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CONSIDER Luis Martinez an exception. Faced with the challenge of buying his first home, the 38-year-old navigated the financial obstacle course with few jitters about how potential lenders would judge his creditworthiness. Once he took care of an 11-year-old bill and got some help with the down payment and closing costs, the bank approved his loan application. He was able to move his family of six into a 3-bedroom home in Bradford, N.Y. in September. Looking back, he says the home buying process wasn't bad at all. “It was easy,� he says, “not as hard as other people say.�

Still, Martinez's confidence in the process and in his credit history is a departure from the attitudes of most prospective African American and Latino homebuyers. Many minority homebuyers tend to be more nervous than their mainstream counterparts when it comes to applying for a home mortgage loan. A fear of rejection can color their behavior and make shopping for that home loan a painful experience. And homebuyers like these may shy away from standard lenders, who could lose out on the fastest growing part of the home buying market.

Homeownership has never been just about taking legal title to a property. It's also a first step in creating wealth. Investing in a home has helped many people move into the asset-owning class, and more consumers than ever are joining the ranks of homeowners in America. By the end of 2002, 68 percent of all heads of households owned their home, according to a report released in June by the Joint Center for Housing Studies of Harvard University. But not all Americans have benefited at the same rate. Black, Asian and Hispanic Americans still lag the mainstream population in seeing the American Dream come true.

Despite the gains of the 1990s, minority homeownership rates still limp some 25 percentage points behind white rates. Among white heads of household, 3 in 4 own a home. But only 49 percent of black householders, 47 percent of Hispanic householders and 54 percent of Asian householders can make that claim.

Demographics go far in accounting for the disparity, says Nicolas Retsinas, director of the Joint Center for Housing Studies. Minority populations — including the foreign-born — tend to be younger in age compared with the U.S. population as a whole, with lower incomes. And the young, in general, are less likely to own a home than older people.

What's more, lenders prefer easy targets, and that preference, along with historical discrimination such as redlining and steering, also helps to explain the gap in homeownership. As lenders prepare for life after the refinancing boom that has been fueled by record low interest rates, they should take a good look at their best customers. The favored client during an interest rate decline was financially savvy. They knew precisely what they wanted, had relatively good credit and didn't need a lot of time and attention. As interest rates rise, such customers will vanish. Lenders who want to maintain their growth rates will need to adapt their services to the fastest-growing segment of potential homeowners.

That group is composed of minority consumers, who are set to play a greater role in the housing market. Growth in the housing sector, the primary driver of housing demand, is projected to top 12 million units between 2000 and 2010, according to the Harvard study. Minority consumers, the study says, are on pace to account for two-thirds of that total during the decade. The demographics of the home buying population will become more ethnic and lower income. “Unless the housing industry enthusiastically embraces those markets, they're not going to be able to sustain their historic growth patterns,� says Scott Syphax, president and CEO of the Nehemiah Corp., a Sacramento, Calif.-based nonprofit group that administers a privately funded down payment assistance program.

To identify the needs of some of these home buying consumers, especially as they relate to mortgage and credit arenas, in 2002, Fannie Mae surveyed over 9,300 consumers, including more than 700 black households and 600 Hispanic households. Researchers discovered that a traditional model that segments consumers as first-time buyers, repeat buyers or refinancers is relatively meaningless. Six new consumer segments emerged from the study. They are classified based on varying levels of satisfaction with the current mortgage process, priorities when shopping for a home loan and levels of reliance on people versus technology when acquiring a mortgage.

Home buying consumers tend to feel alienated and frustrated by the process or comfortable and at ease in their relationships with financial and mortgage organizations. Up until now, lenders have pursued the “Financially Confident.� They usually know their credit score and are familiar enough with the process of getting a loan to ask about annual percentage rates, closing costs and margin costs. As knowledgeable consumers, they're reluctant to pay anything above the cost of the loan. Lenders prize them as customers because they do not require much guidance, generally boast strong credit and therefore are not labor-intensive clients.

Lenders have tended to avoid those homebuyers who exhibit less financial confidence, particularly Fannie Mae's “Financially Challenged� and “Friends & Family� segments. More often than not, their credit score is a total mystery to them, and they are apt to worry that their credit rating is blemished, even if it's not.

The “Financially Challenged� prefer to deal one-on-one with trusted advisers who offer guidance as they make their way through financial transactions. A majority of these consumers say they have fallen behind on credit card payments. Not surprisingly, this group is less likely to own a home than average. They are more likely than average to describe the mortgage process as a humbling experience. Most tend to think they didn't get the best mortgage possible, compared with a majority of all surveyed who think the opposite. Less than half say they thought the loan officer was on their side compared with a majority of the total sample of mortgage applicants in the study. According to Fannie Mae estimates, one-fourth of African Americans fall into this “Financially Challenged� classification, as well as one-quarter of English-dominant Hispanics and 28 percent of Spanish-dominant Hispanics. The number of Asians in the sample was too small to be nationally representative.

Like the Financially Challenged, consumers in the Friends & Family group have poorer credit habits than average. They tend to have smaller mortgages, less equity and monthly payments that represent a higher than average share of their monthly salary. Although they believe they understand the process, they still feel it's a humbling experience. Consumers in this segment are far more likely than average to consider quick approvals a priority. They prefer to talk to a real person during the lending process. One-third of blacks fall into this category, as do 22 percent of English-dominant Hispanics and 57 percent of Spanish-dominant Hispanics.

Minority home buying consumers have less confidence in their credit than their mainstream counterparts do. African Americans and Hispanics are much more likely to worry that their credit rating is blemished, says Vada Hill, senior vice president and chief marketing officer of Fannie Mae's Consumer Insights marketing division. While less than one-third (28 percent) of whites surveyed said they thought their credit rating could be better, 64 percent of African Americans and 50 percent of Hispanics share that belief. Consumers who are more likely to fear rejection based on their credit ratings are also more than twice as likely to believe they'll have difficulty getting approved for a mortgage. These fears shape their behavior. “If you're worried about getting approved,� says Hill, “you'll just get the ‘yes,’ take what you're given and run away as soon as you can.� Giving priority to obtaining loan approval versus shopping for the most cost-efficient loan opens these consumers up to predatory lenders who lock them into high interest rate loans.

Minority consumers tend to view conventional lending institutions as overly daunting because they may lack experience with banks. Minorities are among the most underserved populations when it comes to financial organizations. Part of the problem is rooted in history. Banks fled urban neighborhoods in the late 1960s. In the 1990s, consolidation in the lending industry eliminated branch after branch in these communities. Fringe financial services stepped in. But check cashing stores, rent-to-own stores and the payday lenders have their downside: high fees for money order transactions or short-term loans. Also, they don't offer savings products, so it's difficult to build assets. Sometimes the services create a cycle of debt, according to a study conducted by Jim Carr, senior vice president for innovation, research and community technology at the Fannie Mae Foundation.

Besides a history of discrimination in the housing industry, cultural barriers constitute one of several fundamental obstacles to minority homeownership, says Oscar Gonzales, chief strategic relations officer for the Houston Association of Realtors. Many people from Latin America or even Asia are reluctant to take out a loan, because it's not a part of their culture. Hispanics hailing from Central and South America, where financial institutions are the most volatile and the least stable, and the credit industry is relatively new, are leery of loans. As a result, many Spanish-dominant Hispanics do not fully understand or participate in the U.S. financial and credit systems. Consequently, they may fail to build a traditional credit history, savings or investments that represent a first step toward homeownership.

Whether it's due to cultural or historical factors, minority consumers often feel like foreigners in the U.S. when they're in the market for a mortgage loan. “You feel different when you know that the mainstream institutions are not the ones where you feel welcome,� says Hill. “Psychologically, you feel like you can't access the mainstream institutions. You feel like you're on the outside looking in.�

Ironically, consumers in the Friends & Family and Financially Challenged groups are more likely than average to be in the market for a new home. Yet lenders have been slow to notice them. “This consumer is the one the traditional mortgage lender is least capable of servicing,� says Hill. To bridge the chasm that separates prospective minority homeowners and lending institutions, some companies and organizations are already reaching out to potential minority homeowners with “high touch� customer service, pre-purchase financial education, credit rehabilitation and assistance with the down payment.

Some lenders increase their brand exposure by going into the communities. In late July, Countrywide, a Calabasas, Calif.-based mortgage banker, launched a radio and outdoor ad campaign targeting select Latino and African American dominated markets. Wells Fargo conducted mortgage seminars in local libraries nationally. In the San Francisco Bay area, the finacial services company held four monthly seminars at 12 different libraries. So far, it has closed two loans for people who attended those library-based workshops, says Darrell Walker, regional emerging markets manager at Wells Fargo Home Mortgage, based in San Francisco.

Education is an important part of programs designed to help homebuyers succeed. The Springfield Neighborhood Housing Services, a Springfield, Mass.-based nonprofit, which offers lending services, created a financial fitness program that consists of 10 to 12 hours of instruction. During the course, clients whose credit profiles identify them as credit risks work on rehabilitating their credit and learning the importance of maintaining good credit. The objective is to help customers gain control over their finances in the short term and become systematic savers and homeowners in the long term, says Charles Ruchs, the nonprofit's executive director.

Organizations that seek to help possible homeowners often assume the role of trusted adviser by association. Countrywide has sought to make inroads into the African American community by capitalizing on ties to churches. It currently provides information on the homeownership process to members of churches in the Fifth District of the AME Church, an area west of the Mississippi. Through 69 homeownership centers across the country, another organization, NeighborWorks deals with employers, churches and other organizations that already have roots in the community. The NeighborWorks Network consists of not-for-profit affordable housing and community development organizations affiliated with the Neighborhood Reinvestment Corporation, a public nonprofit that aims to revitalize communities. Its homeownership centers offer financial training and extensive pre-purchase counseling. The relationship between the homeownership centers and consumers is highly service-oriented. At least three hours of individual counseling is scheduled, as well as eight hours in a group session.

What's clear from the glimmers of success in such initiatives, and from the revelations of attitudes among minority home buyers is that cultural fluency, an evolved emphasis on personalized customer service and less intimidating credit checking processes could lead to a surge in mortgage lending opportunity for financial organizations. In turn, if lenders adapt to the needs of a changing customer base, they could help secure the American Dream for more people in America.

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