Minorities increasingly denied home loans due to their debt burdens

Rising interest rates are creating heavier debt burdens for all would-be borrowers today, but they’re also disproportionately harming debt-to-income levels among minority home shoppers, which has led to an increase in their mortgage credit denials for that reason, an analysis of 2022 HMDA data by the Consumer Financial Protection Bureau said.

The report, which looked at data filed by 55 financial institutions in the first and second quarter of 2022, found that the debt-to-income (DTI) for minority borrowers has notably increased this year, putting many would-be minority homeowners at a disadvantage. With the increase in DTI, the watchdog’s analysis found a concurrent uptick in credit denials among minority borrowers on the basis of elevated DTI.

Ting Shen/Bloomberg

By the end of the second quarter of 2022, over 45% of Black and Hispanic white applicants who were denied had DTI reported as the reason. That’s the highest share registered since the latest HMDA data reporting requirements took effect in 2018. 

“For many mortgage applicants who are on the margin of qualifying, the higher projected DTI could potentially lead to their applications being rejected, when they would have otherwise been approved if they had a lower DTI,” Feng Lui, a senior economist at the CFPB said in a blog post on Wednesday.

In the past two quarters, the average debt-to-income ratio increased for all groups. However, Hispanic white borrowers and Black borrowers saw the largest increases.

The average DTI for Hispanic white borrowers reached over 40%, while the average DTI for Black borrowers rose to 39.4%. Meanwhile, in the non-Hispanic white category, DTI increased a little over 36% at the end of the second quarter.

The CFPB said in its report that it intends to “keep a watchful eye” on this trend as additional HMDA data arrives.

The report also found that the average monthly payment for borrowers taking out a conventional mortgage in the first half of the year shot up from $1,446 in December 2021 to $1,974 in June 2022 — marking a 36.5% increase in a span of six months.

The average payment increased by 36.9% for Black borrowers, 36.7% for Hispanic white borrowers, 37.7% for non-Hispanic white borrowers, and 32.3% for Asian borrowers, the watchdog’s report said.

Meanwhile, another trend is coming to the forefront: a notable rise of discrimination complaints.

Discrimination complaints “rose substantially” in 2021, a National Fair Housing Alliance report found, despite fewer agencies reporting housing discrimination data to the Washington D.C.- based nonprofit.

A total of 31,216 housing discrimination complaints were lodged by consumers last year, an 8.7% increase from 2020 when 28,712 fair housing complaints were filed. The number of complaints is the highest on record since the nonprofit started collecting discrimination complaint data from agencies 25 years ago.

The data set is a “snapshot of millions of instances of housing discrimination that occur annually,” the report said. Many cases go unreported. 

“The significant increase in the number of discrimination complaints filed with federal and state agencies and nonprofit fair housing organizations is disturbing and should alarm us all,” said Lisa Rice, president and CEO of NFHA in a statement. “It will take significant resources to turn the tide and give needed support to the groups who are on the ground providing assistance to victims of discrimination.”