The CFPB’s Office of Research recently issued a blog post regarding its analyses of the impacts of higher mortgage interest rates on borrowers and potential homebuyers. The analyses are based on first and second quarter Home Mortgage Disclosure Act (HMDA) data filed by the 55 mortgage lenders that are required, based on their high volume of mortgage lending, to collect and submit HMDA data on a quarterly basis. For 2021, these 55 lenders accounted for about 55 percent of mortgage applications received and about 52 percent of originated mortgage loans. The CFPB compared the quarterly data of these 55 reporters in the first half of 2022 with their annual data from past years.
The analyses focus on increases in monthly mortgage payments, debt-to-income ratio (DTI) levels for Hispanic, white and Black borrowers, and whether increased DTI ratio levels are leading to higher denial rates. The analyses assess closed-end home-purchase loans secured by a first lien on site-built, single-family homes that are the borrower’s principal residence. Reverse mortgages were excluded.
Monthly Mortgage Payment Increase
For purposes of this analysis, the CFPB focused on the type of loans noted above that were 30-year fixed rate conventional conforming loans (i.e., non-government insured or guaranteed loans eligible for sale to Fannie Mae or Freddie Mac) originated to the prime borrowers. The CFPB found that after two years of decline based on very low mortgage interest rates, beginning in 2021 monthly mortgage payment amounts began to rise and “shot up in the first half of 2022, from $1,446 in December 2021 to $1,974 in June 2022 – a 36.5 percent increase in a span of six months.” The CFPB states that the increase mainly was driven by the rise in interest rates, as loan amounts during this period increased by only about 1 percent. The CFPB notes that the “increase in monthly payment amounts was felt across all racial and ethnic groups.” Specifically, during this period average monthly mortgage payment amounts rose by about 37 percent for Black and Hispanic, white borrowers, about 38 percent for non-Hispanic, white borrowers, and about 33 percent for Asian borrowers.
DTI Levels for Hispanic, White and Black Borrowers
For purposes of this analysis, the CFPB focused on the type of loans noted in the second paragraph above that were 30-year fixed rate conventional conforming loans. DTI first became a HMDA data reporting category for applications received in 2018. The CFPB advises that “[o]verall, the average DTI declined between the end of 2018 and beginning of 2021, given the historical decline of mortgage interest rates taking place over the same period.” The CFPB then states that this trend has reversed since the beginning of 2021, with the average DTI for all groups rising significantly to, or slightly exceeding, 2018 levels by June 2022. At the end of the period, the average DTI for Hispanic, white borrowers and Black borrowers was over 40 percent and over 39 percent, respectively. The CFPB advises that “[a]lthough we don’t have third quarter filings for 2022 HMDA data at this time, given the trends observed in the first half of the year and the fact that the mortgage interest rates continued to rise in the third and fourth quarters of 2022 to the highest level in more than 20 years, we predict that the increase in DTI will likely continue through the rest of 2022.” The CFPB notes that there is the “potential that average DTI for Hispanic white and Black borrowers will approach levels not seen since DTI information was first collected in HMDA in 2018.”
Higher DTI Levels and Denial Rates
While higher DTI levels can lead to higher denial rates, the CFPB advises that “[s]o far, in the HMDA quarterly filing data, we have not observed a significant increase in the denial rates of mortgage applications for home purchase loans distinguishable from noises and seasonal variation.” However, the CFPB also focused on the reported reasons for denials. The CFPB advises that “[c]ompared to 2021, DTI has become more likely to be reported as a denial reason for denied Black, Hispanic white and non-Hispanic white applications in 2022.” Specifically, by the end of the second quarter of 2022, over 45 percent of all Black and Hispanic, white applicants who were denied had DTI reported as a denial reason. The CFPB concludes by stating “[t]hat is the highest since the revised HMDA data collection and reporting requirements took effect in 2018. Whether this represents a trend into the rest of 2022 remains to be seen and is one indicator we should keep watchful eyes on as additional HMDA data arrive.”