Closing the Gap in Homeownership Rates: How Fannie Mae and Lender-Partners Can Close the Gap

Sullivan University

MGT 510

Executive Summary

This proposal addresses the gap in homeownership rates between whites and minorities. According to the United States Census Bureau, 67.9 percent of the population in the United States are homeowners. However, while 71.8% of Whites are homeowners, only 47.3% of African Americans and 48.2% of Hispanics are homeowners. This large gap in homeownership rates can be contributed to discrimination by lenders and minorities’ misconceptions about the lending process. To overcome these issues, lenders need to eliminate discrimination and reach out to minorities. Ultimately, lenders who discriminate are going to hurt their own bottom lines since minorities represent a large market that has the high potential for growth.

Introduction: Homeownership is the “American Dream”

Housing has often been referred to as the #1 creator of wealth in the United States. It has been called, (1) the leading consumer product, (2) the leading consumer investment, and (3) a leading economic driver. Homeownership, in short, is the “American Dream.” It creates wealth. If you purchase a home today, with appreciation and through upkeep, it will be more valuable in the future. That appreciation provides homeowners with opportunities to create wealth. According to the Perlo (2003), in the latest Survey of Consumer Finances, published by the Federal Reserve Board, the median family that owned their home had a net worth of $171,700 in 2001 as compared to those without a home, whose net worth was only $4,800 in 2001.

Homeownership also provides economic security and creates opportunities. You can pass your wealth on to the next generation. You can withdraw the equity to fund your children’s education, make investments, or to finance other large expenditures. Owning a home creates opportunities that otherwise may not be available.

Background: Racial Inequalities Still Exist in Home
Ownership

For many years, society has worked towards reducing inequities between whites and minorities. Although we have been successful in many aspects, such as creating equal opportunity employment, inequities still exist. These inequities can be observed in the gap in homeownership rates by race. According to the statistics from the United States Census Bureau, 67.9 percent of households were homeowners in 2002. When broken down by race, the results are as follows:

Race/Ethnicity Homeownership Rates in 2002
White 71.8%
African American 47.3%
Asian and Pacific Black Islander 54.7%
Hispanic (of any race) 48.2% Source: U S Census Bureau www.census.gov

According to the table, 71.8 percent of white households owned their homes, but only 47.3 percent of African American households and only 48.2 percent of Hispanics households owned their homes. That is a substantial difference in percentage. According to this information, there is a gap in homeownership rates of 24.5 percent.

Problem: Discrimination & Misconceptions Increase the Gap in Homeownership Rates

The gap in homeownership rates can be contributed to two things, (1) discrimination by lenders, and (2) minorities’ misconceptions about the lending process.

Although mortgage loan discrimination is illegal, that does not stop it from happening. Stereotyping is common. Discrimination often begins at the early stages of the mortgage lending process. According to Balkin (2004), “Overall, minorities were less likely to receive information about loan products, received less time and information from loan officers, and were quoted higher interest rates.” She goes on to state that, “At later stages of the process, racial disparities in loan denial rates cannot be “explained away” by differences in credit worthiness or by technical factors affecting the analyses.” One study showed that even African American and Hispanic homeowners with above-average incomes paid more for their mortgages than whites with comparable incomes.

According to another study, in 2003, even upper-income African Americans families earning 120% or more above the metropolitan area median income were discriminated against. The study found that these borrowers were 2.6 times more likely to be turned down by a lender than upper-income whites, and denial rates were back to the same denial rate levels as in 1993 and higher than in 1998 when African-Americans were 1.8 times more likely to be denied.

The second factor contributing to the gap in homeownership rates is, according to studies, the misconceptions that minorities often have about the mortgage lending process. Their beliefs lead them to believe that they would never qualify for a mortgage. Some common misconceptions are that:

• a 20 percent down payment is needed;
• they must have a perfect credit rating;
• five years on the same job is required to qualify for a mortgage.

Many minority borrowers are convinced that their credit is impaired, and they will be rejected by lenders. They are willing to pay high interest rates just be get an approval, so they turn to brokers instead of traditional lenders.

In 2003, sub-prime lenders originated 25.4% of the conventional home purchase loans originated to African Americans, 23.3% of the loans to Latinos and 8.2% of all the loans to white borrowers, which is higher than in
1993 and 1998. In the case of Latinos, the share of sub prime loans in 2003 is twice that of 1998. According to Perlo (2003),

In the early 1990s, the community organization ACORN showed that African Americans are four times more likely than white homebuyers to receive a sub prime loan, and Hispanics are twice as likely. The problem is getting worse: from 1995 to 2000, the percentage of sub prime loans increased three-fold to white homebuyers, and about seven times for African-American and Hispanic homebuyers (pg. 53).

Opportunities: Today’s Racial Minorities Equal Tomorrow’s Racial Majorities

Ultimately lenders who discriminate against minorities hurt their own bottom lines. There are substantial opportunities for growth in this market and it benefits Americans who have not previously had the opportunities of homeownership. This creates a win-win situation for everyone. Also, simply put, it is the right thing to do.

The large number of minorities that do not own homes is a business opportunity. Currently, there are 300 million people in the United States and according to Sitaramiah (2003), “The expected minority population is going to be 40 percent within 10 years.” Based on this information and the information above, the minority population will be at least 120 million and less than 50 percent of them own homes. Why would lenders ignore such a large potential market. This presents a wonderful growth opportunity for lenders.

Some banks are catching on. Wells Fargo’s fastest increase came on its loans to minority homebuyers. The company’s loans to minorities grew by 200 percent to $26.5 billion which represented a market share of 8.2 percent, up from 5.4 percent at the end of 2000. Their rational behind this was “it’s just the right thing to do.”

Several geographic locations are focusing on the opportunities associated with minority lending. For example, in 2003, Minnesota had the eighth- largest gap in the nation between white and minority homeownership rates. So in 2005, Minnesota launched a statewide effort called Emerging Markets Homeownership Initiative to increase minority homeownership. By 2012, they expect to add 40,000 minority homeowners. By increasing minority homeownership, Minnesota is increasing their market..

Based on the gap in homeownership rates between minorities and whites, increasing minority lending would be a win-win situation for everyone since there are substantial opportunities for growth in this market and it benefits Americans who have not previously had the opportunities of homeownership.

Recommendations: Close the Homeownership Gap

The barriers to homeownership for minorities are credit or lending limitations, a down payment, cultural or immigration factors, marketing and outreach, discrimination, and availability of homebuyer counseling and financial education. All of these issues are things that can be overcome.

Since research has found that minorities oftentimes rely on the advice of people from their church groups, real estate professionals, and other “trusted” sources, lenders need to build relationships in target communities to reach minorities. This includes adding mortgage sales people in low-income and minority neighborhoods, recruiting more minority staff, hiring bilingual staff, and building partnerships with community organizations and local real estate and mortgage professionals. Also, they need to be aggressive in their advertising and copy the tactics of some of the sub-prime lenders. Do more marketing and advertising. Send out mailings and put flyers on windshields to make their presence and availability known.

Other strategies include offering loan products designed for the low-income market. To increase minority business, lenders should offer down payment assistance and liberal loan products since one of the financial challenges is affordability, on both down payments and monthly installments. Loan products that require borrowers to make smaller down payments and set aside less money in reserve can help extend homeownership to families with

low and moderate incomes. Also, another barrier for immigrant or low-income borrowers is that credit histories are often either nonexistent or spotty. Many of the borrowers in these markets haven’t used the traditional credit like credit cards, so lenders need to help them create a credit history. They should used rent payment or other account histories to demonstrate reliability.

Finally, lenders should offer homeownership education, followed by one-on-one counseling to help families with little ownership experience develop and execute a financial plan to buy a home. Once the loan processes has been completed, lenders can take steps to prevent delinquency and default by staying in close contact with new homeowners to help them adjust to making monthly mortgage payments and to spot budgeting and credit problems before they cause delinquency.

Conclusion: Correct Misconceptions and Close the
Gap

There is a large gap in homeownership rates between whites and minorities. The 24.5 percent gap in homeownership rates can be contributed to discrimination by lenders and minorities’ misconceptions about the lending process. To overcome the gap in homeownership rates, lenders need to be aware of and eliminate discrimination. Also, lenders need to take steps to close the gap by reaching out to minorities through providing homeownership education, building relationships in communities, and offering loan products designed for the low-income market.

This is an excellent opportunity for lenders as well. There is lots of potential for growth in minority markets which benefits the lenders along with potential homeowners.

References

Coleman, T. (2005, July 24). Goal: homes for minorities. Saint Paul Pioneer Press pp. 2, 6..

Jackson, A. (2005). Closing the homeownership gap. National Mortgage News, 29 (25), 17-21.

Hannon, K., et.al. (1996, August 26) . Report cards for mortgage lenders. U.S. News & World Report. 121 (8), 51-52.

Perlo, A. (2003, February 8). People before profits: Systemic discrimination in home ownership. People’s Weekly World. (36), p. 8.

Sitaramiah, G. (2005, July 24). Buying into the dream. Saint Paul Pioneer Press pp. 3, 7.

U S Census Bureau. (2005). Census of Homeownership in the United States: 2000-2005. Washington, DC: U.S. Government Printing Office.