Do Mortgage Lenders Reject Loans To Blacks That They Would Make To Whites?


That is the thrust of a recent article by Diana Olick in CNBC, which she terms “An outrageous tale that reveals Black discrimination in the housing market.” Her information comes from Akili Akridge, a black applicant who “had all the right stats: a steady six-figure salary, an 800 FICO credit score, and 20% equity in a home.”

The major points of the story, as told to Olick by Akridge, are the following:

  • Looking to refinance, he entered his financial information in an online mortgage site.
  • The first two calls he received asked about his race and he replied that he was black. One of them turned him down on the nonsensical grounds that they did not make loans on townhouses, the second quoted a rate higher than the one he now has.
  • On the next two calls he received, he did not identify his race, and was offered loans at competitive rates by both.

Because the story was light on details, last week I wrote Olick the following questions:

1.   Did the complainant disclose to you the names of the loan officers who rejected him, and/or the lenders who employ them? I ask this because it seems to me that the malefactors should be held to account, at least by disclosing who they are.

2.   Did the complainant disclose the web site through which he contacted the lenders? I ask that because I have a multi-lender web site (www.mtgprofessor.com) in which built-in safeguards make the discrimination you describe impossible. I would be happy to describe how it works if you are interested.

Since I have received no reply from Olick, I decided that readers would be interested in how discrimination can be avoided. The applicant who comes to my web site for a loan provides the financial information that lenders require to qualify for the loan requested, and to price it. That information does NOT include the applicant’s race. If the applicant proceeds to contact one of the lenders, the loan officer assigned to him would know that the applicant met the qualification requirements, and that the applicant knew the price posted on that day.

The loan officer cannot refuse the loan on the grounds that it does not meet the lender’s property requirements. Those requirements are part of its qualification requirements that are posted on the site and known to the applicant. If the applicant wants a loan on a townhouse, for example, only lenders that make such loans would appear on the screen. Similarly, the loan officer cannot quote an inflated interest rate because the rate has been posted on the site and is known to the applicant.

Applicants using the site do not disclose their race until the loan officer takes the application. It would be extremely difficult for a biased loan officer to attempt to scuttle the deal at that point.

  • He can’t change the qualification requirement or the rate, those have already been set.
  • If he fabricates a rule and uses it as a ruse to reject the application, he must fill out a denial letter which sets out the specific reason for the denial. The letter must be provided to the applicant and is also available to the loan officer’s manager, whose salary and bonus are tied to the number of loans originated on his watch.  
  • If despite all this an unjustified rejection happened anyway, the applicant can contact me as ombudsman to consumers who use the site.

Mortgage lenders who want to participate are invited to contact me at jguttentag@mtgprofessor.com



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Will HUD Allow The HECM Program To Die?


HUD created this ingenious and multi-faceted reverse mortgage program, but its well-intentioned effort to protect it against misuse has been a disaster.

The disaster has stemmed from HUD’s requirement that the HECM be a stand-alone product, as opposed to being part of integrated retirement plans. FHA Mortgagee Letter 2008-24 bars HECM lenders from “involvement with any other financial or insurance product.” This rule stemmed from some abusive transactions early in the history of the program where HECMs were combined with annuities in order to generate 2 commissions.

The stand-alone rule prevents synergies that would benefit retirees, generates excessive loss rates, and is not needed to prevent market abuses.

Synergy Between HECMs and Annuities

The mortality-sharing feature of annuities allows retirees taking a HECM to draw larger amounts over their lifetimes if they combine it properly with an annuity. This would be particularly valuable for house-rich/cash/poor retirees who have negligible financial assets.

Chart 1 applies to a retiree of 63 who owns a $700,000 house but no financial assets. He draws a HECM credit line and uses a portion of it to purchase an annuity on which payments will begin after 10 years and grow at 2% a year. The balance of the line is used for monthly draws during the first 10 years, also growing at 2% a year, [Note: The math underlying the seamless transition from HECM draws to annuity payments was developed by my colleague Allan Redstone.]

The horizontal line in Chart 1 is the highest HECM tenure payment quoted by any of the lenders who report their prices to my web site. Tenure payments are for a fixed amount and cease if the borrower moves out of the house. With a stand-alone HECM, this is the best the retiree could do.  The HECM/annuity combination can escalate, it is 2% a year in the example, and it runs for life.

The higher of the two upward-sloping lines is based on the best annuity price quoted by a network of carriers who offer deferred annuities, to which I have access. The lower line is based on the lowest price of the carriers in the network, though there could be others with even lower prices. HUD’s stand-alone rule protects HECM borrowers from the worst annuity providers but prevents them from taking advantage of the good ones.

 

Synergy Between HECMs, Asset Management and Annuities

Homeowners with significant amounts of financial assets can safely increase the rate of return on assets by integrating asset management with a HECM and an annuity.

The received wisdom among financial advisors is that as retirees age, their asset portfolios should shift from assets with high expected returns and large variance to assets with lower expected returns and low variance. The logic of this shift is that as the investment period shortens, the likelihood rises that a large decline in asset returns won’t be offset.

For example, using data compiled by Ibbotson covering asset returns over 86 years, portfolios composed entirely of common stock had a median rate of return over 10-year periods of 10.9%, but in 2% of the periods, the return was -6.9% or less. Shifting a major part of the asset portfolio to fixed-income securities would reduce both the risk and the expected return.

But the homeowner with financial assets has another option. He can use a HECM credit line in conjunction with a portfolio composed entirely of common stock to hedge against the possibility that the rate of return on the stock will be markedly lower than the expected return.

Consider the retiree of 63 cited above but assume he now has a portfolio of $1 million of common stock in addition to the $700,000 house. He retains the stock portfolio with its 10.9% expected return, and will draw on a HECM credit line as needed to offset returns that are less than 10.9%.

This is illustrated in Chart 2. The spendable funds line is calculated at a rate of 10.9%. If the realized return is 5%, the retiree will draw on the credit line to make up the difference. The unused portion of the line will be retained for possible future use.

In my example, the realized rate of return has to fall to –9.2% for the credit line to be fully used in the 10-year period. The maximum shortfall that can be fully hedged depends on the amount of equity the retiree has in his home relative to the amount of financial assets that will be hedged.

 

The Stand-Alone Rule Generates Excessive Loss Rates

Current HECM losses are much higher than they would be if HECMs were integrated into retirement plans.

The program has been subjected to a great deal of bad publicity, for reasons I can’t explain, but the effect has been to subject it to adverse selection. The HECM client pool has been heavily weighted by borrowers with low credit scores, many in desperate financial condition, who turn to a HECM as their last resort. Many such borrowers fail to pay their property taxes and maintain their properties in good condition.

HECMs that are integrated with asset management and annuities into comprehensive retirement plans are likely to draw borrowers with better payment habits. Further, a borrower who obtains a rising payment for life is better positioned to meet home ownership charges than those who exhaust their HECM borrowing capacity in the first few years.

Protecting Retirees

The major concern that generated the stand-alone rule is potential abuses connected to annuities. The rule does not prevent HECM borrowers from using credit lines to purchase annuities, but it prevents HECM lenders from helping them in any way.

The better way would be to remove its rule that HECM lenders cannot be involved with annuities but subject to the following conditions:

•     The terms of annuities associated with HECMs would be competitively determined in a manner acceptable to HUD.

•     The retirement plan that includes an annuity with a HECM is demonstrably better for the retiree than any plan without the annuity.

Disclosure

The writer has been developing a retirement planning program, called the Retirement Funds Integratortm, a segment of which is directed to the house rich/cash poor retirees discussed above. We call it the “Enhanced HECM”tm, and it will become operational shortly. It marries HECMs with deferred annuities in the way described earlier, and it provides competitively determined annuity and HECM prices. However, in conformity with the stand-alone rule, the program shields the lender from any involvement with the annuity. This makes the process somewhat clumsy for no good reason.



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How Potential Mortgage Borrowers Can Cope With A Virus-Struck Market


Last week I wrote about holiday payment programs that allow existing mortgage borrowers who have lost their income as a result of the pandemic to defer their payments without penalty. This article is about potential borrowers who must cope with a much less favorable market for new loans.

Impact of the Pandemic

The housing finance system hasn’t faced one before. Within a very short time, a significant segment of potential home buyers who need mortgages to make their purchases, or to refinance the one they have, have had their ability to repay severely eroded —some because they have contracted the coronavirus but most because they have lost their jobs or their businesses as a result of the pandemic. In response to the widespread deterioration in the ability- to-pay of prospective borrowers, credit standards have been markedly tightened – with the impact especially severe on those with the weakest credit credentials.   

How Bad Is It?

The current disorganization of the home mortgage market is the worst I have ever seen. The mortgage pricing process, where price quotes on mortgage-backed securities (MBS) drive wholesale prices set by large lenders, which drive the retail prices that borrowers see, is completely broken. The price sheets used in these relationships either show massive rate increases or are not being issued. Price lock programs have become extremely costly or shut down altogether.

In an attempt to repair the process, the Federal Reserve has entered the MBS market with massive purchases. Since MBS prices ordinarily drive the entire market price structure, such purchases should have resulted in higher MBS prices and lower mortgage rates, but they haven’t. Of course, they might well have prevented even higher rates.

The required credit score for an FHA loan, which previously had ranged from 620 to as low as 540, is now 680. While the credit risk on FHAs is assumed by the Federal Government, no lender wants to be responsible for submitting loans that will result in large losses to FHA.

How Potential Borrowers Can Cope

Their options depend on where they are now in the process.

Prospective Home Buyers Who Will Need Mortgages: Those who have become sick, or lost their jobs or their businesses, or had their credit score dropped significantly should put their purchase plans aside until their fortunes improve. Those not directly affected by the pandemic should consider waiting a few months until the market has stabilized and rates are back to where they were before the pandemic. This applies as well to prospective refinancers.

Homeowners in Process of Refinancing: If you have not already locked an advantageous rate, there is little likelihood that it will happen now. Back out to wait for the turbulence to end.

If your rate has been locked advantageously, the lender can unlock it only if you lose your job or if you incur a new debt. Lenders have become hyper-vigilant in checking employment status of borrowers with loans in process.

You are safe, however, against losing an advantageous refinance because your credit score has dropped. Lenders cannot undo the credit score used to qualify you for 120 days.

Home Buyers in Process With Purchase Agreements and Locked Mortgages: Unless you lose your job or increase your debt, the rate lock will be honored and the purchase will be executed.

If one or both of those conditions has been violated, the lock probably will be withdrawn and the purchase will be cancelled. Your best option in that case is having your deposit with the seller returned. That will happen if your agreement of sale provides for the return of a deposit made by a prospective buyer whose failure to execute the transaction is due to a failure of the lender to deliver the promised loan.



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