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Homeownership Mismatch: Surveys Show a Homeownership Disparity, as Banks Work to Close the Gap (March 2003)

INDEPENDENT BANKER
MARCH 2003


Homeownership Mismatch
Surveys show a homeownership disparity, as banks work to close the gap

by Robert O'Connor

Homeownership is widely acknowledged as a vital component of the American dream yet it is not evenly distributed across the U.S. population. Ownership rates among minorities remain significantly below those for whites. Franklin D. Raines, chairman and CEO of Fannie Mae, a leader in the secondary mortgage market, explains that disparities in homeownership rates have created a $1 trillion “wealth gap” between white families and African-American families. (See article on Fannie Mae’s perspective on page 76.)

Community banks can play a role in closing this gap, industry experts say, making it easier for minorities to obtain mortgages, while generating additional business for banks.

According to Fannie Mae’s 2002 National Housing Survey, Americans still regard housing as the best possible investment. The survey also found that many members of minority groups are deterred from buying homes because of a lack of information about how easy it can be to qualify for a mortgage.

Robert McCarson, Washington, D.C.–based director of the National Housing Survey, says banks should be working to correct such misconceptions. “There are still quite sizable pluralities of African-Americans and Hispanics,” he says, “who believe you need a 20 percent down payment to buy a home and that you need perfect credit.”

The Fannie Mae survey found that 32 percent of African-Americans feared that their credit ratings would make it very difficult to get a mortgage compared with 23 percent of all adults. Further, 27 percent of African-Americans were concerned a lack of security in employment would work against their desire to become homeowners. A fourth of African- Americans said that a lack of knowledge of the home-buying process would be a major barrier to obtaining a home. Another third said that it would be a minor barrier. The Fannie Mae survey also reported that members of minority groups were more likely to pay too much for their mortgages.

In November 2002, ICBA released the results of its own membership survey to identify bankers’ perceptions of the mortgage market and community banks’ place in it. While respondents reaffirmed their commitment to serving their minority customer base, one-quarter admitted to not knowing the percentage of minorities living in their markets. Of the three-quarters of respondents who knew the percentage of minorities living in their markets, almost half noted that minorities accounted for more than 10 percent of the local population. According to the community banks, the four largest minority groups were:

  • Hispanic (42 percent);
  • African-American (32 percent);
  • Asian (17 percent); and
  • Native American (9 percent).
Meanwhile, 40 percent of survey respondents noted their involvement in financial literacy programs. Thirty-five percent have an employee who speaks a language used by minority customers. And 20 percent give their employees access to language training. Fifty-two percent of banks offer mortgages that are tailored to low-income and nontraditional credit borrowers.

MidSouth Bank in Lafayette, La., has been actively seeking mortgage opportunities among the local minority population for five or six years, according to C.R. “Rusty” Cloutier, the bank’s president and chief executive officer. “We get more active every year,” says Cloutier, ICBA incoming ICBA chairman.

MidSouth Bank has won recognition from the Louisiana branch of the NAACP and an award from the Federal Home Loan Bank. In Cloutier’s view, “there is nothing better than to help a person get into a house who really needs it and appreciates it.”

Reaching the Masses

The ICBA survey was sparked by President Bush’s speech in Atlanta in June 2002 in which he stressed the government’s determination to increase minority homeownership by 5.5 million by the end of this decade. Cloutier was there in part because of his role as chairman of the Fannie Mae National Advisory Committee.

Mike Hindman, president of ICBA Mortgage, ICBA’s secondary mortgage market service provider for community banks, says that the ICBA survey was designed to reveal what member banks knew about the minority mortgage market and to “help make them more efficient and more productive.”

Overall, Hindman says bankers’ level of awareness was good. He notes, however, that minority-oriented mortgage activity was higher among urban banks, but says that the rural-urban differences were not substantial. He says changing demographics have begun to blur the distinction between rural and suburban.

Hindman was further encouraged by the efforts that banks have been making to extend mortgages to low-income people in general. “For a community bank to be successful,” he says, “it has to serve its entire market.”

Cloutier agrees. “We don’t look at it strictly as minority versus non-minority,” he says of MidSouth Bank’s targeted mortgage program. “We look at it much more as a low- to moderate-income [market] across the board.”

MidSouth Bank, which has about $400 million in assets, has 19 locations in an area west of New Orleans and east of Houston. Identifiable groups in its market include African-Americans, Hispanics, Vietnamese, natives of India, Muslims and French-speaking Cajuns.

The market, Cloutier says, has “a very diverse culture.” And he says that banks coming into this market should seek to build relationships with community groups. A good place to start, he says, would be the Fannie Mae Partnership Offices, which are located in every state. Fannie Mae, Cloutier says, has done a very good job of identifying geographical areas and groups that need housing.

“Reach out,” Cloutier advises. “Talk to people. Go into your community and look for opportunities, because there are opportunities out there.”

Serving Emerging Markets

Washington Federal Savings Bank in Washington, Iowa, has done just that. According to Dale Torpey, the bank’s president, Washington Federal Savings has built up good relationships with its local Hispanic population. Activity includes mortgages, checking accounts and consumer lending.

Washington Federal Savings, a $100 million-asset bank, serves a market with a population of about 22,000. The city of Washington itself has a population of about 7,000. Torpey says that the local Hispanic population is estimated at 3 to 5 percent of the total. Most came from Mexico a decade ago to work in a local meat packing plant, he explains.

“These are people who could teach Americans some things on how to save,” Torpey says. “A lot of times they will come in to buy a house and have 40 or 50 percent down.” Torpey, who notes there is an ample supply of housing in the bank’s area, says that Hispanics have integrated well into the local community. Mexican restaurants and a Mexican grocery store have been established, he says. “They are starting to get into the mainstream here.” Cloutier says that the availability of reasonably priced housing is always a challenge. About three years ago, MidSouth became involved in the successful development of a subdivision of about 70 lots aimed at low-income buyers.

Meanwhile, Devon Bank in Chicago has been exploring ways to cater to Muslim customers whose religion forbids them from paying interest. One route into this market, says Richard Loundy, chairman and CEO of the $250 million-asset bank, is for the bank to take ownership of the property and sell its interest to the buyer. Devon Bank has drawn on the advice of the ICBA, and the bank has been encouraged by determination of Fannie Mae to create products to serve this market.

Devon Bank is well placed to deal with a variety of cultures. Loundy says that the bank’s neighborhood, in North Chicago, has been described “as the most multi-ethnic neighborhood in the country.” He notes that 35 languages are spoken locally. Like other Chicago neighborhoods, the area has long been in ethnic flux. The area has had large numbers of German, Irish and Jewish residents. In more recent years, Greek and Russian residents have arrived and moved on. Now the neighborhood is also a center of immigration from India, Pakistan and the Balkans.

At first, Loundy says, Devon Bank had no answer for Muslim customers who wanted mortgages that did not involve interest. “Finally,” he says, “someone got our attention and we said, ‘There’s a problem here and we’ve got to solve it.’”

Devon Bank is a prime example of a community bank that knows and understands its diverse and ever evolving market, and thus is able to respond to its customer bases’ unique challenges. And then there are the perception obstacles that banks must overcome when dealing with some customers, Hindman says.

For example, immigrants from countries where currency devaluations and bank failures have wiped out people’s life savings, like in Mexico, will require extra convincing that placing their money in community bankers’ hands is safe.

Washington Federal Savings hopes to bridge part of the education gap by offering a multi-modular financial educational program prepared by the FDIC. One of the modules deals with mortgages. Employees who are also members of target groups can bring linguistic skills and valuable insights into what approaches are likely to work best.

Among MidSouth Bank’s employees are speakers of Spanish, Vietnamese and French. Cloutier says that the minority mortgage market will continue to grow. He says that every time the bank can put a person into a better house, the community gets stronger. And that’s good for his bank.

“I’m a community banker,” he says. “So I serve the community.”

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






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