Executive Summary

Report

Recommendations

Appendix I

Press Release

In a disturbing trend, lenders far more frequently report that the information about an applicant’s race or national origin was not provided in mail or telephone applications—undermining HMDA analysis. In the refinance market, this is particularly true for subprime lenders.

While lenders reported “information not provided” for only 3.2 percent of all home purchase loans in 1996, this jumped to 5.9 percent in 1998. Worse, lenders reported “information not provided” on race/national origin for 14.9 percent of refinancing loans and 13.6 percent of home improvement loans.

Cendant Mortgage, a growing “800”-line home purchase lender statewide, reports that information on race or national origin was “not provided by applicant in mail or telephone application” by 80 percent of its borrowers. Lenders who process loan applications entirely by phone are not currently required to ask borrowers for information about race/ethnicity or sex. If lending by telephone or over the Internet grows over the coming years without required reporting, HMDA data may decline in usefulness over time.

Nationally, subprime lenders do not report the race of the applicant on a large share of refinance applications reported. Nearly half of applications reported by subprime companies did not provide the race of the applicant. Subprime lenders accounted for 55.4 percent of all applications where race was not provided by the applicant.

Further, “the minority composition of the neighborhood suggests that the conventional applications where race was not provided by the applicant may have been disproportionately Black,” reported HUD in 1999.(10) In low income tracts in every major MSA studied, The Money Store, Centex Credit Corporation, and Green Tree Financial did not report race information on most of their low income tract refinancing loans, although they refinanced a significant number of homes in these areas.

Since subprime lenders do not report the race of the applicant at a much higher rate than prime lenders, it is possible that subprime lending among black borrowers is occurring at even higher rates than we have outlined in this report.

Fewer Conventional Loans to Minority Applicants Statewide

Most owner occupied home purchase loans are made in the conventional loan market, but Black and Hispanic applicants are more likely to apply for and receive FHA loans. A FHA loan is a mortgage loan from a commercial lender just like a conventional loan, but the Federal Housing Administration (FHA) insures 100 percent of the loan’s value, thus eliminating risk to the lender. The program is supported by the insurance premiums paid by all borrowers. (11)

Interest rates for FHA loans are set by the market, and can be competitive with conventional loan rates, but FHA requires borrowers to pay an insurance premium up front of 2.25 percent of the amount borrowed, plus .5 percent of the amount borrowed every year. Thus, the actual cost of an FHA loan will generally be somewhat higher than a conventional loan for a person with good credit.(12)

FHA loans may be issued to borrowers with lower quality credit histories. Further, the additional cost of the initial insurance premium and some closing costs can be rolled into the loan and financed. (13) Reduced costs at closing allow some buyers to purchase a home who might not be able to meet conventional guidelines (at least 5 percent down plus closing costs).

In 1998, 83.2 percent of all owner occupied home purchase applicants applied for conventional loans, up from 79.1 percent in 1996. And 73.5 percent of home purchase loans were originated as conventional loans. Only 20 percent of loans in 1998 were FHA loans.

Blacks and Hispanics applied for conventional loans at somewhat lower rates than whites in 1998, and received conventional loans at much lower rates (see table, page 11). About a third of Hispanic and Black borrowers ultimately received FHA loans, compared to 16 percent of White borrowers.

Several of the state’s largest mortgage lenders (including North American Mortgage, Irwin Mortgage, Countrywide and FT Mortgage Companies) made more loans in 1998 to Black and Hispanic borrowers through their FHA program than through their conventional loan program, while making conventional loans to the majority of their White borrowers.

Denial Rate Findings

Denial rates, an indicator of the potential for discrimination, remained higher for Black and Hispanic applicants compared to White applicants. The difference between denial rates for Whites and denial rates for minorities remained about the same over the three year period for home purchase loans, but actually increased for refinancing loans.

In 1998, applicants were generally denied home purchase loans at a slightly higher rate than in 1996, but Black and Hispanic applicants statewide were about 1.5 times as likely to be denied a home purchase loan as White applicants in 1998.

The disparity between the denial rate for White applicants and the denial rate for Black and Hispanic applicants increased in the booming 1998 market for owner occupied home refinancing loans. Black and Hispanic applicants were denied at twice the rate of White applicants in 1998.

Predictably, denial rates correlate to income, with higher denial rates for low income people of all races and lower denial rates for higher income people. At the lowest income levels, denial rates for Black and Hispanic applicants statewide are only slightly higher than those for low income White applicants. However, denial rates decrease more slowly for higher income Black and Hispanic applicants. At the highest income levels (over about $90,000 on these curves), Black and Hispanic applicants are denied a home purchase loan about twice as often as White applicants at the same income level.

The highest disparities in 1998 appear in Austin-San Marcos and Bryan-College Station (see tables, page 34). The disparity between denial rates for Whites and denial rates for Black applicants (the disparity ratio) remained about the same over the three year period in Dallas, El Paso, Fort Worth and Houston, but in Austin/San Marcos Blacks were denied somewhat more often as compared to Whites than they were in 1996.

The disparity between denial rates for Whites and denial rates for Hispanic applicants (the disparity ratio) remained about the same over the three year period in most major Texas MSAs. The picture improved for Hispanic applicants in Abilene, El Paso and Wichita Falls.

Certain lenders have very high disparities between rates of denial for White and minority applicants. Statewide in 1998, National City Mortgage, Muirfield Mortgage and Cornerstone Mortgage denied Black applicants at more than five times the rate they denied White applicants. National City Mortgage and Home Loan Corp denied Hispanic applicants at more than five times the rate they denied White applicants.

On the other hand, manufactured home lenders and subprime lenders have among the most uniform denial rates. Of the 10 lenders with the lowest statewide denial ratios for Black applicants, six of them are manufactured home lenders and two are sub-prime lenders. (14) Unfortunately, this pattern reinforces the possiblity that minority applicants end up taking higher priced credit because this is the only credit they can get.

NOTES:

10 Housing and Urban Development, 1998 HMDA Highlights, Appendix D, Manufactured Home and Subprime Lenders in HMDA, p. 36.

11 FHA vs Conventional Financing, FHA Today-Online FHA Financing, 2/21/00.

12 ibid. Also, rate comparisons provided by online mortgage brokers Ascot Mortgage, Mortgage Amenities Corp, and Texas Mortgage.

13 "An analysis of FHA's Single-Family Insurance Program," last revised, 6/30/99, www.huduser.org/publications/hsgfin/singlefa.html. Downloaded 2/21/00.

14 Housing and Urban Development, 1998 HMDA Highlights, Appendix D, Manufactured Home and Subprime Lenders in HMDA, Table D5b, Subprime and Manufactured Home List, 1998, List B, Expanded List. HUD lists Green Tree Financial, Nationscredit MFG Housing, The CIT Group Sales Finance, Greenpoint Credit Corp, Associates Housing Finance and Duesche Financial Capital as manufactured home lenders. HUD lists United Companies

Lending as a subprime lender. Harbor Financial Mortgage was also a subprime lender according to news accounts of its 1999 collapse. Muolo, Paul, "Another Credit Line at Risk?" National Mortgage News, October 25, 1999.