The face of America is changing, and the housing market is changing along with it. If the mortgage market doesn’t keep up, the nation’s economy will bear the consequences.
The mortgage market has a long history of underserving communities of color, yet by 2045, people of color will make up more than half of our population. If the mortgage market can’t find a way to better serve these communities, what has long been a moral problem will eventually become a broader economic one.
Take Hispanic Americans. Over the next quarter century, more than half of new households in this country will be formed by Hispanic Americans, according to a 2015 Urban Institute study. An overwhelming amount of the overall demand for housing will come from this community, particularly among those buying their first home. The impact of this shift in the demographics will be particularly dramatic in more obvious places such as California and Texas, but it will be felt in virtually every region of the country.
Yet the system we have today isn’t set up to serve Hispanics well. U.S. Census data show that Hispanic households are often composed of extended family members, many of whom contribute to monthly expenses like the mortgage. Yet mortgage underwriting rules typically only consider the income of the person who is named on the mortgage. Hispanic borrowers tend to be self-employed. Yet mortgage underwriting rules remain challenging for those who don’t collect a regular paycheck from a full-time employer. And Hispanics on average use cash more than credit when making purchases. Yet mortgage underwriting relies heavily on credit history to assess future credit worthiness.
Because of the disconnect between how Hispanic households manage their finances and how the rules of underwriting work, mortgage lenders consistently fail to accurately assess the credit risk of a large number of Hispanic borrowers. And the result is as one would expect: only 47 percent of Hispanics own a home, compared with the non-Hispanic homeownership rate of almost 68 percent.
Why does that matter?
It matters because too many Hispanics are missing out on homeownership, one of the primary vehicles of economic and social mobility in this country. Through the simple act of paying down their mortgage each month, Americans have long been able to build the wealth needed to climb into the middle class. Indeed, for many working-class families, which are often less comfortable investing in the stock market, homeownership has been their primary means of building wealth.It is not surprising the median net worth of a homeowner is 44 times that of a renter, according to a 2017 Federal Reserve report.
If the mortgage market doesn’t figure out a way to serve the Hispanic community substantially better, the nation as a whole will bear significant economic consequences. If homeownership rates across ethnic groups were to remain what they are today, then over the next 40 years the national homeownership rate would decline to a rate not seen since the years following World War II.
This would in turn mean a drop in the broader economic and social benefits that flow from homeownership: less labor force participation, less productivity and less of the social and economic investment that a family so often makes in their home and community when they become homeowners.
Not only would this be economically and socially disruptive, but it would be a significant lost opportunity, as the Hispanic community is fast becoming one of the nation’s most powerful economic engines. While the number of businesses in the United States declined in the years following the financial crisis, the number of Latino-owned businesses grew by nearly 50 percent, creating millions of additional jobs and billions of dollars in economic activity, census data show.
The mortgage market must adapt to better serve a changing nation. The social and economic consequences are simply too great to ignore. That does not mean it should loosen its standards to admit those who aren’t prepared to become homeowners. We’ve gone down that dark path and know where it leads. Instead, it means taking a broader approach to assessing credit risk, with more variables driving its measurement and less reliance on the household economics of the average home-buying family of two decades ago, with one generation in the house, one full-time employer and a host of credit cards used to pay the bills.
This means changing the regulatory environment to make it is easier for lenders to include in their underwriting more sources of income and more ways of paying one’s bills, so they are better equipped to assess the risks associated with the broader range of families looking to buy a home today. This will require the agencies that together define the underwriting regime we have today to reassess their rules with this challenge in mind. It is no small task. But only then will the mortgage market be able to evolve along with the nation it is to serve.
Gary Acosta is co-founder and chief executive officer of the National Association of Hispanic Real Estate Professionals. Jim Parrott is a nonresident fellow at the Urban Institute and owner of Falling Creek Advisors. Mark Zandi is chief economist at Moody’s Analytics.