Low-income households shying away from mortgages

Dina Gachman Nov 5, 2015

There are still major hurdles for low-income people trying to get a mortgage after the recession — and many potential first-time home buyers are opting to keep on paying those monthly rent checks.

At the Federal Reserve Bank of New York’s Economic Press Briefing this week, New York Fed President Bill Dudley said that 12 percent of low-income people credit applicants are so-called “discouraged borrowers”  — those who needed credit but “were discouraged to apply since they believed they wouldn’t be approved,” according to the Fed’s Survey of Consumer Expectations. 

Dudley said that the Fed, which has a twofold mandate of price stability and maximum employment, has “been monitoring mortgages at the zip code level using the New York Fed’s Consumer Credit Panel.” When it ranked zip codes by their 2012 average adjusted gross income, it found that in low-income areas, mortgage origination volume was 38 percent of that in the highest income locations in 2007.  By the beginning of 2015, that ratio had fallen to 14 percent.

This reflects the experiences of households attempting to transition to becoming homeowners for the first time and of homeowners who might want to “trade up,” Dudley said. 

So the poor are getting far fewer mortgages than the rich, and far fewer than they did in 2007. 

Before the Great Recession, experts said, mortgage credit was easily obtainable, and banks were not as cautious about FICO scores and credit status, so lower income households were less discouraged when it came time to buying that new home or trading up for a bigger, better home.

“Clearly the standards in the country have changed,” Dudley said. 

“If you think that maybe the low-income households more often would tend to have a lower FICO score, everything else equal, then it would be pretty rational for more of them to be discouraged about their access to mortgage credit.”

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