More Loans Getting Approved, But Applications Still Low

The share of home purchase loan originations to total home purchase loan applications improved steadily if slightly, based on the latest Home Mortgage Disclosure Act (HMDA) loan level data as of 2014 (most recent). However, consumers remained reluctant to borrow as credit standards remained difficult, even for middle-income earners. FHA-insured mortgages have higher debt-to-income requirements and are more accessible to non-high income earners.[1]

Loan approvals continue to increase although modestly

The share of loan originations to the total loan applications has been improving steadily, although modestly since 2011. In 2014, 69.4 percent of all home purchase loan applications resulted in a loan origination, a slight increase from 66.6 percent in 2011. Conversely, the share of loan applications that were denied decreased from 15.6 percent in 2011 to 13.4 percent in 2014. The combined share of loans that were approved but not accepted by the applicant and loans that were withdrawn by the applicant also decreased from 15.6 percent in 2011 to 14.7 percent in 2014 (Chart 1).

Across income group categories, the shares of home purchase loans originated to loan applications have increased since 2011, although modestly (Chart 2)[2]. Among applicants whose income is 80 percent or more of the median family income of the metropolitan statistical area (MSA) in which the applicant’s census tract is located, the share of loans originated was greater than 70 percent in 2014.  Among applicants whose income is below 80 percent of the MSA median family income, the percentage of loan applications that were originated also improved to 64.9 percent in 2014 from 62.5 percent in 2011. The likelihood of having a loan originated increases as income increases.

 “Middle” to “higher income” borrowers increasing, but “lower” income borrowers still reluctant to borrowAlthough the share of loan originations to total applications has been improving across all income groups, the number of loan originations has increased only among applicants earning 80 percent or more of the MSA median family income.  Meanwhile, the number of loan originations among applicants earning below 80 percent of the MSA median family income has stayed at about the same level since 2010 (Chart 3). Loan originations from this latter group were essentially flat because loan applications have barely budged since 2011. In contrast, applications from those earning 80 percent or more of the MSA median family income have steadily increased, especially among applicants earning 120 percent or higher of the MSA median family income (Chart 4).Altogether, the number of home purchase loan originations increased only modestly to 3.14 million in 2014 from about 3.02 million in 2013, a slower pace compared to the turnaround in 2012-2013. The number of loan originations remains far below the 6.81 million level in 2005.

Access to credit remains difficult for middle-income earners

One reason why the number of applications has barely increased among those earning below 80 percent of the MSA median family income and has improved only modestly overall is that credit access remains tight. Underwriting standards such as FICO credit scores, debt-to-income ratios, and ability to make a down payment are all related to income, and these standards have become more stringent.[3] Amid modest income growth, tight inventory conditions have also caused a rapid rise in prices that made homes more unaffordable. Finally, lower-income borrowers also tend to avail of FHA loans, and FHA’s increase in the annual mortgage insurance premiums from 55 basis points in 2010 to 135 basis points by 2014 also likely affected low-to middle-income earners during this period.[4]

The reduction in the upfront mortgage insurance premium by 0.5 percent in 2015 is intended to lower the cost of credit for FHA-insured loans and attract more first-time homebuyers. As noted in a NAR analysis by Ken Fears, NAR’s Director for Regional Economics and Housing Finance, this change in policy appears to have been well-received by consumers with lower credit scores whose optimism towards housing demand improved dramatically over the 12-month period ending in March of 2015.

What this means to REALTORS®. Among those who do make a decision to purchase a home and apply for a loan, access to credit has been improving, especially for those earning above average incomes. However, access to credit still remains generally difficult, even for middle-income earners. REALTORS® need to work with borrowers to access FHA-insured loans or loans backed by state housing finance agencies where income-related requirements are less stringent.

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[1] Thanks to Ken Fears, Director of Regional Economics and Housing Finance for his valuable comments and to Hua Zhong, Data Analyst, for his assistance on the data tabulation.

[2] A detailed breakdown of the action taken on a loan application was reported by lending institutions starting in 2011. Previously, reporting lending institutions only reported if the loan was originated or purchased from another institution. In counting loan applications, NAR used the “Action Data” counts. In counting total applications, we excluded preapprovals and loans purchased by the institution to eliminate double counting.

[3] In the New York Federal Reserve Board’s various surveys on consumer expectation regarding credit access to a mortgage from February 2014 thru June 2015, respondents’ perceived likelihood of being rejected was nearly 40 percent. See http://www.newyorkfed.org/microeconomics/sce/credit-access.html#indicato...

[4] A detailed breakdown of the action taken on a loan application was reported by lending institutions starting in 2011. Previously, reporting lending institutions only reported if the loan was originated or purchased from another institution. In counting loan applications, NAR used the “Action Data” counts. In counting total applications, we excluded preapprovals and loans purchased by the institution to eliminate double counting.