MReport October 2018

TheMReport — News and strategies for the evolving mortgage marketplace.

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54 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST ORIGINATION ... black ownership has dropped by five percent since 2001, while white homeownership has dropped by just one percent and Hispanic homeownership has increased. Examining the Gaps in Loan-Application Denials Differences in loan-denial rates between varying races may be smaller than they first appear. S ometimes it may seem like a tougher market out there for black and Hispanic homebuyers. However, according to a report from the Urban Institute, there may not be as large a gap as previously believed. Laurie Goodman, VP, Housing Finance Policy at Urban Institute, and Bing Bai, Research Associate with Urban Institute, explained in an Urban Wire post that the traditional method for measuring denial metrics, called the "observed denial rate," does not account for the creditworthiness of mortgage applicants. In order to account for cred - itworthiness, Goodman and Bai developed a metric called the "real denial rate." While the traditional "observed denial rate" divides the total number of denied applicants by the total number of mortgage applications, the "real denial rate" accounts for credit by dividing owner-occupied purchase borrow - ers into two halves: higher-credit profile applicants and lower-credit profile applicants. According to the "observed-deni - al" data for 2017, the denial rate was 9 percent for non-Hispanic whites, 18 percent for non-Hispanic blacks, 13 percent for Hispanics, and 11 percent for Asians. However, the "real denial rate," accounting for creditworthiness, shows much higher denial rates for all races: 30 percent for whites, 37 percent for blacks, 33 percent for Hispanics, and 43 percent for Asians. Though these numbers are overall higher, the gaps between them are significantly smaller. Additionally, according to the "real denial rate," Asians have the highest denial rate. Urban Institute noted that this is due in part to the low number of lower-credit profile applicants in this group. Additionally, Asian borrowers are less likely to take advantage of government loans than other groups. Still, the real denial rate is not perfect. It does not account for income or borrower's assets, but it can still be used as a tool to un - derstand discrimination problems in the housing market. According to Urban Institute, black home- ownership has dropped by five percent since 2001, while white homeownership has dropped by just one percent and Hispanic homeownership has increased. The real denial rate may help researchers and policymakers understand why. Why Jumbo Loans are Less Expensive in 2018 For years, conforming loans were the "cheaper" loans, but today the tide has turned with the most recent measure finding conforming loans to be 33 basis points higher than jumbo loans. S ince 2013, large-balance mortgage loans (jumbo loans) have broken the trend of holding a higher interest rate than smaller conforming loans. In the first quarter of 2018, jumbo loans were 33 basis points cheaper to the borrower than a conforming loan, so what made these loans cheaper? CoreLogic investigated what made jumbo loans the lower-cost option compared to the more popular but more expensive conforming loans in a study released in August. The study indicated that over the last 17 years, conforming loans were a better deal for borrowers. They were the cheaper op - tion, especially during the Great Recession, peaking in Q2 2009 when conforming loans were around 90 basis points cheaper. However, the trend reversed in Q2 2013 when jumbo loans "began to have a lower average contract rate," the report said. "The dif - ference continues to favor jumbo loans by about 30 basis points through Q1 2018." CoreLogic determined that the declining jumbo-to-conforming rate difference is due in part to increasing guarantee fees on con - forming loans purchased by Fannie Mae and Freddie Mac. Since 2010, the average guarantee fee has nearly tripled, increasing from 22 basis points to 57 basis points as of 2017. Jumbo loans are too big to be purchased by Fannie Mae and Freddie Mac, leaving them untouched by the fee increases. According to CoreLogic, nearly all jumbo loans are full doc and made to prime borrowers, which means these loans have relatively high credit standards. Homebuyers with 30-year fixed- rate jumbo loans tended to have higher credit scores than other buyers. These buyers' credit scores were 18 points higher on average than those with conforming loans as of Q1 2018. These factors may have also led to the lower cost of jumbo loans.

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