBA included both manufactured housing data and pre-approval data in its calculations, which some opponents argue is inappropriate.
"MBA includes manufactured housing data in its calculation because MBA members lend on this collateral, and both GSEs have MH loan programs and tout these programs as means to provide affordable homeownership to lower and moderate income homebuyers," Stevens said in the May 22 statement.
He added that the group looks at pre-approvals as well because "being denied at this stage is an important signal on availability of credit. A denial is a denial, regardless of where in the loan process it occurs."
But others note that Fannie Mae and Freddie Mac can only guarantee manufactured housing loans when a borrower also purchases the land underneath it, and it's not clear that HMDA data can be dissected narrowly enough to split off those loans from so-called chattel loans.
"Given limitations that prevent the GSEs from non-real estate lending, inclusion of chattel loans is questionable," said Rosner in a statement released Friday, pointing to a Consumer Financial Protection Burau factsheet suggesting that more detail about the types of loans for manufactured housing offered would be beneficial.†
Observers also noted that pre-approval denials shouldn't necessarily be considered, because the data can be difficult to interpret.
"The inclusion of pre-approval rates is something I've never seen, and I'm concerned it could artificially inflate" denial rates, said Debbie Bocian, a principal researcher at the Center for Responsible Lending.
Buyers may shop around for pre-approvals and not all lenders offer it, she added. If a buyer is pre-approved but doesn't take the loan, institutions also have the option of reporting the data or not, which could also complicate the calculations. †
Why should we care?
Stepping back from the specific data dispute, concerns about racial disparities in the mortgage market aren't going away.†
"There's always going to be data disputes and debates. People can twist themselves up disputing the data, but there are disparities and they are statistically significant," said Joshua Silver, vice president of research and policy at the National Community Reinvestment Coalition.
In fact, recent legislation to overhaul the mortgage finance market stalled in part because of ongoing questions by some on the left over how the new system would serve low-income and minority borrowers. The bill by Sens. Tim Johnson, D-S.D., and Mike Crapo, R-Idaho, to unwind the government-sponsored enterprises passed out of the Senate Banking Committee earlier this month but is not expected to get a vote on the chamber floor this year.
"I'm heartened by the inclusion of mortgage access in this debate, because I think it's an important one to have and I'm troubled by the current disparities in the system," said Stan Humphries, chief economist at Zillow. "Mortgage access is not where we want it to be in the current system. We can debate if Johnson-Crapo is bringing us closer or further away, but it's not where we want it to be."
In an interview, Stevens says the statistic was meant to help make a larger point.