The voices of Urban Institute's researchers and staff
February 10, 2017

Borrowers with less-than-perfect credit are giving up trying to get a mortgage

The traditional way to measure mortgage credit availability suggests that it’s easier to get a mortgage now than it was before the housing crisis, but we know this is not the case. We introduced a new way to measure denial rates in 2014 that confirms that it’s harder to get a mortgage today than it was before the crisis. 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. We recently expanded our calculations to include 2014 and 2015 mortgages, using 2015 Home Mortgage Disclosure Act data. 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 

Observed versus Real Denial Rate

Why the two denial rate measures are so different

As we’ve explained before in greater detail, our real 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.

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.  

For all four racial groups we studied, the share of lower-credit applicants is well below precrisis levels. 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.

The most recent findings show a small improvement in access to credit in the mortgage market. This success is likely because of strides the government-sponsored enterprises and the Federal Housing Administration have made in expanding credit, as well as the increased share of nonbank lenders in the market. But while the denial rate among lower-credit applicants has moved closer to precrisis levels, lower-credit applicants accounted for a lower share of total applicants in 2015 than they did before the crisis (33 versus 49 percent). Tight credit is discouraging lower-credit-profile applicants from applying.

Isn’t it good to have fewer borrowers with less-than-perfect credit?

Some would say that fewer lower-credit borrowers in the applicant pool and the borrower pool is a good thing. After all, didn’t lower-credit borrowers lead us into the housing crisis? Our answer is no. As you can see from our Housing Credit Availability Index—which separates borrower and product risk—risky products, not risky borrowers, were the major contributors to the housing crisis.

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.

Photo via Shutterstock.

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