Report: 1 in 3 loan applications denied

WASHINGTON – Oct. 1, 2009 – 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 is 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.

WASHINGTON – Sept. 10, 2009 – The Obama administration’s $50 billion mortgage relief program is finally picking up speed after a sluggish and disappointing start: Nearly one in five eligible homeowners have been offered help so far.

The “Making Home Affordable” plan was launched with great fanfare in March. As of last month, lenders had sent out more than 571,000 offers to reduce borrowers’ monthly payments, the Treasury Department said Wednesday.

That’s 19 percent of the nearly 3 million U.S. homeowners eligible for a loan modification under the plan, up from 15 percent at the end of July.

“There are signs the plan is working,” said Michael Barr, assistant Treasury Secretary for financial institutions. “But we can do better.”

Of the modifications offered, about 360,000 borrowers, or 12 percent, have signed up for three-month trial modifications, which are supposed to be extended for five years if the homeowners make their payments on time.

To increase pressure on the industry, Waters and other lawmakers threatened to revive a failed proposal, opposed by banking lobbyists, to let bankruptcy judges rewrite the terms of a mortgage.

That change is necessary, consumer groups say, because getting a lender to do so voluntarily is still a time-consuming, bureaucratic nightmare. Many lenders are still scheduling foreclosure sales, and charging borrowers fees for participating in the Obama plan.

“The administration has got to put some teeth in this and really get some consequences for the lenders and servicers who are not cooperating,” said Bonnie Mathias, a board member of the Association of Community Organizations for Reform Now, or ACORN.

But mortgage executives say they are racing to implement the program, hiring thousands of workers to handle an unprecedented flood of calls.

“We fully understand the urgency,” Jack Shackett, Bank of America’s head of credit loss prevention, told lawmakers. “We understand that we have a long way to go under very challenging circumstances.”

Bank of America has doubled its number of trial modifications in two months to nearly 60,000. But it still lags its competitors, having enrolled about 7 percent of its 836,000 eligible loans, compared with 25 percent for JPMorgan Chase & Co.

The Treasury Department’s decision to publish those numbers has clearly provided a powerful inventive for many in the industry.

Lenders are “concerned about the report card showing them in a worse light than their peers,” said David Stevens, an assistant secretary at the Department of Housing and Urban Development. “Nobody wants to be a low performer on that score card.”

Industry executives also say they are planning to work with Obama administration officials on a possible extension of the program to unemployed homeowners. Also under consideration is finding a way to help borrowers with “pick-a-payment” or option ARM loans, which gave borrowers the ability to defer some of their interest payments and add them to the principal.

Treasury says 48 mortgage companies are now involved in the program, up from 38 in July. The companies have requested financial information from almost two-thirds of eligible borrowers and say they are on track to have 500,000 loan modifications in place by Nov. 1.

The program is voluntary, relying on subsidies to encourage mortgage companies to participate. Lenders must agree to reduce the loan payments to 38 percent of a borrower’s monthly pretax income. After that, the government and lender split the cost of bringing the payment down to 31 percent.

Borrowers can receive rates as low as 2 percent for five years.WASHINGTON – Sept. 10, 2009 – The Obama administration’s $50 billion mortgage relief program is finally picking up speed after a sluggish and disappointing start: Nearly early one in five eligible homeowners have been offered help so far. The “Making Home Affordable” plan was launched with great fanfare in March. As of last month, lenders had sent out more than 571,000 offers to reduce borrowers’ monthly payments, the Treasury Department said Wednesday. That’s 19 percent of the nearly 3 million U.S. homeowners eligible for a loan modification under the plan, up from 15 percent at the end of July. “There are signs the plan is working,” said Michael Barr, assistant Treasury Secretary for financial institutions. “But we can do better.” Of the modifications offered, about 360,000 borrowers, or 12 percent, have signed up for three-month trial modifications, which are supposed to be extended for five years if the homeowners make their payments on time. To increase pressure on the industry, Waters and other lawmakers threatened to revive a failed proposal, opposed by banking lobbyists, to let bankruptcy judges rewrite the terms of a mortgage. That change is necessary, consumer groups say, because getting a lender to do so voluntarily is still a time-consuming, bureaucratic nightmare. Many lenders are still scheduling foreclosure sales, and charging borrowers fees for participating in the Obama plan. “The administration has got to put some teeth in this and really get some consequences for the lenders and servicers who are not cooperating,” said Bonnie Mathias, a board member of the Association of Community Organizations for Reform Now, or ACORN. But mortgage executives say they are racing to implement the program, hiring thousands of workers to handle an unprecedented flood of calls. “We fully understand the urgency,” Jack Shackett, Bank of America’s head of credit loss prevention, told lawmakers. “We understand that we have a long way to go under very challenging circumstances.” Bank of America has doubled its number of trial modifications in two months to nearly 60,000. But it still lags its competitors, having enrolled about 7 percent of its 836,000 eligible loans, compared with 25 percent for JPMorgan Chase & Co. The Treasury Department’s decision to publish those numbers has clearly provided a powerful inventive for many in the industry. Lenders are “concerned about the report card showing them in a worse light than their peers,” said David Stevens, an assistant secretary at the Department of Housing and Urban Development. “Nobody wants to be a low performer on that score card.” Industry executives also say they are planning to work with Obama administration officials on a possible extension of the program to unemployed homeowners. Also under consideration is finding a way to help borrowers with “pick-a-payment” or option ARM loans, which gave borrowers the ability to defer some of their interest payments and add them to the principal. Treasury says 48 mortgage companies are now involved in the program, up from 38 in July. The companies have requested financial information from almost two-thirds of eligible borrowers and say they are on track to have 500,000 loan modifications in place by Nov. 1. The program is voluntary, relying on subsidies to encourage mortgage companies to participate. Lenders must agree to reduce the loan payments to 38 percent of a borrower’s monthly pretax income. After that, the government and lender split the cost of bringing the payment down to 31 percent. Borrowers can receive rates as low as 2 percent for five years.