It has been estimated that more than 50 million creditworthy borrowers were shut out of the mortgage market in the aftermath of the financial crisis, mainly due to stricter underwriting standards resulting from increased regulation.
Many of these “underserved” borrowers are of Hispanic background. They are borrowers with good credit histories who would have gotten a mortgage had the rules not changed. Some are self-employed, some are seasonal workers, and many have multiple income streams. They are not your typical W-2 wage earners; thus, many of them lack the required documentation in order to apply for a mortgage. Yet, they are creditworthy – most have adequate incomes to make a mortgage payment, and some are even high-net-worth individuals.
Following the crash, the homeownership rate among Hispanics plummeted for several years. But since 2010, it has been more or less flat, while it has been going down for all other demographics. In fact, the Hispanic demographic is the only one in the U.S. that saw its homeownership rate increase in 2015, according to the State Of Hispanic Homeownership Report, published annually by the Hispanic Wealth Project in conjunction with the National Association of Hispanic Real Estate Professionals (NAHREP). Hispanics achieved a net increase of 245,000 owner households last year, accounting for 69% of the total net growth in U.S. homeownership.
The homeownership rate among Hispanics is still only about 46.7%. But, at least it’s moving in the right direction.
Because of its rapid population growth and rapid household formation, the Hispanic demographic remains a huge untapped opportunity for mortgage lenders. What’s more, things are looking good right now for lenders to go after this market – mortgage interest rates are low, annual household incomes are increasing, and the job market is looking much better, with increased openings and rising wages.
“Certainly, the macro-economic market is positive,” said Gary Acosta, co-founder and CEO of NAHREP, during an interview with MortgageOrb. “Interest rates are near historic lows – and obviously, that helps with affordability. Incomes are on the rise, which is great to see – it’s been a long time coming. And home pieces have stabilized – they’re on the rise slightly – so, people are feeling a little more comfortable taking that leap into homeownership than they were a few years ago, coming out of the Great Recession.”
Missing from the equation, however, are first-time home buyers, which Acosta said is distressing to see because many of the potential first-time home buyers sitting on the sidelines right now are Hispanic.
“First-time home buyers traditionally represent about 40 percent of the purchase market, and in the last few years, it’s been about 30 percent – or maybe a little below that,” Acosta said. “That’s a very concerning – and unsustainable – scenario because you need first-time home buyers in the market. Move-up buyers sell their homes and move up to the next level. When first-time home buyers aren’t entering the market, it tends to affect everyone else.”
However, with regard to the Hispanic homeownership rate, Acosta said, “We’re starting to see things change. Last year, the Hispanic homeownership rate increased, while the overall homeownership decreased for a 12th consecutive year. If you look at the trends, you can see that almost 50 percent of the households that were formed last year were formed by Hispanic families.”
Unfortunately, what mortgage lenders tend not to look at closely is the makeup of those households, Acosta said.
“Now, a household can be when a single person moves into an apartment, but Hispanic households are twice as likely as the rest of the population to be made up of at least two adults and one child,” he said. “That means those households that are forming are more likely to be interested in homeownership.”
The other thing lenders often fail to take into account when looking at the Hispanic market is age.
“The Hispanic homeownership rate has lagged behind the rest of the market, historically, and some of that is due to income, and some of that is due to [a] lack of knowledge about the home buying process, but, in general, most of it is due to the fact that Hispanics are a much younger demographic – some 10 to 15 years younger than the general population,” Acosta explained. “That means more Hispanics are now moving into the prime home buying ages. This factor – along with low interest rates, rising incomes and strong household formation – [is] creating a perfect storm, and we are now really starting to see the impact of the Hispanic market.”
So, what can lenders do to tap into this opportunity? How can they help boost the desire for homeownership among the Hispanic community?
Acosta said that’s not an issue because “the desire for homeownership among the Hispanic community is very strong.”
“I don’t think they have to be convinced – they already want it,” he said. “But getting to the fulfillment of that is going to be challenging. For mortgage lenders, there are nuances in the Hispanic marketplace that are unique. There are language nuances, and they have unique needs in terms of the product sets because many of them are first-time home buyers. So, things like low down payment loans, products that allow for down payment assistance, or co-borrowers are all very helpful.”
Acosta said lenders that hope to tap further into this market should consider three main things: Product, people and marketing.
“First is product,” he said. “Now, we’re not in a product-driven environment like we were 10 years ago. So, most mortgage companies have fundamentally the same products. But there are nuances within the products that exist that can give lenders a competitive advantage – such as, ‘Are you guys good at the low down payment stuff? Do you do buy loans?’ Not all Hispanic home buyers will need these loans, but maybe a third of them will. So, those lenders that are good at dealing in the types of products that are relevant to Hispanic home buyers are the ones that will succeed in winning business.
“Second is people,” he continued. “This is a relationship business. A majority of Hispanic transactions involve a Realtor. So, developing those relationships is really important. You need people who are familiar with the community and who can speak the language and who are comfortable navigating in the Hispanic environment. Those are the ones who will have an advantage – and that includes the mortgage lenders.
“Third is how a lender markets and presents itself,” he said. “Remember, it’s all about trust. Many of these borrowers were burned during the downturn. There are mortgage banking firms out there today that are increasing their market share and increasing their profits by recruiting the people who are in those communities and who can develop those trusted relationships.”
When asked whether he feels the mortgage industry is doing a good job today of targeting the Hispanic market, Acosta said, “I think we have a ways to go. There’s no question that lenders are coming to recognize the opportunity. But translating that into strategies and tactics – and actual products – is where the industry has a ways to go.
“It is an underserved market – but things are starting to change – and you can see that in the industry events,” he added. “During our national convention, all the major players are there – Fannie, Freddie, all the big banks and probably 50 to 60 mid-tier lenders – to learn, develop those relationships and try to get a little bit closer to the consumer.”
Acosta said he is very encouraged by the introduction of new high loan-to-value (LTV) or low down payment products in the marketplace – including the rollout of the new 97% LTV programs by Fannie Mae and Freddie Mac, as well as numerous lenders, such as Bank of America, Carrington Mortgage and United Wholesale Mortgage. He is also very encouraged that the government-sponsored enterprises and the lending community are looking at new ways of calculating income, which will open the credit box to more “thin-file” borrowers, including self-employed and seasonal workers. As an example of this trend, Fannie Mae’s new version of Desktop Underwriter now supports trended credit data.
“If you look at how people earn money today – especially young people – it’s not like it was 30 or 40 years ago, when everyone was a W-2 wage earner,” Acosta said. “Today, these kids design websites, they drive for Uber, and they rent out a bedroom via Airbnb, and people are just more entrepreneurial. They earn money in less traditional ways. So the industry, in general, needs to get better at measuring capacity – not just income – but capacity, which is a mix of factors. The traditional debt-to-income ratio metric is becoming more and more obsolete.
“So, the market has to adjust to the fact that people don’t earn money in traditional ways anymore. And it has to start at the top; Fannie, Freddie and the Federal Housing Administration, perhaps some of the major lenders, need to experiment with these things. I think we’ll get there, but it’s not going to happen overnight. There is a lot of work to be done to develop products that are relevant, that are safe and that are going to perform well. But I applaud that activity that we’ve seen over the past year.”
And how well, in Acosta’s view, are lenders are doing with their bilingual efforts?
“It’s probably a B minus right now,” he said. “I appreciate and applaud the efforts of lenders that are trying to be creative in how they reach out to the Latino community. It’s a very dynamic market.
“My advice to any lender that is trying to market to the Hispanic community effectively is, be cognizant of one thing, above everything else: Hispanics are going to make their borrowing decisions based on trust more than anything else,” he said. “So, just translating your ad in Spanish is not necessarily going to do it. You need to appeal to the sensitivity and the mindset of the Latino consumer. And it’s all about trust. Trust supersedes brand, and it supersedes price in many cases. If you’re aware of all of that, and convey that, you’ll be that much more successful.”