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Hispanic Homeownership Seminar

Hispanic Homeownership Seminar. U.S. Department of Housing and Urban Development Thursday, June 1, 2006. Improving Hispanic Homeownership Opportunities: A Review of the Literature Alvaro Cortes Chris Herbert Erin Wilson Elizabeth Clay. Goals of the Study.

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Hispanic Homeownership Seminar

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  1. Hispanic Homeownership Seminar U.S. Department of Housing and Urban Development Thursday, June 1, 2006

  2. Improving Hispanic Homeownership Opportunities: A Review of the Literature Alvaro Cortes Chris Herbert Erin Wilson Elizabeth Clay Hispanic Homeownership Seminar - June 1, 2006

  3. Goals of the Study • Describe key characteristics of the Hispanic population and trends in Hispanic homeownership rates and gaps relative to whites • Review what is known about the determinants of Hispanic homeownership gaps and the principal barriers to increasing Hispanic homeownership • Identify existing efforts to promote Hispanic homeownership and what is known about the effectiveness of these efforts Hispanic Homeownership Seminar - June 1, 2006

  4. Key Demographic Characteristics • Hispanics are an increasingly important source of demand for housing • Nearly 12 million Hispanic households in 2004 or about 10 percent of all U.S. households • The number of Hispanic households increased by more than 50 percent between 1990 and 2000 – compared to 12 percent growth for all households • Masnick and Di (2003) estimate that Hispanic households will increase by 7.5 million between 2000 and 2010 – a third of all growth and nearly as large as growth in white households • But a variety of characteristics contribute to lower homeownership rates for Hispanics Hispanic Homeownership Seminar - June 1, 2006

  5. Hispanics Are Disproportionately Low Income… Source: 2000 Decennial Census Hispanic Homeownership Seminar - June 1, 2006

  6. …Have Limited Wealth… Source: SIPP 1999-2000 Hispanic Homeownership Seminar - June 1, 2006

  7. …Low Levels of Education… Source: 2000 Decennial Census Hispanic Homeownership Seminar - June 1, 2006

  8. …and Are Much Younger Source: 2000 Decennial Census Hispanic Homeownership Seminar - June 1, 2006

  9. But Hispanics Are More Likely to Be Married with Children Source: 2000 Decennial Census Hispanic Homeownership Seminar - June 1, 2006

  10. Immigrants Account for Large Share of Hispanic Households Source: 2000 Decennial Census Hispanic Homeownership Seminar - June 1, 2006

  11. Although Most Hispanics Have Lived in the U.S. for Many Years Source: 2000 Decennial Census Hispanic Homeownership Seminar - June 1, 2006

  12. Great Diversity Among Hispanic Immigrants Source: 2000 Decennial Census Hispanic Homeownership Seminar - June 1, 2006

  13. Hispanics Have Been Geographically Concentrated – Often in Higher Cost Markets – But Now Are Growing Rapidly in Other Areas • Slightly more than half of Hispanics live in 30 largest metro areas compared to a third of all households • Hispanics are more than 25% of the population in California, Arizona, New Mexico, and Texas and between 12.5% and 25% of the population in New York, New Jersey, Florida, Nevada, and Colorado • Growth rates have been highest in states like North Carolina, Georgia, and Tennessee • Mexicans predominate in West and Midwest, are a majority in the South, but only a small share in the Northeast Hispanic Homeownership Seminar - June 1, 2006

  14. Hispanic Homeownership Rates Have Risen Sharply Since 1993 Source: Current Population Survey Hispanic Homeownership Seminar - June 1, 2006

  15. But Hispanic-White Homeownership Gaps Remains High as White Rates Also Increased Source: Current Population Survey Hispanic Homeownership Seminar - June 1, 2006

  16. Homeownership Gaps Differ by Country of Origin… Source: 2000 Decennial Census Hispanic Homeownership Seminar - June 1, 2006

  17. …And by Years in the U.S. … Source: 2000 Decennial Census Hispanic Homeownership Seminar - June 1, 2006

  18. …Which is Reflected in Differences in Gaps by Region Source: 2000 Decennial Census Hispanic Homeownership Seminar - June 1, 2006

  19. Determinants of Hispanic-White Homeownership Gaps • Much less studied than Black-White Gaps • Studies that do not include immigration status generally explain about three-quarters of the observed gap • Studies including immigration status explain most of Hispanic-white homeownership gaps Hispanic Homeownership Seminar - June 1, 2006

  20. Determinants of Hispanic Gaps (cont’d) • Wachter and Megbolugbe (1992) use the AHS and find that demographic and housing market variables explain three-quarters of total gap (32 of 41 pp) • Lower Hispanic incomes are most important factor accounting for gap • Flippen (2001) uses data from Health and Retirement Survey to include wide range of variables about income, risk aversion, and health • Explain 21 pp of total gap of 27 pp • Hispanics income and employment are most important factors, followed by Hispanics location in high cost markets • But study only includes those age 51-61 Hispanic Homeownership Seminar - June 1, 2006

  21. Determinants of Hispanic Gaps (cont’d) • Gabriel and Rosenthal (2005) use SCF to examine importance of credit constraints • Only explain half of 30 pp total gap • Credit constraints only account for between 2 and 5 pp of gap • Coulson (1999) uses CPS and includes controls for immigration status and finds most of gap is explained – only 2 percentage points of total 31 percentage point gap unexplained • Most important factors are immigration status, age, and location in high cost markets • Unexplained gaps are largest for Puerto Ricans (9 pp) and Cubans (7 pp), while no unexplained gap among Mexicans Hispanic Homeownership Seminar - June 1, 2006

  22. Primary Barriers to Hispanic Homeownership • Lack of information about homebuying and mortgage qualification processes • Particularly an issue for immigrants with limited English proficiency • Difficulty in qualifying for mortgage financing due to: • Poor credit or no credit history • Undocumented immigrant status • Difficulty in documenting employment, income and savings • Housing affordability • Result of Hispanics’ concentration in high cost markets and the high share of households with low income and wealth Hispanic Homeownership Seminar - June 1, 2006

  23. Primary Barriers (cont’d) • Some evidence of discrimination in housing and mortgage markets • Paired-testing studies of housing search commissioned by HUD in 1999 found decline in discriminatory treatment of Hispanics since 1999 • But some evidence they are steered to Hispanic neighborhoods and are offered less help with obtaining a mortgage • HUD study of mortgage pre-application process also found evidence that Hispanics were given lower estimate of how much house they could afford, less information on range of mortgage products available, and were less likely to be given positive coaching • But only two markets studied – and discriminatory treatment more evident in Chicago than Los Angeles Hispanic Homeownership Seminar - June 1, 2006

  24. Efforts to Promote Hispanic Homeownership – What is Being Done and What Works? • At the Federal level there are not Hispanic-specific programs per se, but Hispanics are helped by: • Efforts designed to assist low-income and low-wealth households • Efforts designed to assist immigrants • Hard to catalogue magnitude of existing homeownership programs since they involve a range of efforts by federal, state, and local governments, national and local non-profit organizations, and private sector firms • Very little is known about the effectiveness of homeownership policies generally – let alone about efforts specifically to help Hispanics Hispanic Homeownership Seminar - June 1, 2006

  25. What is Being Done • Information barriers  • Homeownership and financial literacy counseling (HUD, many others) • Bilingual and culturally-sensitive service delivery approaches (CBOs, lenders, real estate agents) • Mortgage market barriers  • Relaxed mortgage underwriting guidelines (many lenders) • Financial barriers  • Downpayment and closing cost assistance (HOME, CDBG, NeighborWorks, FHLB, State HFAs) • Income subsidies (Housing Vouchers, RHS Sec. 502, MCC) Hispanic Homeownership Seminar - June 1, 2006

  26. Efforts to Improve Homeownership Opportunities for Hispanics: Case Studies of Three Market Areas Alvaro Cortes Erin Wilson Chris Herbert Pedram Mahdavi Hispanic Homeownership Seminar - June 1, 2006

  27. Overview • Objectives of the Research • Approach to Site Selection • Cross-cutting findings • Market–specific findings from Orlando (FL), San Antonio (TX), and Washington DC Hispanic Homeownership Seminar - June 1, 2006

  28. Primary Objectives • Identify the major barriers to Hispanic homeownership in three local markets. • Document the range of services offered by local providers to improve Hispanics’ access to homeownership opportunities. • Understand the scale of, and demand for, homeownership services, as well as approaches to marketing and coordinating services Hispanic Homeownership Seminar - June 1, 2006

  29. Site Selection • Used 2000 census data to estimated the number of Hispanic households who would be homeowners if Hispanics owned homes at the same rate as non-Hispanic white households. • Among the 25 markets, we looked for diversity in: country of origin, share non-citizen, share of population, housing affordability, and size of homeownership gap. Hispanic Homeownership Seminar - June 1, 2006

  30. Site Selection Hispanic Homeownership Seminar - June 1, 2006

  31. Site Selection • Identified key stakeholders in each market for onsite interviews, including: • Housing counselors, affordable housing developers, mortgage lenders and loan officers, and real estate agents. • Conducted follow-up telephone interviews as needed. Hispanic Homeownership Seminar - June 1, 2006

  32. Cross-cutting Findings • Common barriers: (a) lack of information about the homebuying and mortgage qualification process; (b) lack of affordable housing; (c) lack of credit or poor credit histories. • Homeownership is made easier with more flexible mortgage products and downpayment assistance programs, but the efficacy of these packages is limited by the housing market and the targeting of certain households. • The majority of Hispanics need most (if not all) of the available services, but clients must cobbled them together from multiple providers. Hispanic Homeownership Seminar - June 1, 2006

  33. Cross-cutting Findings • Service providers operate within their preferred network of providers; service coordination is fragmented across metropolitan areas. • There is a strong demand for homeownership services among Hispanics, but the capacity to serve these clients is increasingly strained. Hispanic Homeownership Seminar - June 1, 2006

  34. Market-Specific Findings: Orlando • Puerto Ricans have access to mortgage products that are otherwise unavailable to undocumented Hispanics. • Migration patterns are important: Financially stable Hispanics from the North (e.g., Boston and Chicago) and from Miami are moving to Orlando. • Neighborhood preferences limit Hispanics’ housing options. • Demand for services is growing tremendously: Hispanic growth accounts for 47 percent of metropolitan area’s overall growth. Hispanic Homeownership Seminar - June 1, 2006

  35. Market-Specific Findings: San Antonio • Hispanics comprise a large share of population, which prompts more service providers to offer targeted services to Hispanics. • Information barriers differ from one generation to the next: first generation households distrust or avoid financial systems (i.e., no credit); second generation households are overloaded in debt (i.e., bad credit). • Undocumented households are the “hardest to serve,” and few programs/financial packages exist to serve this clientele. Hispanic Homeownership Seminar - June 1, 2006

  36. Market-Specific Findings: Washington DC • Hispanic homeownership gaps do not always narrow as household income increases; rates increase as income increases, but gap fluctuate between 19 and 28 percentage points. • Impact of downpayment assistance programs is offset by escalating housing prices. • Service coordination is particularly fragmented across metropolitan area, which is associated with the multiple governmental layers across Maryland, Virginia, and Washington DC. Hispanic Homeownership Seminar - June 1, 2006

  37. Conclusion • Public and private sector interventions should be tailored to account for the metropolitan-level variations. • Unclear whether the scale of these efforts will continue to meet the demand for these services. • The lack of any real attention to households in the 80 to 120 percent of AMI group overlooks a large segment of Hispanics that might benefit from assistance to become homeowners. • Service providers in each of these communities clearly are working very hard to open homeownership opportunities to Hispanics. Hispanic Homeownership Seminar - June 1, 2006

  38. Review of Selected Underwriting Guidelines to Identify Potential Barriers to Hispanic Homeownership Kimberly Burnett Alvaro Cortes Chris Herbert Hispanic Homeownership Seminar - June 1, 2006

  39. Identified Underwriting Barriers to Hispanic Homeownership • Reviews of underwriting barriers by Listokin and Wyly (2000) and Schoenhotlz and Stanton (2001) • Establishing credit history • Documenting income and employment history • Verifying assets • Meeting citizenship or residency status requirements • Affordability Hispanic Homeownership Seminar - June 1, 2006

  40. Methodology • Reviewed mortgage underwriting guidelines used by • Fannie Mae and Freddie Mac • FHA • GMAC for subprime products • Conducted interviews • Review completed December 2004 • Goal: To understand the extent to which available products overcome underwriting barriers and identify where there is still progress to be made Hispanic Homeownership Seminar - June 1, 2006

  41. Establishing Credit History • Barrier: Many immigrants lack credit reports with one of the major credit repositories • The GSEs and FHA’s standard products allow use of non-traditional credit reports/credit history • GMAC requires credit scores for subprime products • Traditional credit history is required for some products that are flexible in other respects • For borrowers with established but poor credit history • FHA’s standard product allows the most flexibility among prime products • The GSEs have targeted products that offer flexibility • GMAC approves borrowers with low credit scores Hispanic Homeownership Seminar - June 1, 2006

  42. Documenting Income and Employment History • Barrier: Immigrants are more likely to be paid in cash, may change jobs more frequently, have gaps in employment, and have extended family members who contribute to household income • Employment history • Standard products require two years of employment history. Income stability, not the length of tenure at a particular job is the focus. • Written documentation is required • Income documentation • GSEs and GMAC have products that allow low/no income documentation, but also require high credit scores • Income from boarders is counted in FHA’s standard product and some of the GSEs’ targeted products. Hispanic Homeownership Seminar - June 1, 2006

  43. Verifying Assets • Barrier: Borrowers who do not use banks for their savings can not provide bank statements to document that they accumulated funds used for downpayments over time. • Acceptable sources of funds to close the mortgage in FHA’s standard product and targeted products offered by Fannie Mae and Freddie Mac are: • Cash accumulated through savings clubs • Cash saved at home • Must be sufficiently documented. • Some products also allow related people living together to pool funds for closing costs and downpayments. Hispanic Homeownership Seminar - June 1, 2006

  44. Meeting Citizenship or Residency Status Requirements • Barrier: Mortgage underwriting may preclude loans to borrowers who are not U.S. citizens. • U.S. citizenship is not required for mortgage approval for standard products by Fannie Mae, Freddie Mac, or FHA • GMAC imposes some additional requirements for non-permanent resident aliens. • But legal residence in the U.S. is required for mortgage approval. • Nationwide, a handful of pilot programs have tested extending mortgage credit to borrowers who do not have valid Social Security numbers, but their viability is uncertain. Hispanic Homeownership Seminar - June 1, 2006

  45. Affordability • Barrier: Hispanics are disproportionately in low-income and low-wealth households. • Products targeted to low- and moderate-income households help to address this barrier: • Low-downpayment products: • Some require relatively high credit scores • Come at the expense of mortgage insurance payments • Subprime low-downpayment products typically carry higher interest rates • Higher total debt-to-income ratio allowed • Higher housing expense-to-income ratio allowed • Low or no financial reserves required for some products Hispanic Homeownership Seminar - June 1, 2006

  46. Remaining Barriers • Legal residency • Lack of acceptability of cash income • Availability of Spanish-language homebuyer education and counseling • Special products that address key barriers may not be widely available • Flexibilities from subprime lenders come at the cost of higher interest rates Hispanic Homeownership Seminar - June 1, 2006

  47. Language, Agglomeration, and Hispanic Homeownership Don Haurin and Stuart Rosenthal Hispanic Homeownership Seminar - June 1, 2006

  48. Motivation • As of the fourth quarter of 2005 • 76 percent of white non-Hispanic families owned homes • 50 percent of Hispanic families owned homes • Why? • Differences in socio-economics between white non-Hispanic and Hispanic families • We control for these factors, but this is not the focus of the present study • Low homeownership rates in Hispanic communities create self-reinforcing effects that further restrict homeownership • This is the primary focus of this study Hispanic Homeownership Seminar - June 1, 2006

  49. Motivation • Proximity to other homeowners facilitates access to information about how to become a homeowner • Neighbors may learn from each other • Local lenders are more likely to provide services demanded by homeowners when there are sufficient numbers of homeowners nearby • Proximity to other homeowners may affect preferences, encouraging other families to become homeowners Hispanic Homeownership Seminar - June 1, 2006

  50. Motivation • Low homeownership rates in Hispanic communities create self-reinforcing effects that further restrict homeownership • These effects are especially likely if nearby homeowners belong to a given family’s social network • These effects are also likely to be especially sensitive to whether nearby homeowners speak English Hispanic Homeownership Seminar - June 1, 2006

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