WASHINGTON – They make up the fastest growing segment of the U.S. population, yet Hispanics are increasingly locked out of homeownership because of tighter lending standards that rely on outdated measures of creditworthiness.
Comprising more than 17 percent of the population right now and projected to double, Hispanics are a political and economic force to be reckoned with. And they potentially represent an answer to turning around a sagging national homeownership rate that's approaching levels not seen since before the fall of the Berlin Wall.
The national rate of homeownership fell to 63.8 percent over the first three months of 2015. The last time it was lower was the final quarter of 1989, when it stood at 63.7 percent.
The problem for Hispanics, who in 2014 had an ownership rate of 45.4 percent, a 14-year low, is that conventional tools for gauging creditworthiness are locking them out in large numbers.
"Communities of color under the current scoring model aren't being accurately captured," said Joe Nery, president-elect of the National Association of Hispanic Real Estate Professionals. "You don't have the opportunity to establish your credit."
Hispanics are more likely to pay in cash, and they have extended families under a single roof with a higher tendency to pool resources. Yet that counts for little in the traditional scores used by credit-reporting agencies and banks to determine whether an applicant qualifies for a mortgage or car loan.
In fact, the Consumer Financial Protection Bureau issued a report in early May noting that 26 million Americans are "credit invisible," meaning they have no credit history on file with any of the major credit-reporting companies such as Experian, Equifax and TransUnion. About 15 percent of black and Hispanic consumers are among those 26 million, the report said.
Currently, credit reporting is dominated by FICO scores. Lenders now purchase more than 10 billion FICO credit scores annually for use in making loan decisions. Consumers are granted free access to their FICO score, but the three major credit reporting agencies require personal information.
FICO's current methodology dates back to around 2004 and relies on a borrower's income, payment history, debt load and to a lesser degree on how often lenders take a look at a borrower's credit history.
Here's the rub for Hispanic borrowers: When looking at payment history, the FICO scoring relies on whether payments have been timely on credit card bills, mortgages, car loans and the like. There's greater weight given to lengthy repayment of credit.
"For most first-time home buyers … their largest monthly expense is their rent payment," said Joe Castillo, the managing broker at ERA Mi Casa Real Estate in Chicago. "And at the current time the credit agencies do not provide landlords larger or even small avenues to report that payment. So that is a huge misstep, or missed opportunity."