Mortgage Lending & Minority Homebuyers

By Vicki Joyal
Vice President—Research Services
Credit Union National Association

Real estate loans have become a significant part of credit union loan portfolios—increasing from 34% in 1990 to 46% in 2005. But first mortgage originations are now slowing as interest rates start to rise, according to the recently released 2005-2006 Credit Union Environmental Scan from CUNA’s Center for Research & Advice. As real estate lending slows, credit unions will need to be more creative and explore nontraditional markets.

Over three-quarters of non-Hispanic whites own a home, compared to just half of African-Americans and Hispanics/Latinos. But the immigrant homebuyer market is poised for significant growth. In fact, the National Association of Realtors reports that 24% of first time homebuyers are African-American, Hispanic/Latino, Asian/Pacific Islander, or some other minority. Furthermore, the Joint Center for Housing Studies of Harvard University reports that minority homebuyers contributed nearly half of the net gain in homeowners during 2004.

According to the Milken Institute, many minority borrowers can afford the monthly mortgage payments, but the qualifying requirements, down payment and closing costs are seemingly insurmountable obstacles to homeownership. In response, a number of mortgage program initiatives and unique features have recently emerged to help prospective borrowers overcome these obstacles. Consider that:

• No- and low-downpayment loans are now relatively common—16% to 17% of loans are originated with downpayments of 5% or less.
• Subprime loans are growing. The subprime share of first and second mortgage loan originations in 2004 reached nearly 20%.
• Interest-only loans have gained wide acceptance within the mortgage market. As many as a third of home purchases during 2004 were made with interest-only loans.

Last month, I was able to witness the growth in minority homebuyers first-hand. In holding an open house for my “for sale by owner” starter home, I found that half of my potential homebuyers (individuals or couples) were racial/ethnic minorities. Knowing full well that the incidence of minority populations in Madison, WI is significantly lower than for the rest of the nation, this took me by surprise. Yet it did serve to confirm what I have been telling various credit union groups across the nation as I present issues and trends from the Credit Union Environmental Scan.

On the downside, I was troubled by how difficult it was for us to communicate as I showed the house. More disturbing was the single most-interested party had no idea of what it meant to submit an offer to purchase. I later heard from one of my colleagues (also a seller) about a local real estate agent who speaks multiple foreign languages. If not today, this realtor will surely be making money hand over fist before long.

As your credit union looks to provide mortgage loans to first-time homebuyers from immigrant and minority markets, here are some strategies to keep in mind:

• Educate minority members about how to become homeowners. Help them to understand the homebuying process, build credit, and save for a down payment.
• Offer innovative mortgage options such as interest-only mortgages, and near-prime or sub-prime loans.
• Create stronger ties to real estate agents and other mortgage professionals who specialize in serving the emerging minority homebuyer market.

CUNA’s 2005-2006 Credit Union Environmental Scan is credit unions’ premier source of issues and trends affecting the financial services industry. Mortgage lending and minority homebuyers is just one of 60 individual topics covered in this just released strategic planning resource.

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