During the recent housing boom, first-time Latino homebuyers fueled a wave of startup real estate and mortgage companies eager to serve them. Today the tightening credit cycle fueled by the subprime mortgage meltdown threatens to take down not only the homeowners but the cottage industry they created.
Manuel Martinez, owner of By Referral Real Estate Network in West Covina, cites studies that predict half of all mortgage companies will go out of business by the end of this year. A 21-year veteran of the industry, he stockpiled money during the good years, so he expects to survive the shakeout, but he fears his under-capitalized colleagues won’t.
“The business has completely dried up,” Martinez said. “We are in survival mode right now.”
The sub-prime mortgage crisis “has affected every first-time or entry-level buyer. Many of the Latino homebuyers are in this category,” said Don Sanchez, owner of Nuevo Realty Group and president of the L.A. chapter of the National Association of Hispanic Real Estate Professionals. “When the subprime crisis hit, it not only took away the lenders with more relaxed underwriting guidelines, but also effectively put the possibility of homeownership just out of reach.”
According to Sanchez, the boom drew small lenders and mortgage brokers into the Latino market, a segment overlooked by traditional banks. But some of these entrepreneurs proved to be unscrupulous and made loans regardless of the consequences.
The Latino market “is an underserved segment, and a lot of the time they don’t know where to go. That’s sort of a dream come true for people who want to take advantage,” said Eloy Ortega, president of Latino-owned Promerica Bank in downtown Los Angeles. “It’s kind of like a car dealer. If you paid the sticker price, you paid too much. That’s what happened to these people. They didn’t bother asking or shopping, so they didn’t necessarily get the best deal.”
Since banks haven’t developed a significant presence in many minority communities, “you have these subprime entities cross-selling and marketing to them,” according to Lori Gay, executive director at Los Angeles Neighborhood Housing Services. “The mortgage brokers got a little greedy and the consumers got greedy.”
Statistics confirm that Latinos receive a disproportionate number of high-cost mortgages. A report from the non-profit Acorn Housing Corp. defines a high-cost loan as one with a rate at least 3 percentage points higher than the interest paid on comparable Treasury notes. In Los Angeles, Latinos were twice as likely to receive such high-cost loans as whites, the report found.
Moreover, “racial disparities persisted even among homeowners of the same income level,” according to the report. For new home purchases, affluent Latinos were 2.8 times more likely to get an expensive mortgage.
Document dilemma
Martinez doesn’t believe mortgage brokers took advantage of consumers.
“I know a lot of people want to hear that, but no,” he said. “The reason a lot of Latinos got these loans is that’s all they could qualify for. We worked with what was given us by the mortgage companies and by the clients.”
Instead, Martinez blames the preponderance of high-cost loans among Latinos on a lack of documentation. A typical borrower has a full-time job and another job or business on the side. Alternately, Latinos may rent out a room in their house or sell Avon or Mary Kay.
“We couldn’t verify that income so we had to do a stated income loan,” Martinez said. Such loans, based on an applicant’s self-reported income, pose a higher risk to financial institutions and carry a correspondingly higher interest rate.
Martinez notes that the secondary market not the Latino market invented high-cost mortgages. However, he agrees that mortgage brokers failed to teach Latino consumers about credit. “We got them into the house and sent them home,” he recalled. “Now that type of borrower, they can’t qualify for refinancing. They have the same type of credit as before. We didn’t go the extra step of showing them how to change their credit habits to change that loan to a better loan.”
And disaster now faces the Latino market. The Acorn study predicts that minority neighborhoods, where high-cost loans are geographically concentrated, will suffer from increased crime and decreased property values as foreclosures multiply.
“We have a foreclosure crisis in this country, and high-cost, low-value loans are the primary cause of it,” said Gay. “Projections show low- to moderate-income neighborhoods will be most affected. But the impact will be across the board. This is first time we’ve ever seen foreclosures at every economic level.”
Ortega worries that the crisis will hamper his bank’s mission to connect Latinos with the U.S. financial system. “A lot of these folks immigrated with a distrust of the banking system because of what was happening in their home country. Now they’re right back where they were,” he said. “If you lose your home, you’re going to taste that for a long time.”
But Martinez hopes to weather the downturn by moving away from mortgages into refinance counseling. “We don’t just send them home now. We set up a financial plan to restore or repair their credit in next 24 months,” he said.
