One Out of Three loans denied

Report from Federal Reserve reveals 1 in 3 loan applications denied in 2008; Lenders raised standards

According to a recent article written by Alan Ziebel, AP Real Estate Writer, on Wednesday September 30, 2009, 4:52pm EDT, Ziebel wrote that one out of three borrowers who applied for a mortgage last years was denied. This was attributed to lenders keeping their standards tight during the mortgage crisis.

Overall the Federal Reserve said the denial rate for all home was about 32 percent in 2008 and about the same in 2007 but up 29% from 2006.

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

Ziebel stated that for black borrowers, more than half of all loans were FHA-insured, more than tripled 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.

John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer group in Washington said, “I’m hard-pressed to believe that many of those borrowers couldn’t have been served by the private sector…it implies that the industry has shut down in service 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 form a high of 29 percent in 2006. This figure is believed to reflect unusually low interest rates during the recession, the report said, and understates the disappearance from the market of high-priced subprime loans to make borrowers with poor credit.

According the mortgage industry, lenders say they 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.

Jay Brinkmann, chief economist of the Mortgage Bankers Association says, “You still have a certain degree of risk-based pricing in the market.”

Lenders dramatically scaled back on the amount of so-called “piggyback” mortgages, in which borrowers used second mortgages to avoid making a 20% 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 8,4000 lenders, is required under the Home Mortgage Disclosure Act of 1975,