WASHINGTON
They make up the fastest growing segment of the U.S. population yet Hispanics are increasingly locked out of home ownership because of tighter lending standards that rely on outdated measures of creditworthiness.
Comprising more than 17 percent of the population right now and projected to double, Hispanics are a political and economic force to be reckoned with. And they potentially represent an answer to turning around a sagging national home ownership rate that’s approaching levels not seen since before the fall of the Berlin Wall.
The national rate of home ownership fell to 63.8 percent over the first three months of 2015. The last time it was lower was the final quarter of 1989 when it stood at 63.7 percent.
The problem for Hispanics, who in 2014 had an ownership rate of 45.4 percent, a 14-year low, is that conventional tools for gauging creditworthiness are locking them out in large numbers.
“Communities of color under the current scoring model aren’t being accurately captured,” said Joe Nery, president-elect of the National Association of Hispanic Real Estate Professionals. “You don’t have the opportunity to establish your credit.”
Hispanics are more likely to pay in cash, and have extended families under a single roof with a higher tendency to pool resources. Yet that counts for little in the traditional scores used by credit-reporting agencies and banks to determine whether an applicant qualifies for a mortgage or car loan.
“The current (credit) models established in the 1980s and early ’90s really don’t account for those methods of payment,” said Nery, a Realtor in Chicago. “Unfortunately that limits the access to loan products, especially for those of minority descent.”
In fact, the Consumer Financial Protection Bureau issued a report in early May noting that 26 million Americans are “credit invisible,” meaning they have no credit history on file with any of the major credit-reporting companies such as Experian, Equifax and Transunion. About 15 percent of African-American and Hispanic consumers are among those 26 million, the report said.
Currently, credit reporting is dominated by FICO scores. They date back to 1956, when software developers Bill Fair and Earl Isaac created a program to gauge the risk of a consumer credit default. Lenders now purchase more than 10 billion FICO credit scores annually for use in making loan decisions. Consumers are granted free access to their FICO score.
FICO’s current methodology dates back to around 2004, and relies on a borrower’s income, payment history, debt load and to a lesser degree how often lenders take a look at a borrower’s credit history.
Here’s the rub for Hispanic borrowers: When looking at payment history, the FICO scoring relies on whether payments have been timely on credit card bills, mortgages, car loans and the like. There’s greater weight given to lengthy repayment of credit.
“For most first-time homebuyers … their largest monthly expense is their rent payment,” said Joe Castillo, the managing broker at ERA Mi Casa Real Estate in Chicago. “And at the current time the credit agencies do not provide landlords larger or even small avenues to report that payment. So that is a huge misstep, or missed opportunity.”
That’s the problem Maria Flores faces in the Hispanic suburbs of Chicago. She sold her home at a loss several years ago amid the Great Recession, and is trying to buy again but her on-time rental payments aren’t factored into her ability to pay. It’s ironic because her monthly mortgage payment had been $2,000 a month. Her rising rental payments now are $1,800, which she routinely pays on time.
“For a bank, we are too low-income,” said Flores, whose truck-driving husband is an owner-operator who earns more than $100,000 before expenses. “Before, it was fine. It was the same as we earn now!”
Post-crisis lending standards are decidedly tougher, and that hits all borrowers. But for Hispanics there’s also the real issue of what is being measured. Cell phone payments are also not counted in conventional payment history. That would have helped Flores, who said she had no credit problems until the Great Recession.
Read more here: http://www.charlotteobserver.com/news/local/article28765174.html
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