Lenders looking for a growing niche mortgage product with a 100% government guarantee may like the U.S. Department of Housing and Urban Development's (HUD) Section 184 program for Native Americans. HUD's tribal lending program has been something of a bright spot for the department: HUD guaranteed over $495 million in 2011 through the program, compared to about $168 million in 2006.
Several years ago, the program was changed so Native Americans could qualify for Section 184 even if they do not live on tribal lands. Tribes can ask HUD to designate areas outside their reservation as eligible for Section 184 loans. Borrowers must be official members of federally recognized tribes to qualify.
Over time, that provision has helped entire states to become eligible for Section 184, including much of the western part of the country, explains Brett Robinson, managing director of 1st Tribal Lending in Point Richmond, Calif., a division of Addison, Texas-based Schmidt Mortgage Co.
‘You're pretty much free to go anywhere – you don't have to be right next to your tribe,’ Robinson says. ‘One of the challenges is finding urban Indians – Native Americans living in cities and who may not know about this program.’
Marketing efforts by tribes and lenders in the niche have gradually helped the program grow.
‘It's expanding because more and more people are finding out about the program through different marketing efforts,’ says Ross Hill, CEO of Bank2 in Oklahoma City, which offers the program nationwide. ‘The program continues to accelerate. More and more Native Americans are finding out about the program.’
Part of the program's good growth prospects may be due to the low homeownership rate of Native Americans, which is partly because the land in Indian Country is often held in trust by the federal government. That prevents tribes from selling the land, but also stymies standard mortgage lending. If property is held in trust, the tribe issues a 50-year lease to its member with approval from the Bureau of Indian Affairs (BIA). The home and the leasehold interest are mortgaged, while the land remains in trust for the tribe and the Section 184 mortgage is secured with the leasehold interest.
‘When it's on trust it gets more complicated because you must deal with BIA,’ Robinson says. ‘They become the title company and give environmental clearance and issue a title status report.’
The program's benefits to Native American borrowers include a small down payment requirement of just 2.25% for loans over $50,000 and 1.25% for loans under $50,000, no requirement for private mortgage insurance, and market-based interest rates instead of rates based on the borrower's credit score. A one-time 1% up-front guarantee fee is paid at closing and can be financed into the loan.
‘That's a great savings for Native Americans,’ Robinson says.
Funds can be used for purchase or refinance, rehabilitation, or new construction, including modular homes. In addition, tribal housing authorities can use Section 184 to borrow money, and then sell or rent out housing.
Players in the niche praise the program's lack of automated underwriting and credit scoring. Instead of plugging numbers into a computer, lenders underwrite loans the old-fashioned way – with human beings talking to borrowers.
‘It's one of the few programs that's still done manually, so it's a very human-driven process,’ Robinson says, noting that the manual underwriting is a key reason why the program's default and late-payment rates are lower than in other government programs. ‘There's a lot of flexibility in evaluating the borrower.’
Determining creditworthiness also requires extra attention. Robinson notes that Native Americans often have income from second jobs like arts-and-crafts work, seasonal income, and income involving government treaties. Down payment help may come from their tribe or other non-traditional sources, and Native Americans frequently lack significant standard credit histories, causing the lender to seek non-traditional credit sources. Those unusual factors make for a more manual – yet more fulfilling – process for underwriters.
‘You're not just checking off the boxes on an automated underwriting program,’ Robinson says. ‘It's more satisfying because you don't have a computer telling you what to do.’
Servicing is hands-on and high-touch. Bank2's servicing efforts, Hill notes, start with a welcome letter and personal phone call from bank staff. If homeowners start to struggle with payments, bank staff calls them in addition to sending letters.
Lenders in the niche say other programs can learn from Section 184. For instance, the program requires prospective borrowers to complete a homeowner's class, covering such topics as taxes and insurance, home maintenance and repairs, and budgeting.
‘All of America needs that kind of training, not just Native Americans,’ Hill says. ‘If people were required to have that training in the past, maybe we might not have gone through the downturn.’
Michael Kling is a former editor of Secondary Marketing Executive and a financial writer based in Stratford, Conn.