How to Reach New, Underserved Borrower Audiences in 2023
Today, homeownership remains the number one driver of wealth creation. But access to affordable housing and responsible credit sources is becoming more challenging for many demographics, including the U.S. Hispanic population. Despite Freddie Mac reports of 8.3 million mortgage-ready Latinos, that same demographic is 81% more likely to be denied financing for a conventional loan when compared to their non-Latino counterparts.
On a recent episode of Clear to Close, Maxwell leaders Alan Parris, Bryan Traeger, and Anthony Ianni spoke with Laura Arce, Senior VP of UnidosUS, in an effort to unpack the reality of those statistics.
UnidosUS is one of the largest Hispanic civil rights organizations. Over the past 25 years, the nonprofit has been dedicated to building a positive economic trajectory for Latinos through homeownership. With experience at both Wells Fargo and the FHFA, Arce joined UnidosUS to focus on closing the homeownership gap within the Hispanic community.
Want to access unique data to better understand Hispanic borrowers? Click here to download our free white paper, the Maxwell 2023 Hispanic American Borrower Report.
Why focus on the Hispanic homeownership gap?
When discussing the idea of homeownership as a means to generational wealth, Arce turns to the example of her own family. When her parents came to the U.S., they faced obstacles in getting a loan on the only property they could afford, a boarded-up foreclosure. Through some creative perseverance, they ended up getting a student loan to pay for the house; it was the only financing they qualified for.
Arce says, “Ultimately, it was one of the best decisions they ever made.” Even though “they did everything wrong,” they got a foot on the property ladder. Eventually, her parents were able to upgrade to a bigger house with access to better schools, setting her family on a path of wealth-building that may not have otherwise been possible without that first step of homeownership.
Median white households have more than five times the wealth of median Latino households, according to the National Association of Hispanic Real Estate Professionals’ 2021 State of Hispanic Homeownership report. That wealth disparity continues to perpetuate due to the Hispanic homeownership gap. Without access to affordable housing and appropriate loans, the Latino community has fewer opportunities to build generational wealth.
Biases experienced in property valuation and even credit scoring don’t help either. According to a 2021 study by Freddie Mac, home appraisers are more likely to undervalue homes in majority Black and Latino neighborhoods, leading to lower rates of homeownership for those two groups of color. And Arce notes that credit scores—something that’s designed to bring objectivity to the process—don’t allow for an accurate representation of credit-worthiness in many Hispanic households.
What are the essential elements to helping to close the Hispanic homeownership gap?
In her work at UnidosUS, Arce focuses on four pillars of homeownership accessibility. When these four pieces come together, there’s a greater chance of seeing Latino communities achieve success in homeownership.
1. Assessing readiness
The first pillar involves education in regards to personal finance, mortgage lending, and homeownership. In general, people tend to rely on personal knowledge and experience when it comes to making home-buying decisions, but firsthand experience is not necessarily available within the Latino community due to a lack of generational homeownership.
In addition, Latinos must reckon with broken trust in the financial system. Arce mentions that during the foreclosure crisis, Black and brown communities were more likely to be put into predictory loans. “Financially it’s hard to recover from that,” she says. “Emotionally it’s really hard to recover from that.”
With those obstacles in mind, Arce and her colleagues work to provide educational resources –– solid information that alleviates a reliance on third party (possibly biased) sources. UnidosUS strives to instill confidence by helping Latino communities believe that homeownership is attainable and in turn showing them how to go about the process.
Arce says, “The last thing we want is for someone to get into a loan that’s not right for them at that time. We want to make sure they fully understand the process and set them up for success from day one.”
2. Access to credit
When talking about the topic of credit, Arce can’t help but think of her grandfather. She relates that he was the most responsible person with money, paying for everything with cash and never getting into debt. Yet, in the financial world that wouldn’t mean much. “He would’ve been credit invisible,” she says.
Examples like Arce’s grandfather are common in Hispanic communities, where self-employment, side hustles, gig income, and multi-generational households often create barriers in the traditional underwriting process. The industry needs to find ways to cater loan products and underwriting practices to the realities of a wider group of Americans.
Recent changes show some movement in the right direction. Fico 10T Rent, in which consistent on-time rental payments are shown as credit-worthy, is one such example. But the risk-averse industry is slow-movin, and frankly under-motivated toward diversity.
For instance, traditional loan officer compensation structures tend to discourage service to new home buyers as a whole. Arce notes, “They’re either pushed toward higher value mortgages and/or the cookie-cutter mortgages that they can process quickly and get the volume.”
“I think the market is overdue for a modernization of how we approach or assess credit risk,” she adds. “Who’s being left out?”
3. Affordable housing supply
Arce recognizes several barriers or blockers standing in the way of Latino homeownership. But she says if she had “one magic wand to wave”, she would fix the problem of supply. There simply is not enough inventory when it comes to affordable starter homes within Latin American communities.
“Freddie Mac has a report that there are 8.3 million mortgage-ready Latinos out there,” Arce says. “[Affordable housing supply] would go a long way in narrowing the homeownership gap. We could probably close it by half. But many [Latinos] live in high-cost markets where they might be mortgage-ready, but there’s nothing affordable for them. So I would say that’s the biggest issue at the moment.”
In an effort to address the issue of affordable housing on a scalable level, UnidosUS encourages the following:
- CDFI: Community Developed Financial Institutions
- Affordable housing built by nonprofits
- The creation of different types of homes (condos, multifamily, coops, etc.)
4. Generational homeownership preservation
Because of the direct link between homeownership and wealth creation, the Latino community needs education in regards to generational homeownership preservation. Specifically, they need awareness around tax issues and ways that heirs can transfer property.
Arce says, “Over the years, title issues have increased.” Grandparents may die and pass on their house within the family. But no one knows that they need to change title ownership, and thus the next generation isn’t getting the advantage of owning that home.
In addition, she speaks to the prevalent gentrification issue in Latino communities of New Mexico and Texas. There they’re seeing large investors come in and make cash offers for homes. The offers may be fair and seem good, especially if the family is struggling. But then that house is lost in terms of wealth creation for future generations of the family.
What can the finance industry do to help close the Hispanic homeownership gap?
There are four ways that Arce believes individuals and corporations within the industry can make a difference in regards to the homeownership disparity experienced by Latinos.
1. Promote awareness
Circulating data and stats on homeownership gaps in today’s market can go a long way in increasing awareness that the problem exists. It’s also important to employ a diverse workforce that personally understands the barriers to entry, so that changes can be made at a micro level. In addition, connecting with local housing counselors can help pinpoint housing pain points within the local Hispanic community.
2. Regulatory change
Support long-term changes within FHFA and CFPB to build the foundation now for future homeownership growth. Homeownership is the key way to move the needle forward in closing the wealth gap.
3. Technology
Implement solutions and features that build accessibility into the lending process. For example, consider automation that reduces documentation (auto-filling functions) and takes Spanish-speakers into account.
Maxwell’s recent 2023 Hispanic American Borrower Study shows the challenges related to limited English proficiency in the mortgage process. Twenty-three percent of respondents said that language acted as a barrier in the mortgage process. Those applicants needed to bring a family member to translate (34%) or hire a professional translator (51%). Over a third were not able to find Spanish-speaking lenders in their region, and only 17% were able to access translation services during the application process.
This is an easily-solved issue with today’s technology, one that allows lenders instant access to an unrealized market segment. Parris says, “This is a huge opportunity. We talk about being in a time of low loan volume. This is a part of the market that we can and should be better serving.”
4. Loan officer incentives and company buy-in
Lenders need to reexamine the pay structure of loan officers to incentivize working in diverse communities. When good borrowers are being denied because they don’t fit a traditional mold, something needs to change. Goals and metrics should aim at connecting with new audiences.
Maxwell is committed to advocating for inclusive homeownership access. By addressing issues at the point-of-sale and loan processing stages, we believe more individuals can have access to the loan products that are right for them, and more lenders can have access to great borrowers who may have been previously overlooked.
Click here to listen to the full Clear to Close episode 33: How to Connect with Hispanic Borrowers & Improve Homeownership Access.
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