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Untapped Market: Helping North America's Indigenous People Realize the Dream of Homeownership (December 2003)

INDEPENDENT BANKER
DECEMBER 2003


Untapped Market
Expanding homeownership opportunities for Native Americans

by Robert O'Connor

Mortgages have not always been an easy option for Native Americans. Because land on reservations is held in trust, banks have typically been unable to take over individual properties in cases of default. This has discouraged lenders and building contractors from getting involved in the housing market on such lands.

“You’ve got major issues with sovereignty, with regards to doing loans in the tribal community,” says Valerie Van Winkle, vice president of tribal services at Canyon National Bank in Palm Springs, Calif. Canyon National provides mortgages to Native American tribes throughout California.

Another barrier to greater mortgage activity among Native Americans has been the extensive documentation that has been required by the U.S. Bureau of Indian Affairs. So time-consuming has this process been that, in the past, locks on loans have sometimes expired long before the necessary paperwork had been completed. (The BIA’s caution is partly dictated by the need to track changes in ownership that have occurred with properties over the generations.)

Fortunately, obstacles to the growth of the Native American mortgage market are diminishing as the result of determined efforts by such organizations as Fannie Mae and the U.S. Department of Housing and Urban Development. That’s good news for community banks in areas with substantial Native American populations wishing to serve this market. And the timing couldn’t be better.

According to the Washington-based National American Indian Housing Council, 45 percent of all Native American households are on tribal lands. The NAIHC also predicts that the Native American and Alaskan Native population will increase from its year 2000 level of 2.5 million to 3.1 million by 2020.

How the Programs Work

HUD’s Section 184 Guarantee Loan Program, which has been specifically designed for Native Americans, allows for low down payments and less restrictive credit criteria than those that are applied to mainstream mortgages. The 184 loans are also 100 percent guaranteed, so a bank does not stand to lose money if the borrower defaults.

Meanwhile, Fannie Mae is active in the secondary market as a buyer of 184 loans from lenders. And on the primary side, Fannie Mae’s Native American Conventional Lending Initiative offers mortgages to buyers living on reservations for as little as 1 percent down.

Bob Simpson, head of Fannie Mae’s Native American Business Council, says that the barriers to mortgaging property on trust land steered both Fannie Mae and HUD toward the use of leasehold mortgages. “Our security is the lease,” says Simpson, who is based in Sioux Falls, S.D.

The NAIHC is also trying to persuade the federal government to increase its annual spending on Indian housing from about $650 million to about $1 billion. “We estimate that there is a need for 200,000 additional homes in Indian Country,” says Gary L. Gordon, executive director of the NAIHC. “So there is certainly a market out there.”

Gordon says that there has been some improvement in Native American homeownership over the last 10 to 15 years. But he argues that such gains can hide a discouraging reality. Many homes that are owned by Indians may be structurally deficient or lacking in plumbing, electricity and heating, he explains. “To say that somebody owns a home does not necessarily mean that it is a habitable home.”

Community banks interested in developing mortgage markets among Native Americans will need to be flexible to allow for differences in tribal customs and housing needs and should be willing to invest the time both to understand the program and to market it, say experts.

Banks should also draw on any existing experience that they might have with local tribes. Ronan Bank’s Pablo office is within the reservation of the Confederated Salish and Kootenai tribes, which own a number of local businesses. “This is going to be a viable market down the road,” says Ben Graves, manager of the Pablo branch of Ronan State Bank in Ronan, Mont. “Marketing is quite easy here. We’re a community bank in a small community.”

Before a tribe can participate in HUD’s 184 program, it must accept HUD’s forfeiture provisions. Foreclosures would involve the tribal courts and may be resolved by having the tribe absorb the debt or move another family into the property.

Simpson says that tribes long resisted Fannie Mae’s insistence that they waive their rights to sovereign immunity and agree that disputes over mortgages not go through the tribal courts. In 2002, he says, Fannie Mae announced that it would acknowledge tribal court jurisdiction if the tribes put acceptable mortgage codes and foreclosure ordinances in place. “That has really helped us work much more closely with the tribes on the NAIHC initiative,” Simpson says.

New Customers

Van Winkle says that Canyon National Bank has an added incentive to get involved in the Native American mortgage market. The bank is 45 percent owned by a local tribe, the Agua Caliente Band of Cahuilla Indians.

Van Winkle says that, after Canyon National opened in 1998, it became aware of the need for financial services among the Native American community. In the first year, she says, the bank attended the National Congress of American Indians, which the Agua Caliente were hosting in Palm Springs. Van Winkle says that the Agua Caliente invested in the bank to diversify the tribe’s assets. The tribe’s primary source of income is derived from its two casino operations. “The Agua Caliente are a very successful and forward thinking tribe,” she says.

Canyon National is still new to the HUD 184 program. In the third quarter of 2003, Van Winkle says, it produced $1.4 million worth of business. When loans that are being processed are added in, she says, the total rises to about $4 million. “And I can see that continuing to expand,” Van Winkle says.

Van Winkle says that lending to Native Americans would be about a quarter of the total lending of the bank. The bank’s loans are purchased by M&T Mortgage Corp., which is based in New York.

The wide geographical spread of Canyon National’s business with Native American tribes means that Van Winkle and her colleagues might spend seven hours traveling by plane and car to a remote reservation to explain the provisions of the 184 program. That effort alone tends to impress potential customers. “Having the ownership of the Agua Caliente tribe,” Van Winkle adds, “definitely gets us in the door.”

Chasing the Market

Ronan Bank, in Ronan, Mont., joined the HUD program this year when the Salish and Kootenai accepted its terms. Graves says that Ronan Bank, an $80 million-asset institution, has done about $1 million in Native American mortgage business in three months. He hopes to see that rise to $2 million by year’s end and to about $5 million by June 2004.

“We have actively pursued the loans,” Graves says. “We have secondary markets that will buy these loans, so we do not have to carry them in-house, which helps small local banks be able to do them.”

Graves estimates that there are about 6,500 enrolled members of the Salish and Kootenai tribe in the area, which has a total population of about 25,000. He says that HUD has designed a very versatile product in the 184 mortgage program. He notes that it can be used in four ways:

  • a cash-out refinance;
  • a no-cash-out refinance;
  • a purchase; and
  • a construction-to-permanent loan.

His advice to any bank interested in this market would be simple-study the HUD manuals.

The relative newness of these programs means that foreclosure is not yet a major issue. Neither Canyon National nor Ronan Bank has had any defaults. Graves believes that the wealth of the Salish and Kootenai would allow them to buy out a property before a loan would become a matter for the tribal courts.

The NAIHC’s Gordon offers further reassurance. He notes that default rates among Indians are lower than those for the rest of the American population. This, he believes, is at least partly the result of a very strong emotional attachment to the land.

Information Sources

Various Web sites offer useful information on Native American home loan programs.

Robert O’Connor is a free-lance banking writer.






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