If the first day of the Opportunity Finance Network’s 2017 conference underscored the role politics and advocacy play in the work of CDFIs, the second day drilled deeper into that work — bridging wealth and opportunity gaps.
“Closing those gaps is one of the most important reasons why we exist,” says Ed Sivak of Hope Enterprise Corporation.
These gaps are significant, according to a 2017 study on the racial wealth divide by the Institute for Policy Studies. While households of color are projected to reach majority status by 2043, “if the racial wealth divide is left unaddressed, median black household wealth is on a path to hit zero by 2053.” For Latino households, this would occur by 2073.
One way to close the gap is through homeownership. Homeownership increases personal wealth, for one. According to the Federal Reserve’s 2013 Survey of Consumer Finances, a typical homeowner’s net worth was $195,400, while that of a renter was $5,400.
Homeownership also provides social benefits as well. Children of homeowners do better in school and have lower crime and drug use rates. In addition, homeowners are more likely to participate in community civic events and engagements.
But where these wealth gaps do exist, the question remains: how do they become homeowners?
In an afternoon panel on day two of the 2017 OFN Conference, two credit unions discussed their solutions for getting low-income members in their communities into homes.
Latino Community Serves North Carolina's Immigrant Population
Latino Community Credit Union ($256.2M, Durham, NC) was chartered to serve Latino immigrants moving into North Carolina in the early 1990s and early 2000s.
“You don’t think of North Carolina being one of the Latino states,” says Vicky Garcia, senior vice president of strategy and risk management at the credit union. “But the growth has been amazing.”
By 2020, Latinos are projected to make up 12% of the state’s total population. But despite this size, barriers and hardships still exist, Garcia says: the language barrier, housing and lending discrimination, fear of deportation and law enforcement, and fraud all impede homeownership.
As do the informal and cash economies that many find themselves wrapped up in. Applicants are often unbanked, have no credit history, and rely on expensive, dangerous, and substandard services such as check cashers.
To work with these potential homeowners, the credit union has developed two products: a 5-year ARM and a 20-year fixed.
The credit union keeps these products in-portfolio, does not require PMI, and offers affordable financing without a credit history. Borrowers need to provide either social security or individual taxpayer identification numbers, and any government-issued ID. In lieu of credit history, Latino Community consider rental histories and utility bill payments. But as flexible as the credit union is with its underwriting criteria, one piece weighs heaviest.
“They have to do their taxes,” Garcia says.
Loan-to-value maxes at 95% for both products, but borrowers average 86%, according to Garcia.
“Our members save,” she says.
In terms of portfolio performance, the credit union has processed more than $192 million in loans, with 1.1% delinquency and 0.69% charge-off rates. 82% of these borrowers are first-time homebuyers, and the average Beacon Score — for those borrowers who had one — is 680.
Hope Sees The Need To Serve The Underserved
Hope Credit Union ($238.3M, Jackson, MS), says James Hunter, its senior vice president of mortgage lending, sees the need to serve the underserved, especially through homeownership.
But where Latino Community sees higher rates of savings among its borrowers, Hunter and Hope see the opposite.
“Down payments are our largest concern,” he says.
That’s why Hope’s Affordable Housing Product provides loans with loan-to-value ratios of up to 100%. In fact, for the last six quarters across its mortgage portfolio, 62% of loans had no money down. Compare that to the national average of 14%, Hunter says.
“Sometimes that financing is the difference in someone paying rent for the rest of their life,” Hunter says.
For its Affordable Housing Product, the credit union allows borrower debt-to-income ratios of up to 42%, does not require mortgage insurance, and manually underwrites all applications. Manual underwriting provides the credit union an avenue to grade a borrower who may have little to no credit history holistically, not simply from a credit score — though the average FICO score for the portfolio is 580, says Hunter.
Instead, underwriters look for other areas of consistent repayment, such as gym memberships or baby sitter costs. It’s this holistic approach that helps Hope to fulfill its mission of serving the underserved, Hunter says, and helps the credit union make homeowners out of those who traditional lenders have passed by, and who feel forgotten.
“When we look at someone and their financial situation we find ourselves asking: ‘Why not? Why can’t you?’” he asks.
Read more from Day One of the 2017 OFN Conference here.