April 1, 2007
By Lew Sichelman
Five years ago, the Latino home-buying market was largely invisible. Now, it is not just a so-called emerging segment of the housing market, but a market unto itself. But it's one that still needs to be reckoned with.
Back then, many Latinos had the capacity to become owners, but the mortgage business didn't see them. Some didn't speak English and had little understanding of the home-buying process. Others didn't use banks, so they had not established the all-important credit histories that lenders require to determine whether people are creditworthy.
Nowadays, a fair number of lenders are reaching out to Latinos, as well they should. But this group still faces barriers to ownership. Latinos continue to be penalized for dealing in cash rather than checks and credit cards.
So what's the problem? At about 43 million, or roughly 14% of America's population, Latinos constitute the country's largest and fastest-growing minority group. And they're not just recent immigrants, or illegal immigrants, either. In fact, the majority of the country's Latinos are native-born U.S. citizens. Almost half are younger than 25, which is said to be the beginning of the prime home-buying years.
Nevertheless, their ownership rate is roughly 50%. That's just a shade higher than the rate for blacks, but it is still far behind that of whites. And the reason, according to several speakers at the recent National Assn. of Hispanic Real Estate Professional's annual legislative conference here, rests with Fannie Mae and Freddie Mac, the two government-sponsored enterprises created by Congress to grease the home-buying wheels.
Fannie and Freddie are responsible for keeping local lenders flush with cash so they can continue to make mortgages. The two congressionally chartered corporations do that by buying loans from primary lenders and packaging them into securities for sale to investors worldwide on the "secondary" mortgage market.
But the GSEs have yet to incorporate into their automated underwriting systems such alternative credit data as rent and utility payments, cellphone payments and money sent back on a regular basis to a would-be borrower's native land.
These underwriting systems are key to the approval process for most mortgages. So until they include alternative credit information, the speakers told the conference, most Latinos will continue to be relegated to what constitutes the back of the mortgage bus, where loan applications are often pushed into the sub-prime basket. Those loans are more expensive and have harsher terms.
"Fannie and Freddie are just not there yet," said Michael Nathans, founder and chairman of Payment Reporting Builds Credit (PRBC), a different kind of credit bureau that collects the type of bill-paying data that is absent from conventional credit reports.
One company that isn't waiting for Fannie Mae or Freddie Mac is the Hispanic National Mortgage Assn., a minority version of the two secondary-market facilitators that launched in October.
It uses a Latino-centric electronic system to underwrite the loans it purchases from lenders.
"With our system, [lenders] originate the loans, and we do all the rest," said Ron Jauregui, senior vice president of community alliances at the San Diego-based company. "This isn't about lowering credit standards, it's about expanding the window."
PRBC is a federally regulated credit bureau that enables consumers to build a credit file and score, based on their history of making rent and other recurring bill payments, which can be delivered electronically to the leading automated underwriting systems.
Even the Fair Isaac Corp., the company that created the all-important, industry-standard FICO scoring algorithms, has developed a new score card using alternative data. And tests show that its Expansion Score is able to obtain a score up to 90% of the time for consumers who had little or no credit data on record.
That's good news for the 50 million Americans who are now being lumped into the high-risk category, if they can get credit at all.
Source: Los Angeles Times