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Downturn Widens Homeownership Divide

While the overall homeownership rate climbed during the housing boom, and minority groups narrowed the homeownership gap with whites, the crash has sent the homeownership trend into reverse.

Gains in homeownership gave under the weight of the subprime loan market meltdown. Fair-housing advocacy groups also blame reverse redlining, the insulation of minority communities and an insufficient financial education for tearing down the homeownership rate.

Rise and fall in homeownership

The Pew Hispanic Center reported this month that, from 1995 to their respective peaks, the homeownership rate among blacks grew from 41.9 percent to 49.4 percent in 2004; the rate for Hispanics rose from 42 percent to 49.8 percent in 2006; and the Asian homeownership rate surged from 49.1 percent to 60.8 percent in 2008.

White homeownership increased from 68.7 percent in 1995 to 72.7 percent in 2005, the U.S. Census Bureau reported, and the Pew Hispanic center found that the white homeownership rate rose from 70.5 percent in 1995 to 76.1 percent in 2004.

According to Lisa Rice, vice president of National Fair Housing Alliance (NFHA), mainstream lenders were not meeting the needs of all borrowers in segregated communities, and “since the need (was) there, subprime filled it.”

NFHA’s members work together as advocates to the federal government on civil rights issues to address regional fair-housing concerns and to share information, test for discrimination locally, and address issues of systemic national housing discrimination, Rice said.

Lenders went after higher-cost markets and senior markets “once tapping out the African-American and Hispanic” market, said Rice.

Gap widens for some minorities

After the boom, the homeownership rate dropped to 47.5 percent in 2008 among blacks, fell to 48.9 percent for Hispanics, dropped to 59.1 percent for Asians and sank to 74.9 percent among whites, the Pew Hispanic Center reported — the homeownership gap with whites widened for blacks and Asians while narrowing for Hispanics.

According to the U.S. Census Bureau, whites recorded a 71.7 percent homeownership rate in 2008, and the overall U.S. homeownership rate declined from a peak of 69.2 percent in fourth-quarter 2004 to 67.3 percent in first-quarter 2009. This overall rate has fallen in the past five consecutive quarters.

From first-quarter 2006 to first-quarter 2009, the overall U.S. homeownership rate declined 0.8 percent among non-Hispanic whites and Hispanics of any race, dropped 1.2 percent among blacks, and fell 2.2 percent among all other races, the Census Bureau also reported.

The Pew Hispanic Center gathered its data from the Census Bureau, RealtyTrac, the Home Mortgage Disclosure Act, the Bureau of Labor Statistics, and the Federal Housing Finance Agency.

Real estate agents and brokers are well aware of how the percentage dips have decreased their prospects and impacted their bottom line.

Despite the souring of the housing market, some homeowner segments have continued to make gains. While foreign-born blacks and Hispanics are less likely than other minority groups to own a home, they have experienced rising homeownership rates.

The homeownership rate among foreign-born Hispanics grew from 36.9 percent in 1995 to 44.7 percent in 2008, while the rate for foreign-born blacks rose from 34.8 percent in 1995 to 45.8 percent in 2008.

For U.S.-born blacks and Hispanics, another picture emerges. The homeownership rate among U.S.-born blacks dropped from 50.1 percent in 2004 to 47.7 percent in 2008, while the rate among U.S.-born Hispanics fell from 56.2 percent in 2005 to 53.6 percent in 2008.

Subprime inequality?

“Foreclosure rates are much higher than whites because they were disproportionally represented” in the subprime loan market, said Rice, adding, “their (low) credit will also be disproportionally represented” after the crisis.

Moreover, some mainstream lenders “have never been able to effectively explain why they were able to penetrate the black and Hispanic market” with their subsidiaries and subprime loans to a greater degree than they had with their mainstream branches and products, said Rice.

The NHFA, a consortium of about 220 nonprofit fair-housing groups, reported that fair-housing groups processed a record 30,758 complaints in 2008, with the U.S. Housing and Urban Development Department processing 2,123 complaints, state and local agencies processing 8,429 and the Justice Department filing 33 fair-housing cases. FHFA also reported 1,499 cases related to discrimination in mortgage lending in 2008, compared with 1,245 in 2007.

We don’t get a good sense of why” minority homeowners were overrepresented in subprime markets, said Josia Madar, research fellow at The Furman Center for Real Estate and Urban Policy, but “large disparities in income level between (whites and minorities) is the straightforward answer.”

The Furman Center found that if borrowers lived in racially segregated metropolitan areas, they were more likely to receive a subprime loan — 3 percentage points higher than the federal Treasury rate, according to a Furman Center report analyzing HMDA 2006 data by the Federal Financial Institutions Examination Council.

Hispanics were 2.6 times more likely than whites to receive subprime loans, according to the Furman report. Blacks were almost three times more likely to receive subprime mortgages than whites in 2006, according to the Furman report.

The Furman study focused on metro areas with more than 200 loans, regardless of borrower characteristics.

White borrowers who lived in a predominantly segregated metro area had no correlation with receiving a subprime loan. This relationship to segregation holds even when compensating for individual borrower characteristics

This is “borrowing while black,” said National Community Reinvestment Coalition executive vice — president David Berenboum, alluding to alleged racial profiling by some law enforcement officers that gave rise to the phrase “driving while black.”

Rice said that a historical legacy of discrimination has complicated homeownership for minorities, and once minorities do gain homeownership status, blacks and Hispanics lose that status faster than whites, as the Pew Hispanic Center statistics show for the two largest native-born minority groups.

Maria Kong, president of the National Association of Real Estate Brokers (NAREB), which represents minority brokers, said agents are now counseling their clients about dropping market values.

And consumers’ ability to tap into the equity of their home is significantly impacted in the current market environment, noted Rice.

Possible contributors

Both Rice and Madar said that while racism could be a factor, the cause of discriminatory practices can be more subtle.

Tino Diaz, chairman of the National Association of Hispanic Real Estate Professionals and managing director and CEO for CharisPROS, a Miami loan company specializing in the Hispanic market, noted that “market dynamics were pushing the family and the professional” to conform to market demands at the time of the boom.

“When you are in a feeding frenzy you forget who you’re biting,” said Diaz.

Although the Furman report questions whether the physical location of mortgage brokers was a factor, as most all racial groups choose lenders who are based outside of their neighborhood, still Rice holds that proximity to lenders is relevant.

“African Americans and Latinos tended to get loans that had a mobile marketing scheme,” said Rice, adding that it was not uncommon for lenders to go to churches and other parts of the community to promote their product.

“You can’t get any more local than that,” Rice said.

Borrowing behavior

Minorities’ borrowing behaviors, too, may make them more of a target for subprime loans. Although more foreign-born minority buyers have been able to keep their home as compared to their U.S.-born counterparts, a significant number of minority borrowers received subprime loans who should have received prime loans, Diaz said.

The Furman authors cite various reasons for different behaviors between groups.

Minorities are less likely to be financially educated, according to the Furman report’s authors, citing reports that show blacks rely more on advice from their broker and are less likely to make an inquiry about loan products directly at banks and other lending institutions.

Hispanics, Furman reports, are more likely to consult their broker for advice than whites, but are just as likely as whites to inquire about loans directly at banks and other lending institutions.

White borrowers tend to secure loans from traditional banks, while many blacks and Hispanics get them from loan officers and brokers, Madar said.

The knowledge disadvantage festers when minorities and immigrants — who may live in minority communities and subcultures — are less likely to receive information from the society at large, according to Madar.

Information spreads differently in different community networks, he said, and it may be more or less acceptable in some community networks to talk about the process of homeownership with neighbors.

Financial education

Some agents question the education about the real estate transaction process and pitfalls that real estate professionals provided to their clients during the housing boom.

Rebecca A. Gallardo-Serrano, managing partner at Portelo Realty Group Real Estate Services in San Jose, Calif., and immediate past chairman of NAHREP, said “there was a huge lack of knowledge” among some minority homeowners who bought during the boom, and “they were not counseled correctly.”

While Gallardo-Serrano admits that real estate agents have a fiduciary duty to their clients, “we are lacking necessary knowledge in our industry.”

“Heck,” Diaz said, some buyers who are native English speakers “don’t read the (loan) documentation,” and communicating with a non-native English speaker is doubly difficult when the client cannot clearly understand their adviser or cannot read the terms of the financial product.

The lack of economic knowledge and the language in loan documentation can make minority and immigrant borrowers more reliant on real estate brokers or mortgage brokers, she noted, and may make them more likely targets for fraud.

“There was no will to change it when the economy was doing well and we were all having a great ride,” said Gallardo-Serrano, “We were part of the process.”

Praveen Sharma, marketing manager for the Asian Real Estate Association of America (AREAA), said immigrants’ and minorities’ language barriers make translated loan documentation crucial, and although immigrant communities have shown resilience in this down economy their homeownerships gap still represents a chasm as compared to others.

In some cases, Diaz said, minorities, foreign or native born, may “have difficulty reading the language” and do not understand how much interest they will pay or for how long.

If the borrower does not know English well “(they) are more likely to be lied to,” said Madar, and this can lead to a mortgage broker — with only their own interest in mind — guiding a borrower to sign off on a less than favorable product.

In a recent case, the Federal Trade Commission has alleged that a mortgage service partnership gave loan officers a percentage of excess markups and failed to monitor discrepancies between what non-Hispanic white borrowers paid for their mortgage as compared to black and Hispanic borrowers, Inman News reported.

New barriers, plans

An uneven rate of unemployment — 15 percent for blacks and 11.3 for Hispanics as compared to 8 percent for whites — could compound the homeownership gap. The unemployment rate for Asian Americans was 6.6 percent, up from 3.2 percent a year earlier, according to a recent monthly U.S. Census report.

Today and in the near future, minority credit hopefuls face a Janus at the credit-score door. Credit scores take into account employment, late payment, bankruptcy and foreclosure history.

Rice commented, “It seems like now I’ve stepped back in the ’80s,” a time when she began her work. Helping minorities achieve homeownership today is “a little frustrating — this sets us back 20 years on this issue,” she said.

Berenboum said banks need to “make it more difficult to get a loan to restore access to credit,” so only creditworthy borrowers can take out loans — appropriate loans with appropriate credit expectations.

He advises an increase in transparency, adjustments to the principal on current home loans, and counseling to avoid foreclosure. This will ultimately help investors, who are mostly institutional investors, pensions and retirement funds, Berenboum said, and increase the tax basis because there have been cutbacks in government spending.

Because some minorities do not have access to traditional mortgage products and have little built-up equity, NAREB, AREAA and NAHREP announced a joint legislative and regulatory partnership outlining a five-point plan to help minorities manage their mortgage woes and protect and foster homeownership.

Also, the plan provided for an increase in multicultural counseling and outreach, improved industry ethical standards, and protections for credit liquidity by — among other devices — advocating for more flexible automated lending standards so nontraditional creditworthy individuals can gain homeownership status.

Minority homeownership “has been promoted wrong and for the wrong reasons,” Rice said, adding, “You can’t promote homeownership with bad loans.”