Mortgage lenders' tolerance of high DTIs may not get much higher

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More loans with high debt-to-income ratios were approved last year, but a lot were denied as well, which suggests lenders' willingness to underwrite them may have its limits.

The DTI ratio "was overwhelmingly the most common reason for denial of home purchase applications" in 2018, according to the Consumer Financial Protection Bureau's report on Home Mortgage Disclosure Act data.

This was "somewhat surprising given the DTI ratio at origination for home purchase loans has recently been trending up," the CFPB added.

The share of mortgage applications with DTIs between 36-50% last year was 45.1%, the Federal Financial Institutions Examination Council noted in its review of HMDA data.

One driver for debt-based denials may be the fact that owner-occupied loans with DTIs above 43% have greater liability under the ability to repay rule. The pending expiration of a government-sponsored enterprise exemption from that DTI limit could broaden that liability if efforts to eliminate the requirement are unsuccessful.

Among other notable HMDA numbers are ones show the share of low-to-moderate income applicants for Federal Housing Administration-insured loans fell last year to 41.4% from 46.2%.

"The share of LMI borrowers that rely on government-backed FHA loans continues to decline," said Jason Richardson, director of research and evaluation at the National Community Reinvestment Coalition, in a report.

The change suggests more LMI borrowers may be getting less-expensive, government-sponsored enterprise loans due to the broadening of some of Fannie Mae's and Freddie Mac's underwriting.

"FHA loans have several advantages over conventional loans which make them particularly attractive to LMI buyers, among which are low down payment requirement and more flexibility in terms of credit score and debt-to-income ratio. However, FHA lending tends to come with higher fees that the borrower pays over time and in recent years conventional products that have low down payment options have become more popular," Richardson said.

While this may have reduced some loan costs for LMI borrowers, "lower incomes, high housing costs and poor credit or no credit history continued to hamper black and Hispanic loan applicants," according to Richardson.

The minority share of home purchase lending was only marginally higher in the past year.

Black applicants' share rose to 6.7% from 6.4%, Hispanic applicants' share inched up to 8.9% from 8.8%, and Asian applicants' share rose slightly to 5.9% from 5.8%, according to the FFIEC report.

"Loans with a black applicant increased just slightly in 2018, while other minority groups saw virtually no change at all," said Richardson.

New data added to HMDA reporting last year also includes more information on disaggregated racial and ethnic subgroups. Researchers are working on combining this data with new information on loan underwriting and pricing to better gauge "where mortgage credit is flowing and what barriers might be leading to disparate impact of underserved communities," Richardson said.

Median total loan costs in the past year were nearly $4,000, and the median credit scores for primary applicants were in the 738-746 range, according to HMDA data.

An estimated 85% of all banks were exempt from reporting the expanded HMDA data points last year.

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HMDA Underwriting ATR GSEs CFPB FFIEC FHA Fannie Mae Freddie Mac