Analysts: Lenders Must Improve Outreach to New Wave of Mortgage Applicants

SAN DIEGO–The good news: millions of Americans are poised to become homeowners over the next 10 years–as many as 16 million.

The not-so-good news: many lenders are woefully unprepared to effectively market to, and work with, these potential homeowners, of whom nearly two-thirds comprise minority groups and younger people who want the mortgage process to be done far differently than current methods.

“In today’s environment, one of the bright spots is the growing demographic base and the opportunities those demographics present,” said Gary Acosta, co-founder and CEO of the National Association of Hispanic Real Estate Professionals, the largest minority real estate association in the U.S. “These are demographics that are young, diverse and who value homeownership.”

MBA data forecast nearly 16 million new households will be formed in the U.S. over the next 10 years, of which as many as 10 million could be minority-based. 

“The minority community is clearly growing,” said Jim Park, co-founder of The Mortgage Collaborative, San Diego and former chair of the Asian Real Estate Association of America. “The home market and the minority community are going to be joined together like never before.”

Add to this mix the Millennial Generation, which is 40 percent diverse and has yet to exercise its full homeownership potential. “This is a group that is enthusiastic about homeownership but who have not yet taken the next step,” Acosta said. “Perhaps they are a little more cautious coming out of the recent recession.”

Park and Acosta, speaking here at the MBA 102nd Annual Convention & Expo, said the immigrant population, particularly among Asians and Hispanics, have a huge incentive to become homeowners. “We demonize immigration in the political process, but homeownership is something that they want to achieve as part of the American experience,” Park said.

Park noted that homeownership net rates for Hispanics and Asians has increased, but not as much as their respective populations. “The numerator has to catch up with the denominator,” he said. So even though we are seeing increases in minority homeownership, the overall homeownership rates among Hispanics and Asians are dropping.”

Acosta noted significant barriers remain, particularly for first-time minority home buyers. “There’s been a huge surge in investor activity, particularly in the single-family market,” he noted. “This is something we haven’t seen for a long time. Another issue is access to credit. If you are a first-time home buyer, you probably don’t have a huge down payment, which is an impediment to homeownership.”

“Supply has fundamentally shifted,” Park agreed. “And it hasn’t returned to pre-crisis levels. Credit is becoming a big issue, particularly for immigrants, because they don’t have the credit scores that lenders traditionally look for and many are self-employed. So as a result, many are being overlooked in the process.”

So what can be done to expand access? “This is where the growth opportunity is for our industry for the foreseeable future,” Acosta said. “We do need to get a better balance of inventory–we need to get through the underwater homes and see expansion of home building. And we need to increase access to credit–these are people who do not earn money in a traditional way, so the underwriting criteria that we use today, that we’ve been using for the past 30-40 years, is inadequate. If we do not adjust, we are going to lose out on a tremendous opportunity.”

“There have been some steps in the right direction, but the way lenders look at credit is old-fashioned,” Park said. “The criteria most lenders use were created many years ago. The way we rank credit doesn’t match today’s home buyers.”

The 30-year fixed-rate mortgage, for example, may not be ideal for the future home buyer. “While the 30-year fixed is the greatest invention since sliced bread, we are going to have to see emergence of more adjustable-rate products,” Acosta said. “But we do have to protect the 30-year fixed rate. There are still a lot of people who want to have that kind of certainty.”

For the Asian population, Park said lenders have to look at credit from the standpoint of people who are leveraging credit, which can be fundamentally different. “Twenty or 30 years ago, people were defaulting on their home as a last result; during the crisis people were defaulting on their home first,” he said. “The market is fluid; it’s changing; and they are looking at credit differently. We have to change our approach to credit to accommodate this.

“In the short run, there is no question that lenders have to widen the bright lines, because right now a lot of borrowers are on the margin and are being left out,” Acosta said. “We have to measure peoples’ capacity for debt-servicing, as opposed to debt-service ratio. We are missing far too many people because of this. I am confident that we can move in this direction, although it might take a little more time.”

Having said, that, Acosta noted that lender demographics have to change. “Minority borrowers operate on a trust-based business,” he said. “They want to develop and build relationships and trust. Do you have to have a Hispanic loan officer for Hispanic borrowers? No. But you have to have officers who have an understanding of the cultural issues involved and the ability to respond to unique concerns.”