QM, ATR Drives Approvals
Earlier this year, a study by Zillow and the National Urban League found that fewer minorities are likely to apply and get approved for conventional mortgages. While minorities make up 36 percent of the U.S. population, the two largest minority groups were only approved for eight percent of conventional loans. These and other points were the focus of a recent Bipartisan Policy Commission Summit held in Idaho.
The consensus at the summit was that credit requirements, powered by ability-to-repay (ATR) and Qualifying Mortgage (QM) rules, had swung too far to the restrictive side. Some analysts are concerned that if credit boxes are opened up and credit overlays are lifted, then we’ll see a return of high-risk, subprime lending; which sunk the housing market years ago.
In an industry where laws and mechanisms were put into place years ago to ensure equitable treatment of all mortgage applicants, ideal color-blind underwriting is something in which the industry is closer to reaching now than in any time in history. While algorithm powered automated underwriting eliminates much subjective bias, the human factor is still required to make judgment calls on the hard to quantify details and these details comprise a small part of what’s required to get approved for a mortgage.
Automated underwriting doesn’t totally eradicate the possibility of mortgage application denials based on bias. Studies and surveys continue to underline the reasons for mortgage denials are inadequate money for down-payments, too high debt-to-income ratios and poor credit scores.
Both Home Mortgage Disclosure Act (HMDA) data and the study data show that the minorities who apply for and were denied a mortgage had a lower average income, higher debt-to-income ratio and lower credit score compared to other groups. With lower average incomes, they are more likely to put less than 10 percent down. Throw in the tighter lending standards because of the QM and ATR requirements and this dynamic becomes compelling.
In the automated underwriting world where algorithms provide more weight in determining a mortgage applicant’s propensity to default, any applicant with a 750 FICO score and 10 percent down will have an easy time in getting a mortgage. Applicants with poor credit and without adequate down-payments are the ones being left behind in their quest for homeownership.
HDMA data shows that whites were denied conventional mortgages 10.6 percent, African-Americans 25.4 percent, Asians 13.2 percent and Hispanics 21 percent. Although QM and ATR rules are what lenders must follow in determining a mortgage applicant’s approval status; 25 percent of Asians, 33 percent of African-Americans, 37 percent of Hispanics and 14 percent of whites surveyed said they thought their race was an influence in their mortgage application experience.
Many ask if the housing industry can strike a fine balance between needing to have reasonably tight borrowing standards to avoid another housing crisis, but yet provide more opportunities to applicants with marginal assets and credit. Some opponents of loosening credit standards and overlays point out that about 3 in 10 Americans are not ready for the responsibility of homeownership.
There are many first-time home-buying classes and programs which address questions, concerns and even may assist with the down-payment. While many take advantage of these tools to help increase the chance of a mortgage application approval, others show up at the lender unaware of the parameters by which lenders approve mortgage applications.
Applicants, regardless of the color of their skin, who put more effort into saving up for a down-payment and improving their credit score, have a greater chance of getting a mortgage.
An article by National Mortgage Professional Magazine suggests that expanding homeownership among minorities may be key to bringing “order” to the housing market. They cite a shift in demographics validated by the 2010 U.S. Census showing that 36 percent of the population is a part of an ethnic minority group. Harvard University’s Joint Center for Housing Studies released “The State of the Nation’s Housing 2014” report early in the summer showing that while the white share of homeowners fell from 86 to 77 percent between 1993 and 2013, the Hispanic share increased from four to nine percent and the Asian share increased from two to six percent.
Will policy and politics, powered by demographic data help push credit and financially marginal mortgage applicants into homeownership?
HousingWire. “Are black and Hispanic buyers being squeezed out of the housing market?” 3 September 2014. http://www.housingwire.com/articles/31188-are-black-and-hispanic-buyers-being-squeezed-out-of-the-housing-market
HousingWire. “Housing shouldn’t look at any color but the color of money” 3 September 2014. http://www.housingwire.com/blogs/1-rewired/post/31200-housing-shouldnt-look-at-any-color-but-the-color-of-money
National Mortgage Professional Magazine. “Can Expanded Minority Homeownership Stabilize Housing?” 4 September 2014. http://nationalmortgageprofessional.com/news50385/can-expanded-minority-homeownership-stabilize-housing