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Older debtors face greater obstacles to homeownership, Fed says

Older debtors face greater obstacles to homeownership, Fed says

Age is not just a number, but a potential barrier to refinancing a mortgage, a report published by the Federal Reserve Bank of Philadelphia argues.

The analysis, which looked at confidential Home Mortgage Disclosure Act data from 2018 to 2020, concluded that being older can have a negative outcome on mortgage applications.

Older borrowers were more likely to be rejected for a refinancing, with older male applicants facing a higher probability of being turned away. The results run counter to the belief that older borrowers are more financially stable.

Borrowers in the age groups of 50 to 59, 60 to 69, and 70 or older were 2.4%, 3.5%, and 5.5%, respectively, more likely to be rejected from refinancing, the analysis found.

Unlike race and ethnicity, the impact of age on mortgage application outcomes hasn’t been studied previously because HMDA data only started including this metric in 2018, according to Natee Amornsiripanitch, senior financial economist at the Federal Reserve Bank of Philadelphia and author of the report.

“Taken at face value, age appears to be an equally important correlate of mortgage application outcomes as race and ethnicity,” wrote Amornsiripanitch in his report. “Under certain circumstances, lenders may consider an applicant’s age in connection with a relevant credit risk factor when making lending decisions.”

“Insufficient collateral” and “other” were the top two reasons why older borrowers got rejected during the underwriting process, the analysis found. The first reason accounts for approximately 50% to 70% of rejections among older applicants depending on their age group.

Older borrowers receiving “insufficient collateral” as the reason for denial on a refi may point to a belief that homeowners past a certain age are less able to maintain the quality of their homes and that older borrowers may be in financial distress since they are “forced to carry mortgage debt into retirement.”

Amornsiripanitch noted that he was surprised with the outcome of his analysis because “data shows that older people in America tend to be wealthier and have higher credit scores compared to younger people, so I did not expect to find the result of rejection being correlated with age, because you would expect the opposite.” 

Mortality rate risk, which is significantly higher for older borrowers, also plays a role in the elevated rate of rejections since a “borrower’s death is an event that causes uncertainty in the loan performance for the lender,” raising the likelihood of the loan being paid off early or entering foreclosure.

The report also noted that the results do not necessarily convey that lenders are actually using age to make lending decisions. 

“A rigorous fair lending analysis of individual lenders’ activities would be required to make such statements and is beyond the scope of this paper,” Amornsiripanitch said.

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