Homeownership demand is evolving, experts say

December 1, 2015

In an October leadership forum on Capitol Hill hosted by Santa Ana, CA-based First American Financial Corp, housing experts, business leaders, members of Congress and other elected officials agreed that the housing industry needs to adapt to the country’s changing demographics. According to Harvard University, over the next 10 years minorities will represent 76% of household growth — and 85% over the next 20 years, First American Vice Chairman Kurt Pfotenhauer told attendees at the Achieving the American Dream forum. Adapting mortgage lending products and services and providing education to these future homeowners is where the mortgage industry needs to focus its efforts, he said. Latinos are passionate about homeownership, Gary Acosta, co-founder and CEO of the San Diego-based National Association of Hispanic Real Estate Professionals told attendees.

In an October leadership forum on Capitol Hill hosted by Santa Ana, California-based First American Financial Corporation, housing experts, business leaders, members of Congress and other elected officials agreed that the housing industry needs to adapt to the country’s changing demographics.

According to Harvard University, over the next 10 years minorities will represent 76 percent of household growth- and 85 percent over the next 20 years, First American Vice Chairman Kurt Pfotenhauer told attendees at the Achieving the American Dream forum. Adapting mortgage lending products and services and providing education to these future homeowners is where the mortgage industry needs to focus its efforts, he said.

“Latinos are passionate about homeownership,” Gary Acosta, co-founder and chief executive officer (CEO) of the San Diego-based National Association of Hispanic Real Estate Professionals (NAHREP) told attendees. Although “there is no question that they are more cautious [about homeownership], Hispanics still want to buy homes,” he said.

And as the population becomes more diverse, he said, the industry and the marketplace need to adapt to provide homeownership opportunities or societal homeownership disparities will widen.

But he cautioned that encouraging and facilitating homeownership in the minority population is just the first step. “It’s one thing to get people in a home; another to keep them in that home,” he said.

Acosta emphasized the importance of public-private partnerships in educating homeowners. “Consumer education is huge,” he said. “Having an educated consumer is the most important thing we can do to effect homeownership.”

The industry also needs to “modernize how we evaluate credit,” he said. “Lenders are scared to death” of making a misstep in the current environment of regulatory scrutiny, and this hampers lending.

Nonprofit organizations are getting more involved,” said Cheryl Chandler Roberts, executive director of the Portland, Oregon-based African-American Alliance for Homeownership, but the mortgage industry still needs “to partner with builders.”

She also cited the importance of other partnerships that might not receive a lot of attention. In Portland, ChandlerRoberts said, “churches own a lot of land in good areas because they’ve owned it for so long.” Portland area churches “generally own at least two blocks around the church,” and many work with investors to develop that land for parishioners to rent.

Acosta said there is a lack of housing inventory because builders are not building enough, and what is being built is too expensive. He said builders and communities need to be incentivized to construct lower-priced homes.

First American Chief Economist Mark Fleming said while the growing minority population wants to own, another factor impeding their homeownership is traditional underwriting. It “doesn’t fit ethnically diverse, younger buyers” who might bank differently than other populations, he said. “You can’t bring money from under your mattress” to the table to aid in traditional underwriting.

“Collectively the minority will be the majority” by 2045, said Fleming.

“Homeownership is highly correlated with age. It is happening later with millennials, but it is happening. Homeownership is not dead,” Fleming said.

He illustrated the problem of builder intent vs. reality with the example of a “builder of a high-rise condo near Verizon Center [in Washington, D.C.] that intended to sell to millennials, but ended up selling to senior citizens” when younger buyers failed to materialize.

“The challenge is … you have to have a particular kind of credit” to qualify for a mortgage, he said. Many millennials have no traditional credit score, and this is where non-traditional credit such as cellphone payment histories and rent are important for lenders to consider.

Barrett Burns, president and CEO of Stamford, Connecticut-based VantageScore Solutions LLC, an independently managed joint venture of the three national credit-reporting companies (Atlanta-based Equifax, Chicago-based TransUnion and Costa Mesa, California-based Experian), and the company behind the VantageScore® consumer credit-scoring model, agreed. Rent is not being factored into credit scores, he said, when in fact, “56 percent of renters’ liability structure is predictive.”

Bums said the government-sponsored enterprises (GSEs) still “use credit-scoring data from 1992-2000,” which doesn’t take into consideration how the changing population of potential homeowners uses credit. VantageScore factors in rent, utilities and cellphone payments in its credit scoring, while FICO doesn’t score the first six months of credit usage and loses the score after six months of non-usage, he said.

Bums emphasized the importance of credit counseling-especially pre-purchase counseling-in improving consumers’ opportunities for homeownership, but said “funding for credit counseling is getting squeezed.” According to Bums, “[Seven] trillion [dollars] of wealth was lost in the [mortgage] crash, to those who could least afford it.”

“We don’t want to lower the bar [on credit standards],” said Burns. “We want to widen the window.”

Patty Arvielo, president of New American Funding, Tustin, California, said that the up-and-coming generation of Hispanic millennials-”Hispennials,” as she calls them-has “heard only that mortgage bankers are bad.” But Hispennials “are purchasing homes at a more rapid pace” than other groups, she said.

New American Funding, which has a workforce made up of 58 percent women and is also 50 percent Hispanic, is growing fast because of this expanding group of Hispanic millennial buyers, Arvielo said. The company has gone from 600 employees just a couple of years ago to 2,000 currently by “getting more Hispanics involved” in homeownership, she said.

Arvielo’s business “is so successful because of old-fashioned lending-know your market, know your customer,” commented Burns.

“Because of [industry] overregulation, banks have taken a big hit [and] decided to pull away from the lower FICO® scores,” said Arvielo. “Everybody in my industry is scared” of regulation, and “the art of underwriting has been taken away from our industry” by this overregulation. But actually “the art of underwriting is key. I think we need to expand on that,” she concluded.

“Collectively the minority will be the majority” by 2045, said Fleming.