Sunday, October 11, 2009

One Third of All Mortgage Applications Denied


The mainstream media will talk a great deal about how the number of mortgage applications is soaring.

What they don't tell you is that one-third of all those applications are denied.

It takes two ingredients to make a bull market:

1. Cheap money
2. Loose lending standards

Thanks to Mr. Bernanke we have #1.

We don't have #2 and won't for a long time. Why?

Because banks and lenders aren't stupid. Conditions for making loans are awful. Rising unemployment, massive loan defaults, and let's not forget inflation and the disaster of borrowing short and lending long when interest rates will likely explode in a few years. If I was a lender I'd be hoarding cash now and building reserves to ride out the bad months still to come---and likely rejecting lots of new loan applications.

Robert J. Abalos, Esq.

Report: 1 in 3 Loan Applications Denied

WASHINGTON — Nearly one in three borrowers who applied for a mortgage last year was denied as lenders kept their standards tight as the mortgage crisis accelerated, the government reported Wednesday.

In its annual look at mortgage practices among lending institutions, Federal Reserve said the denial rate for all home loans was about 32 percent last year — about the same as in 2007, but up from 29 percent in 2006. The denial rates for blacks and Hispanics were more than twice as high as the rate for white borrowers.

The report highlights massive changes in the lending industry after the housing market bust. Overall loan applications were down by a third from a year earlier, and were half the level in 2006.

Loans backed by the Federal Housing Administration soared to 21 percent of all loans made last year from less than 5 percent in both 2005 and 2006.

For black borrowers, more than half of all loans were FHA-insured, more than triple a year earlier. For Hispanics, that number shot up to 45 percent, more than four times as high as in 2007. That was troubling news for consumer advocates.

"I'm hard-pressed to believe that many of those borrowers couldn't have been served by the private sector," said John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer group in Washington. "It implies that the industry has shut down in serving this population."

High-priced loans with rates at least 3 percentage points above the rate for prime loans, shrunk to nearly 12 percent of the market from a high of 29 percent in 2006. But that figure mainly reflects unusually low interest rates during the recession, the report said, and understates the disappearance from the market of high-priced subprime loans made to borrowers with poor credit.

Last year, about 17 percent of blacks and 15 percent of Hispanics got high-priced loans, compared with about 7 percent of whites. Even controlling for factors that might widen that discrepancy, there still a gap of almost 8 percentage points between the number of blacks and whites who got high-cost loans.

The mortgage industry says lenders are not discriminating by race, and are making adjustments based on borrowers' risk profile — such as their credit score and the size of their down payments.

"You still have a certain degree of risk-based pricing in the market," said Jay Brinkmann, the Mortgage Bankers Association's chief economist.

Lenders also scaled back dramatically on the amount of so-called "piggyback" mortgages, in which borrowers used second mortgages to avoid making a 20 percent down payment. Those loans have virtually disappeared from the market: Only 98,000 were made last year, down from 1.3 million annually in 2006.

The data, collected from nearly 8,400 lenders, is required under the Home Mortgage Disclosure Act of 1975.