Brentin Mock is a staff writer at CityLab. He was previously the justice editor at Grist.
One big reason: Conventional credit-scoring methods work against them.
As more Hispanic and Latino people decide to make America home, they’ve been less able to actually buy a home in recent years.
The homeownership rate for Hispanic Americans was 45.4 percent in 2014—the lowest it’s been since 2000, and the first time it’s dropped below 46 percent in the same time period. This rate has steadily decreased every year since 2007, when it peaked at 49.7 percent, according to an analysis of Census Bureau data by the National Association of Hispanic Real Estate Professionals (NAHREP). This despite the fact that incomes for Hispanics are rising — they are the only major racial or ethnic group whose poverty rate declined significantly last year, according to Pew Research Center.
The NAHREP report suggests that the conventional methods for financing new homes are culturally mismatched with how many Hispanics deal with finances, such as saving and making payments primarily with cash. (NAHREP defines “Hispanic” as “a term generally used to refer to individuals of historic Spanish ancestry,” and uses it interchangeably with “Latino” in the report.) That is, “there is little evidence that the industry as a whole has done much to address the unique nuances of many Hispanic homebuyers,” reads the report.
Those nuances have rendered many Latino Americans “credit invisible,” a term the federal Consumer Finance Protection Bureau (CFPB) uses to describe people who either don’t have enough credit history for lenders to track, or have no history at all. Roughly 26 million Americans fall into this category, according to the CFPB. However, African Americans and Hispanics are far less visible when it comes to credit, with 15 percent of each of those populations falling into this category compared with 9 percent of whites. The racial/ethnic disparities exist across all age groups.
Tighter lending requirements in the post-housing-crash era have made buying a home challenging for everyone, but this is especially true for Latinos. Hispanic mortgage applicants were denied home loans at twice the rate of white applicants in 2013, reads the report. It’s not that Hispanics can’t get loans because of bad credit, but rather that many haven’t built up the credit histories needed to obtain loans because of cultural spending habits. Said Mortgage Bankers Association CEO David Stevens about this in the NAHREP’s report:
“Latinos as borrowers may have different underwriting needs. They may have multiple family members living together, multiple wage earners contributing to household income, or they may be self-employed or hold more than one job. Adequate underwriting for these borrowers, who are a key demographic driving homeownership demand, requires prudent judgment and keen understanding of their ability to pay, if we are to expand credit access successfully to a greater number of well-qualified and creditworthy homebuyers.”
Which is why the NAHREP has made expanding credit access for potential Latino and African-American homebuyers a policy priority for this year. The agency recommends that financial institutions shift away from their reliance on the FICO credit scoring model, which doesn’t track expense histories like monthly rental payments, and other transactions not picked up by banking systems. The association asks that lenders start consulting with alternative credit score systems, like Vantage Score, that take a more modernized and holistic approach to evaluating lending risk.
As Chicago managing broker Joe Castillo told McClatchy reporter Kevin G. Hall in a story about this issue, many people’s largest monthly expense is their rent, but “at the current time, the credit agencies do not provide landlords larger or even small avenues to report that payment.”
Another problem with trying to buy a home today is that they cost too much—either because of lack of supply or other market factors. And while Hispanic Millennials show some promise for homeownership in the future, the affordability factor is hampering them now. Reads the report:
While Hispanic Millennials note a desire to own a home, only 21 percent indicate near-term plans to obtain a mortgage. When asked why, 46 percent cite affordability as an impediment to homeownership, in contrast with non-Hispanic Millennials (37 percent). Another 32 percent indicate they have insufficient savings for a down payment, in contrast with 23 percent of non-Hispanics.
Then there are the enduring problems of racial discrimination and redlining, which have historically determined who can buy homes and where, based on skin color. All of these factors combine to put an extra squeeze on Latinos and other people of color, who can’t move as nimbly through the financial landscape as their white counterparts. But in terms of purchasing power for people of color, culture still matters—the current credit system privileges those who bank on credit, and disadvantages those whose spending priorities veer from the mainstream.