This Week in Broker Magazine

This week's featured story from Broker magazine, our sister publication:

Assisting Homeownership For Emerging Markets

The mortgage crisis has impacted this group's financial opportunities and ability to buy a home.

By Amilda Dymi

Homeownership rates for buyers labeled as emerging markets soared during the boom years, mostly due to subprime or other loan products not meant for first-time buyers.

Conditions today have changed. Gone are inappropriate products and financial models used during that era.

What next? Some fear a back turn to the 1990s. Seller-funded downpayment assistance programs, once a lynchpin to getting minorities into homes, has been legislated out of existence unless Congress changes its mind. An unknown is how the government conservatorship of Fannie Mae and Freddie Mac will impact its affordable housing products.

The old myth that branded lending to emerging market groups as unprofitable is back. In the recent past these markets inspired the launch of solutions described as out-of-the-box thinking. Now they risk getting back into the old box of stigmatized business.

The challenge is in defining and creatively serving these groups with appropriate products.

Asked how the government takeover of Fannie and Freddie will affect the emerging markets, if at all, Brian Koss, managing partner at Mortgage Network of Danvers, Mass., said much of the drive to improve homeownership rates for minority and low-income borrowers came at the request of Congress and the Bush administration. "If Fannie and Freddie help meet those needs for the Congress, they would be left alone to do their business."

Borrowers with undocumentable income and insufficient credit history were seen as being discriminated against, he said, so no credit, no documentation, no money down programs were created in the name of helping those who were unable to buy. "But those solutions were clearly an irresponsible patch as opposed to a long-term solution.

"The new Fannie/Freddie setup has no effect on this since Fannie and Freddie had already tightened their guidelines and abandoned the 'House America' initiative prior to the change."

Then again, are the emerging markets of today the same as those of the past? Opinions tend to differ starting with the definition.

In Mr. Koss's view there is not much to say about that.

"I think there is no emerging market," he said. "Our immigrant population is the first-time market."

Dennis Hedlund, president of iEmergent, a provider of data, forecasts and advice on emerging markets to lender clients, disagrees. He said his company has defined about 19 fairly different market segments. "When we are dealing with our client base the most important issue is that of defining the market space."

Given the various assumptions, the important question of today he said is to properly define emerging markets.

"For example, we do the forecasting of loans across the country and in neighborhoods where the combination might be middle-income single female head of the household with children, which is a very fast growing segment."

His definition is: Rapidly growing, very diverse demand market. Yet he believes rapid growth is the defining feature of an emerging market because in the U.S. there are not many markets we do not know about. "It consists of market segments that have been there for years and years and years. A lot of times it comes to mean they are the underserved markets, but it is not necessarily so."

These markets can be different combinations of race, gender, ethnicity "and especially income ranges," he said, since "when you take out of the picture all the other features, including race," income range triggers a wide variety of change in lending behavior.

Common myths about emerging and rapidly growing markets, he said, include lender complains they do not have "bridges or relationships into that market," so they cannot serve it. Lenders also complain that lower-income markets are more expensive to serve since they require too much counseling or processing time.In fact, he explained, it is a lending model issue. "It heavily is the fault of how much commission you pay people, and so on, that prevents lenders from being profitable in these markets. There's not a lot of creativity in changing the lending model to match the market. If you're a jumbo lender you cannot say that your lending model makes it difficult to lend to the middle-income or moderate-income markets."

Should lenders be more creative and flexible with their financial and processing model they can serve these emerging markets and remain profitable.

"I do not believe any market is unprofitable. Where you have a customer with a demand for homeownership and financial flexibility is available, there's a hundred ways to do deals."

He believes most lenders and brokers are still stuck in the past. "It's like with everything else, they follow the same models. In 2003-2006 during the escalation of the housing bubble, lenders opened the doors to homeownership to 25% more buyers based on an outdated financial model."

New customers achieved homeownership but, because lenders assumed these homebuyers were not financially profitable, the products provided to rapidly growing markets were based on existing lending models lenders thought they could keep using and remain profitable by charging a higher price, he said. What happened next is old news. Customers who could have qualified for FHA loans received the now infamous subprime loans that eventually fueled the crisis.

Where are the opportunities now? "There still is heavy, diverse demand from those markets, but now there's not one product that makes it easy to make a big buck," he said.

FHA is the lone product available to the fast growing markets of today. "For example, Gwinnett County in Georgia, east of Atlanta, is a huge, huge market still generating a lot of mortgages and historically has middle-income African-Americans and Hispanics," he said. "Those markets still exist, same as Prince George's County in Maryland, which is the single largest African-American buyer opportunity, or Fairfax County, Va., outside of D.C., an extremely diverse market that still is generating a lot of purchase mortgages and always will. Any lender/broker could make money in those markets, and yet many fall into the: Let's just do upper-income loans." Lenders and brokers simply go back to what is familiar, safe and easy. Meanwhile the rapid expansion of demand from Hispanics, like middle-income buyers in the major metro areas in Texas and Florida, for example, needs to be met since the service workforce is indispensable for the local economy. Today these workers cannot afford homeownership where the jobs are, he said, so prices have to go down to be affordable.

It does not look good but it will not be as bad as it was in the 1990s, he said, it is more like the dot-com collapse. "It changed the marketplace! Creativeness came through that, the learning that occurred during the dot-com bubble eventually helped improve the industry."

Now loan originators will have to come up with new models. If lenders today go back to those old myths about not having bridge relationships, products or complain it is not a profitable market, he said, "They're just denying that 10 years of history occurred, that there's a new world, that markets have changed dramatically and never will return to the 1990s."

Now the growth in the U.S., even with the polarization of incomes, is in the labor and service industry markets, he said. "To me, the market that was in the bubble, that people say now needs to recover, that is the emerging market, that is the rapidly growing diverse market that can consist of any combination of race, ethnicity gender, location and so on."

FHA can meet most of that demand. However, now that all the "old" products are out of reach, new options represent a possibility, as are efforts to modernize FHA.

In addition, these markets now suffer from a huge trust issue, Mr. Hedlund said. If traditional mortgage lenders are going to serve these communities they need to build community bridges and product delivery mechanisms there. "But if they continue to say emerging markets are just African-Americans or Hispanics, if they still tie to those old conventions it will be hard to find new models and generate new business."

Hence community level data and information is key. iEmergent identifies where are those pockets of opportunity within rapidly growing markets. Yet, pressured by investors, often lenders cut costs by reducing services to markets they perceive unprofitable, instead of considering market intelligence based new strategies and product models. In addition, community mortgage bankers have CRA requirements. And here is where brokers fit into the bigger picture and have a business opportunity with the emerging markets. The broker community is the best answer for lenders, Mr. Hedlund said.

"A retail lender who says we do not have branches in that market we cannot fund it, can turn right around and use the broker channel."

A lender who sees this market full of opportunity but does not have branches, or relationships in the community, or doesn't understand the culture, he said, can over time work with brokers who represent "the street-level loan origination relationship."

He added, "If brokers can identify themselves playing that role and being responsible to their lender there is huge opportunity to serve those markets. If they just want to originate a higher-priced loan to maximize the commission, then this model is not going to work." He believes lenders have the choice to modify their retail model by reconnecting with brokers or updating their wholesale model with brokers who have strong ties in communities, work through trust-building referrals and find time to educate their clients or help them connect with homeownership counselors.

"Wholesale became the poster child for subprime lenders who should have known better," he said. "Good wholesale organizations have always done a good job at dealing well with customers and brokers at the same time. As long as people come to the realization that emerging markets are not the same, the demographics have changed, neighborhoods have changed, and the basic dynamics of the emerging markets have changed. Real leaders will deal with financial models that help the business, and use multilayered market intelligence."