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Dispute Over Banking Group’s Analysis of Mortgage Denials to Blacks

dealbook.nytimes.com | May 27, 2014

by Peter Eavis

The Mortgage Bankers Association, one of the nation’s most influential financial lobbying groups, made a startling claim this week about the access of black borrowers to credit.

The association’s president, David H. Stevens, said that 56 percent of blacks who applied for a common type of mortgage were denied. When that figure was publicized, it set off a barrage of questions on social media. Since Mr. Stevens’s number was far higher than the mortgage denial rates for blacks that other analysts found, the association was pressed to provide a full accounting of its calculations.

The association has answered some questions, but its conclusions remain murky.

The discussion underscores one of the most pressing issues affecting the American housing market. Since the financial crisis, the government has dominated the mortgage market. Banks lend borrowers money to buy homes, but they turn around and sell most of the mortgages to investors, attaching a government guarantee of repayment in the process. The government gets paid for that guarantee, but it also requires that the borrowers meet certain requirements that aim to ensure that they can repay the loans. The big debate right now is whether those requirements are overly demanding, excluding certain types of borrowers from certain types of mortgages.

And that debate has intensified as Congress has drafted legislation to replace the current government-dominated system.

The Mortgage Bankers Association favors scaling back government involvement in the mortgage market and replacing it with more private capital, which, in theory, would be provided in part by the association’s members. But some consumer advocates fear that dismantling the current system — including Fannie Mae and Freddie Mac, the huge government-sponsored enterprises, or G.S.E.s, that guarantee mortgages — could restrict minorities’ access to credit.

In his speech, Mr. Stevens decided to address those concerns by making the point that the current system was hardly providing wide access to minorities.

“Some advocates in Washington fear changing the G.S.E.s because they want to protect the underserved and minorities from being crowded out of the housing market,” he said. “However, data clearly shows that they are being left out now.” Mr. Stevens then said that 56 percent of blacks who applied for a Fannie Mae or Freddie Mac loan to purchase a house were denied in 2012.

Those remarks, and the denial rate, were not included in the version of the speech posted on the association’s website on May 19. John T. Mechem, a spokesman for the association, said they were in an earlier version that was sent to reporters. He denied that the material was later removed because of concern about the analytical rigor.

“M.B.A. stands by its analysis of H.M.D.A. data, and frankly we are disappointed at the direction of the debate, which obscures the alarming trend for African-American borrowers,” Mr. Stevens said in statement on Thursday. He was referring to the Home Mortgage Disclosure Act, which requires banks to report data on their loans so regulators can look for signs of racial discrimination.

Joshua Rosner of Graham Fisher & Company, a research firm, did much to bring attention to Mr. Stevens’s comments on the denial rate. On Tuesday, Mr. Rosner posted this to Mr. Stevens on Twitter: “Challenge: show us H.M.D.A. numbers on denials you cite.” Much back and forth ensued, with Mr. Stevens later telling Mr. Rosner, “You are chasing dragons.” But Mr. Stevens did not post the data behind his denial rate.

One reason the association’s rate got attention was that it is much higher than the rate calculated by other entities. The real estate website Zillow says the denial rate for blacks was 25.4 percent in 2012. The Federal Reserve, using the Home Mortgage Disclosure Act data, calculated the denial rate at 32 percent for that year, the most recent available. The Fed said the denial rate for whites that year was 11.6 percent.

Some analysts question whether the M.B.A. took some hard-to-justify steps to get a much higher denial rate, which Mr. Stevens could then use to bolster his argument that minorities are being left out under Fannie Mae and Freddie Mac’s current credit standards.

“We believe there are serious flaws with how this H.M.D.A. data was analyzed and characterized,” said Andrew J. Wilson, a Fannie Mae spokesman. “We are committed to working with all stakeholders to ensure access to safe, affordable mortgage credit in every community.”

Mr. Mechem, the mortgage bankers’ spokesman, said that to get to its 56 percent denial rate, researchers at the association counted 45,897 total loan denials in 2012 for blacks for conventional mortgages, or loans that have characteristics that typically qualify them for backing by Fannie Mae and Freddie Mac. That number is 56 percent of the 82,399 loans in the association’s overall loan sample.

The association declined to break out any of the numbers that make up the aggregated totals, even though it includes data others leave out.

The industry group, for instance, includes preapproval denials on mortgages. Borrowers often go to a bank to get preapproved for a mortgage before selecting an actual property. It is a step taken before a borrower makes a full application for a loan for a specific house, and analysts have traditionally excluded denials of preapprovals. Another reason for excluding preapproval denials is that it may result in an overcount of denials if, for example, a borrower goes to three different banks for a preapproval and is denied by all three.

“The inclusion of preapproval denials in the M.B.A.’s calculation is something I’ve never seen before, and it seems to me that they artificially inflate denial rates.” Debbie Bocian, a principal researcher at the Center for Responsible Lending, said in an email. “Having said all that, we share a concern that credit is constrained, particularly conventional credit, for borrowers of color.”

The association also includes loans for manufactured housing, or trailer homes, which the Fed and others exclude.

Fannie Mae and Freddie Mac can back loans on manufactured housing only when the borrower owns the actual land underneath the home. Those mortgages make up a small share of all manufactured housing loans. And to properly determine a denial rate for Fannie and Freddie loans, analysts would need to leave out all the loans that Fannie and Freddie could not back.

The M.B.A. said it had effectively made that distinction in its denial rate, asserting that it included only conventional manufactured housing loans.

But critics of the association’s methods contend that the data on manufactured housing is not clean enough to make the distinction. To support this assertion, the critics point to a memo that a federal regulator sent to banks in February. The regulator asked for the banks’ data submissions to distinguish whether manufactured housing loans were for homes on borrower-owned land or not.

Including manufactured housing could make a big difference.

The Fed said that mortgage disclosure act data showed that 20,322 blacks were denied loans for trailer homes in 2012. If the association included a large share of those denials, it could have a big effect on its overall denial rate, because the manufactured housing denials substantially exceeded the 17,047 denied applications for loans for regular types of housing.

Mr. Mechem said the association could not provide its manufactured housing number because its researchers were working on other data requests.

The denial rates do not count loans insured by the Federal Housing Administration. Borrowers who cannot get a Fannie or Freddie loan may qualify for an F.H.A. mortgage.

 

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