TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/1181586
22 | M R EP O RT FEATURE T he 2018 Home Mortgage Disclosure Act (HMDA) filings indicate data submissions from more than 5,600 institutions on approximately 10.3 million home mortgage applications. This total includes approximately 2 million applications that the lender closed as incomplete, or the applicant withdrew before the lender made a decision, according to the CFPB's report in August 2019, "Data Point: Mortgage Market Activity and Trends." Why Are Applicants Walking Away? L ender requirements for report- ing denial reasons was changed from optional to mandatory in 2015. The HMDA Loan Application Register (LAR) includes nine poten- tial reasons for denial, and the LAR now requires up to four denial reasons. Lenders can explain loans that are denied for "other" reasons in a free-form text field. The 2018 overall rate of denial for conventional and unconventional home-purchases for all applicants is 9.8%. This figure represents a denial rate of 8.4% for conventional loans and 12.7% for unconventional loans. Denial rates on home-purchase applications have generally de- clined. However, denial rates vary among racial and ethnic groups. Denial rates for conventional and unconventional home-purchase loans were 17.4% for African- American borrowers, 13.1% for Hispanic-white borrowers, and 10.2% for Asian borrowers. The rate of denial was 14.2% for ap- plicants listed as "other," which includes borrowers reporting two or more minority races, American Indians, Alaskan natives, Native Hawaiians, or Pacific Islanders. The reasons for denial are telling. In the home-purchase category for conventional and unconventional loans, a reported denial reason for 13% of all ap- plicants included incomplete credit application. The incomplete application denial rate was 15.6% for Asians, 13.1% for Non-Hispanic white, 10.4% for Hispanic white, 10.1% for African-American, and 11% for "other" minorities. In the home-purchase category for all loan types, 8.4% of all ap- plicants included unverifiable information as a reason for denial. This figure was highest for Asians at 13%, followed by 10.4% for Non-Hispanic white, 8% for other minorities, and lowest for both African-American and Hispanic applicants, each at 7.5%. Remaining reasons for denial are very consistent across each race and ethnic group, with an overall rate of 32.6% based on debt- to-income ratio, 23.1% for credit history, and 16.9% for collateral. Withdrawn applications rep- resent the larger share of loans closed prior to the lender making a decision. Homebuyers, as well as refinance applicants who apply for loans to more than one lender, will ultimately withdraw their ap- plication from one lender, whether or not they were approved. There are many reasons why consumers withdraw a mortgage applica- tion. For purchase transactions, there may be buyer's remorse or concerns about the home after a property inspection is completed. According to Fannie Mae's June 2019 National Housing Survey, 34% of homebuyers obtained only one quote from a lender. About 72% of white borrowers reported shopping around, while only 10% of Hispanic, 7% of African- Americans, and 5% of Asians obtained more than one quote. For applicants earning less than $50,000, only 10% obtained more than one quote. Best Practices to Reduce Fallout C ustomer engagement is a primary driver for building trust. Whether communication is in-person, by telephone, mail, or email, every point of contact from application to closing between the borrower and any representative of the company must demonstrate a willingness to lend. There are potential homebuyers who have the capacity to purchase a home, but they hesitate because they sense some form of unintentional bias. Unintentional bias is not about how a lender treats a loan applicant—it's about the applicant's perception. Applicants sometimes have a preconceived notion that an institution would be reluctant to loan money to them because they lack banking experience, have little or no credit history, have a low-income job, were not born in this country, or because of their race or ethnicity. The Fannie Mae survey brings up an interesting observation—white applicants are more comfortable negotiating with different lenders. One of the most important things a lender can communicate to an applicant is that documentation require- ments, underwriting rules, and verification steps are uniform and apply to all borrowers, and in all income levels. To sustain trust, there can be no surprises. Applicants need to know up-front that verification let- ters will be sent to their landlord, their employer, their union admin- istrator, or to their neighborhood savings club. They need to be told that their boss might receive a telephone call to confirm their overtime pay. Borrowers who are receiving cash gifts should be able to prepare their relatives ahead of time about gift letters and rules for sources of funds. Multigenerational households are popular in certain cultures, Multicultural Markets and Application Fallout What factors result in higher minority loan denial rates, and what can be done to help? By Anna DeSimone