Black and Hispanic mortgage loan applicants in the United States continued to face higher rejection rates on than whites and Asians last year, according to data released by the Federal Reserve last week.

The 2008 Home Mortgage Disclosure Act (HMDA) report, based on data from more than 8,000 lenders, also showed a sharp decrease in loan applications overall and a big increase in government-backed mortgages as a percentage of the overall market.

The report found that 36.1 percent of black applicants and 31.1 percent of Hispanic whites seeking mortgages for home purchases were turned down in 2008, compared to 13.6 percent of whites and 18.7 percent of Asians. Rejection rates for all four groups were up slightly from 2007.

Significant increase in refinance denials

On mortgage refinancings, the rate of rejection increased significantly for both blacks and Hispanics, while rejection rates decreased slightly for whites and Asians. For blacks, 61.2 percent of mortgage refinance applications were rejected in 2008, up from 53.3 percent in 2007. For Hispanic whites, 50.6 percent of refinance applications were rejected in 2008, up from 43.4 in 2007.

For non-Hispanic whites, the comparable figures on mortgage refinancings were 31.7 percent rejected in 2008, down from 34.0 in 2007; for Asians, the figures were 31.6 percent in 2008, down from 32.6 percent the year before.

The report said the substantial differences in denial rates and incidents of higher-priced among ethnic groups could not be explained by factors included in the HMDA data, though some of it could be attributed to economic variations. However, it said it was not possible to determine to what extent the disparities were due to illegal discrimination, due to the fact that many key factors considered by lenders in making loans are not included in the HMDA data.

Mortgage applications down one-third

Overall, mortgage loan applications were down sharply in 2008, to 14.2 million applications, down from 21.4 million in 2007 and 34.3 million in the peak year of 2003. Applications for home purchase mortgages were down to 5.0 million in 2008, down from 7.6 million in 2007 and 11.7 million in their peak year of 2005

Refinance applications were down to 7.7 million, compared to 11.5 million in 2007 and 24.6 million in their record year of 2003. Applications for home improvement mortgages were also down, to 1.4 million in 2008, from 2.2 million in 2007.

The percentage of government-backed mortgages jumped in 2008, with both FHA and VA mortgages up sharply. The share of conventional (nongovernment) loans declined to 74.3 percent of the market, down from 92.5 percent in 2007. FHA mortgages, meanwhile, increased to a 21.5 percent share of the market in 2008, up from 5.6 percent the year before, while VA loans increased to 4.2 percent of all mortgages, up from 1.9 percent in 2007.

The increase in the popularity of FHA and VA mortgages is widely attributed to their lower down payment and credit rating requirements, compared to conventional loans.

"Piggyback" loans plumment

In another illustration of the dramatic changes that have occurred in the mortgage market, the number of "piggyback" loans, second mortgages used by borrowers to cover the down payment and avoid paying private mortgage insurance, dropped dramatically as lending requirements were tightened. Only 43,000 "piggyback" loans were reported in 2008, down from 357,000 in 2007 and 950,000 in 2006, for owner-occupied properties of 1-4 units.

The annual report is required by the Home Mortgage Disclosure Act of 1975, which requires most mortgage lending institutions with offices in metropolitan areas to disclose information about their home-lending activity. The reports are intended to help determine whether those institutions are serving their communities' housing financial needs, facilitate enforcement of the nation's fair lending laws and provide information to investors.

Published on October 5, 2009