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In Banking-Finance

For many people owning a home is a major part of the “American Dream,” – a rite of passage for hardworking citizens. For most men and especially fathers, owning a home is the Holy Grail of manhood and of being a provider.   For women and especially mothers, it is the epitome of stability and security when they can raise their children in home they own. Banks and financial institutions provide the credit and lending facility for most people to fulfill this dream because they are unable to pay cash and have very limited savings in the bank. In fact, they have been price and financed out of the market because of cash buyers who have dominated the market and sellers who would prefer to sell to cash buyer than a finance buyer.   The savings rate for America has declined dramatically over the past years and is currently very low by historical standards. In 2012, we saved about 4 percent of after-tax personal income, down from average savings rates of 5.5 percent in the ‘90s, 8.6 percent in the ‘80s, and 9.6 percent in the ‘70s. This is symptomatic of the challenging economic environment we have been in since 2005, when the savings rate fell under 2%, the lowest since 1970.

The advent of Subprime Lending opened the door to many minorities who were desperately seeking the American Dream. What could have been an opportunity for Wall Street and many banks who originated these loans to strengthen the economy through the housing boom turned out to be an economic nightmare. It was all fraud on every level of the transaction, which, unfortunately, sometimes included the borrower who was naïve and misled by their real estate agents and loan officers. In addition, the misleading loan disclosures, complicated terms and “FICO” driven and underwriting criteria that lacked any commonsense, set up every borrower for failure. The high volumes of foreclosures that started with Subprime Lending diminished home values on neighborhoods, on state and national levels. But are some communities affected more than others, based on the predominant race living in them? Yes!

In a recent study by Zillow economists, data revealed that home values in black and Hispanic communities have not rebounded as quickly as home values in white and Asian communities following the Great Recession. Further, black and Hispanic applicants are denied conventional mortgages twice as often as whites. Finally, Asians, blacks and Hispanics have smaller percentages of homeowners within their demographic than whites.

Home Values

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For Hispanics, home values dropped around 46.3 percent on average since the market peaked in 2007. Similarly, predominately black neighborhoods also fell significantly – 32.1 percent – at their lowest since 2007. Comparatively, home values in white and Asian neighborhoods dropped 23.6 and 19.2 percent, respectively. While these dramatic figures are expected in a housing crisis, the aftermath is somewhat more complicated.

Although national home values continue to rise, black and Hispanic neighborhoods are struggling to rebound as quickly and significantly as white neighborhoods. Home values in Hispanic areas still remain 24.2 percent lower than their peak, whereas home values in black areas are at 17.9 percent below their peak. White neighborhoods, on the other hand, are much better off at 8.2 percent below their peak values – a 15.4 percent increase from their lowest point during the Great Recession. Even stronger, Asian communities are 9.6 percent above their pre-recession peak prices.

Looking forward, Hispanic communities’ home values should appreciate by 16.8 percent, Asian communities by 15.6 percent, white communities by 8.3 percent and black communities by 8.5 percent, according to the Zillow Home Value Forecast.

Mortgages

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A representative of the National Fair Housing Alliance attributes lagging home value rebound rates to subprime lending. Because they often struggle to get approved for conventional loans, black and Hispanic neighborhoods are notoriously targeted by subprime lenders, according to Lisa Rice, executive vice president of the National Fair Housing Alliance. With double the denial rate of whites, black and Hispanic applicants are often pressured into accepting subprime loans with less favorable terms. Risky mortgages were especially abundant in lower-income areas before 2007, but even high-income minority communities are struggling to recover economically.

Minorities apply for conventional mortgages less often, presumably due to their high denial rates. Hispanics make up 17 percent of the U.S. population, but only represent 5 percent of the conventional mortgage total applicants. Similarly, blacks make up 12 percent of the national population, but only 3 percent of conventional mortgage applicants. Alternatively, more than half of black applicants (57.4 percent) and 60.3 percent of Hispanic applicants applied for an FHA loan. Only 30.1 percent of white applicants apply for FHA loans.

Not only are minorities struggling for conventional loan approval, their homeownership rates are significantly lower than whites. According to the latest U.S. Census Bureau News released in January of this year, 72.3 percent of whites own a home, and only 42.1 percent of blacks are homeowners. Asian neighborhoods may have rebounded in terms of home values, but only 53.3 percent of the total Asian population in the U.S. are homeowner and approximately 44.5% of Hispanics own a home.

This data indicates that race, mortgage approval rates and homeownership levels tend to affect home value appreciation. Current homebuyers can still benefit from entering these low-cost markets and hopefully see their home values appreciate in the future – but at a slower, more unpredictable pace. If you’re considering investing in a slow-rebounding neighborhood, calculate your mortgage with a 20 percent down payment and lessen your risk of falling into the same issues outlined above.   This, unfortunately, will be difficult for most minorities who would like to participate in the recovery but lack the money in saving. The good news is that there are conventional loans and government loans that only require a 3 to 3.5% down payment and also will allow down payment assistance and/or the seller to cover your closing cost with certain limitation.

Subprime has hurt the minority community. It may take African and Hispanic Americans 10 years to fully recover from the damage that has been done to their respective communities. Access to credit is the headwind that most minorities face with Hispanics representing only 5 percent of the conventional mortgage total applicants and African Americans representing only 3 percent of conventional mortgage applicants. The FHA mortgage will be the vehicle of choice to help minorities get back into the game. More than half of black applicants (57.4 percent) and 60.3 percent of Hispanic are applying for the mortgage because it represents the great flexibility in credit, debt to income ratio and down payment. Other banks are coming on the scene with a conventional portfolio that looks just like FHA. Where were they during the Subprime debacle? These programs are great, however, they are late. The damage has been done. Let’s hope it doesn’t take 10 years for minorities get back into the game. We need the private sector to solve this program with new loan programs and zero down payment loans that have worked perfectly for veterans.

The American Dream is alive and well because there is still a will to participate and make the dream a reality.

 

by Eric Lawrence Frazier MBA

Reference

Callis, R., & Kresin, M. (2015, January). Residential vacancies and homeownership in the fourth quarter 2014. U.S. Census Bureau News. Retrieved from https://www.census.gov/housing/hvs/files/currenthvspress.pdf

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