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   ARTICLE   |   From Scotsman Guide Residential Edition   |   June 2017

Understanding Diverse Markets

Different cultures bring unique issues to the mortgage table

r_2017-06_Zywiciel_spotA bank or mortgage company looking to increase its footprint in diverse mortgage markets should examine all aspects of the process that impacts lending performance. Some critical areas to review include improving community outreach, hiring diverse loan officers, creating in-language marketing materials, as well as developing or locating new lending programs and products. The area that can take the most time, however, is building relationships with credit policy and underwriting.

Having a strong credit-policy partnership is one of the most critical functions. Without clear market data that explains regional market conditions, banks and mortgage companies cannot make new policies — or adjust old ones — to be more reflective of consumer needs. Also, input from sales can aid in writing clearer policies, which will lead to consistent implementation by underwriters once they receive the files.

In a few short years, the country’s demographic trends — racial, family structure, age, etc. — will shape the way lenders address emerging markets. According to a 2010 report from the Joint Center for Housing at Harvard University, 17 million new households will form between 2010 and 2025, of which 14 million will be from diverse communities. A whopping 40 percent will be Hispanic.

These demographic changes can have subtle and not-so-subtle impacts on how mortgages are underwritten and how creditworthiness gets determined for homebuyers.

Income calculations

Some community-lending solutions, for example, such as those from Fannie Mae and Freddie Mac, take careful consideration of family structures to improve their programs. Many diverse cultures live in extended-family households with more than a few members contributing to the household income.

In fact, 25 percent of Hispanics with mortgages have multigenerational households that provide extended incomes. These households include one or more extra adults living in the home that provide incomes that equal at least 30 percent of the main borrower’s income. This highlights the underwriting nuances needed to serve the Hispanic consumer segment.

Rental income from an attached unit or from someone living in the basement of the home also can be an important source of income for many borrowers. In some instances, borrowers can use boarder income to qualify for a home. Originators must be familiar with these programs and well-versed in how their company handles these scenarios.

Millennials also are forcing new ways of thinking about income calculations, and diverse markets are, by far, younger than the general market. Nearly six in 10 Hispanics are millennials or younger, for example. Many are attracted to — or need to — work for service companies like Uber or Lyft, but then find it difficult to qualify for loans.

Seasonal work, prevalent among immigrants and other diverse cultures, also requires innovative income calculations that take multiple jobs into account. Conventional thought may consider seasonal workers to be risky borrowers, but they also can be viewed as hard working and dependable — a testament to their drive to reach the American dream of homeownership.

It is estimated that around 7 percent of real estate agents and 4 percent of mortgage professionals are Hispanic.

The self-employed also are an emerging minority segment that may need specialized income considerations. There are more than twice as many Hispanic-owned businesses today compared to 13 years ago. The Hispanic share of all new entrepreneurs more than doubled from 10 percent in 1996 to 22.1 percent in 2014. This trend continued in 2015, according to the Kauffman index of Entrepreneurship, with Hispanics having the highest rate of new business starts.

Originators need to have a clear understanding of how to handle the income of the self-employed, and whether or not their company has overlays on top of what the agencies generally require. Loan originators who are confident in the rules will be more likely to pursue business owners as clients, which by default can bring in more diverse business to the company.

Credit and downpayment issues

A 2015 report by the Consumer Financial Protection Bureau (CFPB) revealed that 20 percent of all American adults — about 45 million people — lack a traditional credit score. In addition, these people disproportionally come from minority groups, which makes it even harder for them to secure mortgages.

About 26 million of these folks are “credit invisible” and have no current credit files with Equifax, Experian and Transunion — the three major credit-reporting agencies. Another 19 million have “thin” credit, which means their credit histories are so slim that traditional credit scores can’t be generated.

The good news is that agencies such as Fannie Mae have built new capabilities to help originators more effectively serve borrows who do not have traditional credit histories. Fannie’s Desktop Underwriter now allows the use of trended credit data and nontraditional credit sources, such as rent or utilities paid for a period of 12 months or more.

When it comes to downpayment assistance, 70 percent of adult Americans are unaware of or unfamiliar with programs created to help first-time homebuyers come up with a downpayment. In addition, many mortgage companies still stumble through the efficient processing of these programs, while many originators feel uncomfortable even talking about these programs because they are afraid to say something incorrect.

All of these issues compromise the efficacy of these valuable programs. The bottom line is that many diverse market segments, and first-time homebuyers in general, all need to know about these programs and have a great experience when they use them.

It’s not enough to offer specialized programs without giving thought to how to communicate the features to borrowers from various cultures and segments that could benefit from them. These programs are useless if borrowers don’t know they exist. Loan originators must be properly trained and should coordinate with marketing to create awareness and excitement around the features and the benefits to borrowers. In addition, operations must be properly trained on how to process these types of loans.

Cultural diversity

What all of this comes down to is cultural diversity, both in the clients that mortgage companies and banks pursue, and in the employees who serve those clients. There is very little available data on the number of diverse professionals in the mortgage industry, but it is estimated that around 7 percent of real estate agents and 4 percent of mortgage professionals are Hispanic.

Unless you are in California, Texas or Florida, these numbers are likely to be much lower. To meet the needs of these growing, diverse markets, it is critical to have a concerted strategy to attract and retain diverse talent.

As the saying goes, “the devil is in the details.” Many strategic initiatives focus solely on marketing or grass roots and neglect critical aspects. Not a lot of good can come from hard work toward recruiting or marketing if, when diverse borrowers show up, they can’t get their loans closed. Originators must maintain a close working relationship with risk and underwriting partners, so they can check in and adjust their approach, understand guidelines and provide clarity for all involved.


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