“Debt-to-Income” Now Biggest Player in Mortgage Denials


Mortgage denial rates ebb and flow with the economy,
with lenders appetite for risk, and sometimes with the pressure lenders feel to
make loans. Denial rates in 2017 continued to diminish as they have done since the
economy began to improve in 2013 and were the lowest in any year since at least
2004. Using data collected from lenders under
the Home Mortgage Disclosure Act (HMDA),
CoreLogic estimates only about one in ten mortgage applications were denied
last year.

Poor credit used to be the primary reason
that lenders turned borrowers away, but Yanling Mayer, writing in the CoreLogic
Insights blog, says that, in the
current credit cycle that has changed. 
The tight inventory of starter and lower-priced homes has pushed the
prices of those homes up faster, impacting affordability more on that end of
the market.  That decline in
affordability has disproportionately hit the less affluent.  The 2017 HMDA data shows that borrowers’ debt-to-income
(DTI) ratio is now the primary reason
for denial of mortgage applications,
accounting for 30.3 percent of the 412,000 first-lien applications turned down
last year.  This is up from 28.8 percent
and 28.2 percent in 2015 and 2015 respectively. Credit history is the second,
and not even a close one, reason for denial

There is some variation among loan
types when it comes to percentages, but DTI is the number one problem with
applications for all three of the major types. It accounts for 30.2 percent of
conventional denials
, 28.6 percent of those for FHA loans, and 35 percent of VA

CoreLogic’s loan
application data indicates that increasing denials for DTIs is not due to a change
in underwriting emphasis but rather that DTIs have been increasing.  Figure 4 shows the 25th
percentile, median, and 90th percentile of the DTI in purchase applications.
 There has been a gradual, yet steady,
rise in that measure, from 35.1 in 2012 to 37.7 in 2017 and 38.6 in 2018
year-to-date. In 2017, about 25 percent of applications had a DTI at 30 or
lower, while 10 percent of applications had a DTI of at least 49. Mayer says CoreLogic’s
data doesn’t indicate the final disposition of an application, but the steady
DTI uptrend is consistent with rising HMDA loan denials related to the
debt-to-income ratio.

Mayer concludes that the DTI uptrend
is likely a reflection of the erosion of affordability as home prices have
risen much faster relative to wage growth
. The latest analysis by CoreLogic
shows the principal-and-interest payment on the median home has risen by 14%
over a year ago.  In the event of a negative income shock, higher DTI
loans are at a greater risk of default.

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