HMDA denials don't tell the whole story about mortgage discrimination: Urban Institute
Racial and ethnic discrimination in mortgage lending may be misrepresented by flawed denial metrics that suggest a larger gap between white and black and Hispanic denial rates than what actually exists, according to the Urban Institute.
Traditional mortgage denial metrics, based on analyses of Home Mortgage Disclosure Act data, may not accurately depict denial rates because they fail to account for consumer creditworthiness. Because the metrics cannot maintain that equally qualified borrowers of varying backgrounds are being treated differently, they can't be trusted as evidence of discrimination, Urban Institute researchers Laurie Goodman and Bing Bai wrote in a recent report.
The observed denial rate, which is the traditional method used for measuring mortgage denial rates, divides the number of denied applicants by the total number of mortgage applications. According to this method, the mortgage denial rate for black families is double that of whites.
Using its own method, called the "real denial rate," the Urban Institute determined that the difference in denial rates between the two races was not as "alarmingly high" as the observed denial rate metric portrayed it to be.
"Proving the presence or absence of discrimination is difficult, but using the observed denial rate as a measure of discrimination is misleading. 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," said an Urban Institute report.
The organization's method separates owner-occupied purchase borrowers into two groups — higher credit profile applicants (strong candidates with virtually no chance of denial) and lower credit profile applicants (weaker candidates with some chance of denial) — and then compares the number of denials to the number of lower credit profile applicants, according to the organization.
Putting the methods to the test, observed denial rates for black households are 2 times that of whites, 1.4 times that of Hispanics and 1.2 times that of Asians, while real denial rates suggest the denial rate for blacks is only 1.2 times that of whites, and 1.1 and 1.4 times that of Hispanics and Asians, respectively.
While differences still exist between races, the gaps are considerably smaller, which can help policymakers more better confront issues in the industry.
"Mortgage discrimination shown by the real denial rate arms policymakers with a more accurate and powerful tool to understand and address current problems in the housing market," according to the Urban Institute.
The black homeownership rate has dropped more than any other group since 2001, falling 5% compared to 1% for whites. The homeownership rate has since grown for Hispanics.
The Urban Institute's analysis illustrates "how the generally lower credit scores among blacks and Hispanics borrowers is a significant factor in their higher denial rates. Policy solutions need to focus on this disparity," according to the organization.
While the Urban Institute's method helps account for applicant creditworthiness, it still requires the simplification of complex data and trends; it analyzes credit scores, loan-to-value ratios, debt-to-income ratios and product and documentation types, but does not consider income or income variability because the organization only has access to DTI, according to the Urban Institute.
Likewise, while the analysis offers a more thorough examination of HMDA data, there's no way for the loan data to shed light on the broader socioeconomic factors that contribute to credit profile differences between racial groups.