Every year, researchers look forward to the release of the most extensive publicly available mortgage market data: the Home Mortgage Disclosure Act (HMDA) data. This rich dataset has been instrumental in revealing critical developments in mortgage lending across the nation.
The 2017 HMDA release shows a housing market that is bouncing back, with steadily increasing purchase mortgage originations, modest increases in mortgages made to minorities, and modest decreases in denial rates for lower–credit profile borrowers. At the same time, recoveries tend to be uneven, particularly as access and affordability continue to challenge potential homeowners across the country.
Three tools we created provide a glimpse into how the mortgage market has evolved since the crisis: our HMDA boom and bust map, “real denial rates” analysis, and Housing Credit Availability Index (HCAI). These tools reveal three important trends in the current mortgage market.
1. Black and Hispanic homeowners are gaining traction, but uneven recoveries persist
By many counts, the housing market has recovered. Nationally, the combined share of black and Hispanic households obtaining purchase mortgages in the housing market is at 19.2 percent, which is roughly the level it was in the 2001–03 period of reasonable lending standards.
But national trends don’t tell the whole story. Our recently updated housing boom and bust map shows that as high-growth cities continue to thrive, the recovery for people of color in these cities continues to be uneven. Detroit and San Francisco are two of the most extreme cases, but high-growth cities across the country—including Washington, DC—continue to have a growing gap between white homeownership and black and Hispanic homeownership.
2. Overall denial rates are going down, but obtaining small-dollar financing is difficult
Our recent work on denial rates for mortgage applicants shows that denial rates are steadily going down overall, decreasing from a postcrisis peak of 41 percent in 2013 to 32 percent in 2017.
For our analysis, we use a measure we developed called the “real denial rate,” which controls for variations in applicant credit profiles by looking at denial rates for applicants with lower credit profiles. This analysis reveals that the share of low-credit applicants also decreased during this period, suggesting that many potential borrowers with less than perfect credit have been discouraged from applying in the first place.
Black, Hispanic, and Asian applicants continue to be denied mortgages at slightly higher rates than white applicants. And, loans under $70,000 are denied at significantly higher rates than loans over $150,000: 52 versus 29 percent.
3. It is becoming slightly easier to obtain a mortgage
The Housing Finance Policy Center’s latest HCAI shows that mortgage credit availability rose, for the third quarter in a row, from 5.1 percent in the second quarter of 2017 to 5.9 percent in the first quarter of 2018. This is the HCAI’s highest level since 2013.
The HCAI measures the percentage of home purchase loans that are likely to default—or go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.
The recent HCAI increase was mainly driven by credit expansions within both the government-sponsored enterprise and government channels, thanks to higher interest rates and lower refinance volumes. The rise of nonbank lenders is also a contributing factor, as nonbanks have historically provided financing to a wider set of applicants.
While this slight easing is good news, it’s still not far enough: significant space remains to safely expand the credit box. If the current default risk were doubled across all channels, risk would still be well within the pre-crisis standard of 12.5 percent from 2001 to 2003 for the whole mortgage market. Constraining access to credit leads directly to fewer mortgages: between 2009 and 2015, these excessively tight credit standards resulted in 6.3 million fewer mortgages.
Our recent analysis of HMDA data shows that while the housing market has rebounded from the crisis in many respects, minority and low-income households lag significantly behind in the recovery.
As housing prices and interest rates continue to rise, and supply remains constrained, these households will continue to face challenges to homeownership. As we look forward, we should consider ways to reduce barriers to obtaining small-dollar mortgages and consider alternative forms of credit scoring and income verification that could open up access to credit for more worthy borrowers.