To reach the full range of diverse borrowers entering the market, lenders must rethink their strategies for outreach and customization
To reach the full range of diverse borrowers entering the market, lenders must rethink their strategies for outreach and customization
With mortgage originations on the decline this year, lenders that want to regain lost volume or grow market share must work harder to identify and reach underserved borrower segments. Reaching these borrowers may take more work, but it’s an essential strategy at a time when regulatory and investor requirements limit how much lenders can open up the credit box to bring in more borrowers.
Lenders need to go beyond the usual efforts and employ strategies that dig deeper. Some lenders, for example, are taking a closer look at Home Mortgage Disclosure Act data in combination with demographic information to identify and reach out to underserved ethnic groups in their geographic footprints.
But identifying and finding ways to reach underserved borrowers isn’t always approached best at a high level by business-minded executives. Lenders need to look to their boots-on-the-ground staff, too.
It took a mortgage executive’s personal experience and understanding of borrowers and homebuilders in his bank’s footprint to come up with an innovative model for homes that addresses an unmet borrower need. While he wasn’t looking to build mortgage or homebuilding business on a larger scale when he came up with the concept, it has that potential.
Investors like Fannie Mae and Freddie Mac also recognize that the people on the front lines can be their best resource, which is why they’re staging several pilots with lenders that seek to solve conundrums that make it hard to reach borrowers.
These include finding ways to lower down payments for borrowers with affordability challenges without taking on undue risks or increasing consumers’ loan costs.
Not all these experiments will pan out, but the ones that do are worth it because they’re a gateway to changing the process and allowing for product innovation in today’s market.
Rather than thinking of certain borrowers as square pegs in round holes, lenders and investors are increasingly realizing that they will get further if they make changes to accommodate customers, rather than trying to make people fit into pre-existing molds.
These tactics are not just shortterm solutions. As consumer demographics continue to change, lenders that effectively manage them will set themselves to maximize their outreach to their evolving customer base long term.
About one-third of purchase mortgages go to borrowers in racial or ethnic minority groups, according to the Federal Reserve’s analysis of HMDA data. But the minority share of the millennials that dominate the workforce is over 44%, according to the Brookings Institution. And by 2060, the “minority” share of the population could be 56%, projections based on U.S. Census data show.
Lenders are taking a closer look at marketing to underserved ethnic and racial groups because of market share numbers like that, according to Kristin Messerli, managing director of consulting firm Cultural Outreach Solutions. “The demand has increased significantly for having a diversity strategy from a business perspective,” she said.
With these changes coming, even lenders already doing a lot of comparative analysis of demographic data and outreach to underserved markets may feel they need to raise their game.
“We’re always looking for better sources of data because household migration is moving at a faster rate than some of the data points,” said Jason Madiedo, president of Alterra Group, which does business as Alterra Home Loans. “We’re ahead of the curve. We just want to get better at it.”
The first step in analyzing lender outreach to racial and ethnic markets is usually looking at HMDA, Messerli said. Some lenders can be gun shy about using HMDA for anything but compliance and worry that reaching out to one group could be perceived as a bias.
“They’re worried about targeting and you do have to be very careful, but what they don’t realize is they are already marketing to a particular demographic, which is usually the one that they are made up of, said Messerli.
HMDA is really a compliance tool that wasn’t designed for marketing, but lenders nevertheless “could and should look at it for that,” said Maurice Jourdain-Earl, a managing director at ComplianceTech, a fair lending consultant and software vendor.
“With HMDA, most folks are focused on the compliance, but they could use the data to gain some insight that could help them better understand their market opportunity for growth,” said Trey Sullivan, CEO of TruPoint Partners, a compliance software and consulting firm.
Alterra uses HMDA data to draw up some of its business strategies, but Madiedo said lenders should keep in mind that it’s older data.
“It’s going to be much more detailed in the future, and depending on the speed at which it is released, it could be more useful,” he said. “For now, we use it more to understand where competitors are lending in our space.”
Alterra mines HMDA data with a ComplianceTech tool that analyzes lenders, borrowers, markets and neighborhoods and compares it to several other data sources, in- cluding the Nationwide Multistate Licensing System and Registry and the National Association of Hispanic Real Estate professionals, where Madiedo is a former president.
For its go-forward view of data, Alterra works with iEmergent, an advisory firm that draws up projections that can drill down to details beyond ethnic group, like income level.
Drilling down into specific market segments and data comparisons can identify a lot of new opportunities. Lenders can better see whether they are really reaching all corners of the market when they look at more granular data.
Quicken Loans doesn’t target particular groups exclusively, but does examine statistics from various parts of the market to identify larger subsets to address in the rotating consumer-facing informational articles it posts on its website.
“Like any good lender, we’re trying to find out what the market is and how do we serve that market,” noted Quicken EVP Bill Banfield. “The market is enormous and it’s not one-sizefits-all. It’s millennials, first-time home buyers, single women and more.”
Single home buyers represent almost one-quarter of the market, according to the National Association of Realtors. Further divide the segment by gender and it becomes clear that most of those home buyers are women, who represent a 17% share, compared to just 7% for men.
Furthermore, single women’s share of mortgages is 19.47%, while single men’s share is 28.89%, according to an Urban Institute analysis of HMDA and CoreLogic data. Single women also on average paid 0.02% more for loans, even though their default rate is 0.06% lower than men’s.
Single women as a group have low- er average incomes than men, which could be a factor in this disproportionate lending and pricing. That also can be said of many underserved borrower groups as a whole, so affordability is a key challenge in reaching many underserved borrowers.
But lenders who make assumptions about a borrower’s income based on a group he or she belongs to can undermine their own outreach efforts and possibly cross the line into being discriminatory.
For example, while African-American incomes are lower on average, their wages in higher income brackets are growing faster than other groups.
Over a recent eight-year period, African-Americans in the $200,000plus income bracket saw their incomes grow 138%. By comparison, incomes in the U.S. market as a whole grew just 74%, Messerli noted, referencing a Nielsen study.
While Messerli typically starts introducing borrowers to new borrower segments by helping them run a data analysis they need to follow up it up with more qualitative steps to actually reach the underserved populations identified by statistical analysis.
For example: If a lender is working with limited English proficiency borrowers, a group that constitutes 9% of the U.S. population, or over 25 million people, they might also be working with a translator.
Some loan officers might focus more on the translator than the borrower in those cases, but Messerli learned as a social worker working with immigrant groups that the person being translated wants the focus to be on them.
If lenders are consistent with their efforts, strategies like cultural sensitivity training, hiring and other community involvement can help deliver a return on investment from their outreach in as little as six months, Messerli said.
THINK LOCAL, ACT GLOBAL
While it’s easy for mortgage executives to get bogged down with dayto-day obligations inside their businesses, it’s important to maintain perspective on the world outside those four walls.
If executives are themselves members of an underserved group it goes a long way toward reaching that group as a lender and an employer, according to Patty Arvielo, president of New American Funding.
“I’m a woman at a large mortgage company and I happen to be Latina,” she said, adding that she credits efforts she began five years ago to become more active in the Latino community and be more involved with mentoring employees for the makeup of the company’s 58% female, 43% minority employee base.
She heads the company with her husband, Rick, and said she’s found it helpful to have leaders of both genders so all employees have a C-suite role model to look to.
“We’re always looking for better sources of data because household migration is moving at a faster rate than some of the data points.”
— Jason Madiedo, president, Alterra Group
Sometimes there is an underserved borrower need that exists, but very little data available to point to it. That’s when going out into the community or drawing on observations by local branches and executives can come in.
Rick Davis, a senior vice president at Fidelity Bank in West Des Moines, Iowa, first recognized there was a borrower need that wasn’t being filled when his father got older and began having health and accessibility needs that his housing didn’t address.
Davis began to notice it was an issue for the larger community around him, which included a sizable segment of the population that was older and in some cases, had a military service background that statistically makes disability more likely.
He discussed the issues with builders he knew in his work originating loans for a bank that specialized in new construction and found single-family detached homes are rarely, if ever, built with such needs in mind, except possibly as custom construction.
Eventually, with the bank’s permission, he put his own money into an experiment where model homes are built with standard features for the aging and disabled. The homes are all single-story and include walkin bathtubs, with options that can be customized to meet individual needs from there.
More typically these features get introduced through remodeling, but whether that’s the best route often depends on the house, Davis said.
The concept makes sense for Iowa and the country overall. In both cases, the 65 and older demographic is projected to represent roughly 20% of its population by 2050, according to census data.
He doesn’t see his particular investment as a big moneymaker, but he hopes it will create a market that could build greater volume for lenders and builders. If builders can supply the homes, lenders can apply their expertise in helping senior borrowers get construction loans, rehabilitation loans, or possibly reverse mortgages.
“My goal is to break even. If I don’t make a nickel, but somebody who can’t take a shower because they can’t get up the stairs now can and they’re happy, that’s good,” said Davis. “But the guys making mortgages working with a builder they trust could get something done and make a difference in their community.”
There aren’t readily available statistics on the number of houses prebuilt with such features or builders who make them, but there is data to support general interest in building single-family detached homes for older Americans and anecdotal examples of builders, like Stanton Homes in North Carolina, that advertise custom accessibility features.
Senior citizen homeownership is higher than the national average of 63.7%, at 75.4% for ages 55-64 and 78% for age 65 and up, according to Census data. Also, seniors tend to age in place, which locks up a lot of existing home inventory. But that could change if seniors had new single-family homes available that address quality of life issues.
“You could help the neighborhood that they’re leaving,” said Davis. “People do the most to their house when they sell it and when they buy it. It could be a win for everybody.”
Although it’s unclear to what extent the concept of prebuilt, detached accessibility homes for seniors has become a reality, it’s an idea that’s been around for years, said Paul Emrath, vice president for survey and housing policy research at the National Association of Home Builders.
Single-story structures with wider hallways for access intended for seniors are not unheard of, but surveys suggest things like walk-in bathtubs have less universal appeal to older Americans.
“The issue is some people don’t want to admit that they’re going to have health issues,” Emrath said.
TAKE A TEST DRIVE
Sometimes reaching underserved borrowers takes experimenting with changes to the mortgage finance system. And with the government-sponsored enterprises dominating the secondary market, that means getting Fannie Mae or Freddie Mac, along with their conservator, on board.
Fortunately, the GSEs encourage this, particularly when it comes to lowering down payment hurdles.
“We know there are going to be shifts in borrowers’ needs in the future and we are going to stage pilots that are small scale in many cases to address that,” said Mike Dawson, vice president of affordable lending strategy and policy at Freddie Mac.
For any lender that goes this route, the experimental nature of the pilots is good to keep in mind. They may or may not fly, and even good ideas may end up not working because they’re ineffective over the long term or at any degree of scale. And the pilots that do work will likely get shared with the broader market, eliminating any opportunity for an exclusive program.
For example, after piloting a cashout refinance loan for homeowners to pay off student loans with Social Finance, Fannie Mae rolled out the product to all of its lender partners.
Some pilots are modeled after existing GSE products, like partnerships between Wells Fargo and Fannie and Bank of America and Freddie to offer 3% down payment loans with more lenient eligibility requirements than the original HomeReady and Home Possible 3% down programs.
Other pilots bring a new approach to home finance, like CMG Financial’s program that provides a crowdfunding platform for borrowers to raise the money for a down payment.
The further lenders can knock down the down payment barrier without jeopardizing borrowers’ ability to repay and loan performance, the more consumers with affordability challenges they are likely to reach.
More than two-thirds of renters in a recent Zillow survey said saving for a down payment is a top homeownership obstacle. If that figure holds true across the 45 million U.S. households that the Pew Research Center estimates rent their homes, down payments could be a challenge for more than 30 million would-be homeowners.
The GSE pilots are also inspiring experiments between lenders and private investors. For example, Guild Mortgage and others are testing a 1% down payment mortgage, where the lender provides a 2% grant subsidy to create a 3% down payment loan. While Freddie prohibited the practice for loans it buys, the Guild program is modeled after Fannie’s HomeReady program and the loans are sold to private investors. The idea stemmed at least in part from local insights.
“We heard from retail loan officers in those areas where it was an issue. That’s a large factor in our decisions. We develop unique solutions for geographic problems, but in this case it made sense to do it nationally,” said David Battany, an executive vice president at Guild.
Separately, Guild is also developing a shared equity program with the GSEs. While it’s a promising opportunity, Battany advises lenders not to think a pilot is easy to participate in.
“Some people think Fannie and Freddie throw a pilot in your lap, but they tend to look for the lender to bring the idea to them,” he said. “We spent a year plus researching it with multiple investors. They’re looking for people who have done the work. It could be shut down or modified.”
“Some people think Fannie and Freddie throw a pilot in your lap, but they tend to look for the lender to bring the idea to them.”
— David Battany, executive vice president, Guild Mortgage