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Loan Denial Rates Decline

A boom in refinances helped drive a 26% increase in home loan originations in 2019, according to the latest Home Mortgage Disclosure Act (HMDA) data released by the Federal Financial Institutions Examination Council. Refinance loans jumped 78% over the year, while home purchase loans increased by 4%.

Despite their growing market share, African American and Hispanic white borrowers continued to experience higher denial rates in 2019. The overall loan denial rate for conventional and nonconventional loans in 2019 was 8.9%, down from 9.8% the previous year.

Loan denial rates decreased among all demographic categories but remained elevated among Black and Hispanic white applicants when compared to non-Hispanic white applicants. The denial rate for non-Hispanic white applicants was 7.0%, compared to 15.9% for Black applicants and 11.6% for Hispanic white applicants.

The denial rate was lowest among Asian borrowers, 9.1% for the year.

Changes in denial rates can reveal changes in credit availability, but they may also reveal changes in credit demand and in the “composition of borrowers applying for mortgages,” according to the Consumer Financial Protection Bureau’s (CFPB) report.

In fact, the CFPB pointed out that the loan denial rate was significantly higher before the Great Recession than it is now “even though most measures of credit availability suggest that credit standards were tighter in 2019.”

As such, the drop in denials may be the result of “a relatively large drop in applications from riskier applicants,” the bureau stated.

Debt-to-income ratios were the most common reason for denials of home purchase loans, while DTI ratio and credit history were the most common reasons for refinance loan denials.

The burst in refinancing activity is understandable, given the decline in mortgage interest rates over the year. Rates started 2019 at 4.5% and ended the year at 3.7%.

A slightly higher percentage of purchase loans went to borrowers with low to moderate-income than a year earlier, while the share of refinancing borrowers with low to moderate-income declined. In 2019, low- to moderate-income borrowers made up 28.6% of approved purchase loans, up from 28.1% a year earlier. Low- to moderate-income borrowers accounted for 23.8% of refinance loans, down from 30% a year earlier.

Demographic trends in home loan originations are largely in line with recent years. Following a six-year trend, African American borrowers accounted for an increasing share of loan originations. African American borrowers accounted for 7% of home loan originations in 2019, up from 6.7% in 2018.

Alongside these gains, non-Hispanic white borrowers have accounted for a declining share of home loans. In 2019, non-Hispanic white borrowers accounted for 60.3%, down from 62.0% in 2018 and from a peak of 70.2% in 2013.

Hispanic white borrowers also grew their market share in 2019, while Asian borrowers’ share declined slightly. Hispanic white borrowers made up 9.2% of home loan originations in 2019, up from 8.9% a year earlier, and Asian borrowers accounted for 5.7% of originations, down from 5.9% a year earlier.

The HMDA data for 2019 included data on 15.1 million home loan applications at 5,508 lending institutions.

About Author: Krista F. Brock

Krista Franks Brock is a professional writer and editor who has covered the mortgage banking and default servicing sectors since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.
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