The PIN Magazine August 2016

The 69th Annual NAREB Convention is just around the corner on August 12th to 16th in Long Beach California, and I am very excited about it and happy it is in California.  I am confident that it will be the best convention in the history of NAREB, because we all know that California is the pacesetter in just about everything when comes to business and especially real estate.  No disrespect to the other states, but I think you know what I am saying.  California is a special place and we Californians know how to put on an event.  It is the home of Hollywood, the Dodgers, the Angels, the Kings, the Clippers, and now the Rams because miracles do still happen.  So the verdict is already in.  The convention will be great.

For the last ten years I have been traveling out of state to attend the conference so I know I speak for my fellow Californian Realtists that we are happy to host the convention this year.  I want to encourage all OC Realtist members to attend this very important convention.  This will be the first convention for Ron Cooper, our new President of NAREB, and he is off to great start with a great new campaign to increase homeownership of African Americans that started in February of this year. The goal of the campaign to put two million African American into homes in the next five years.  This is an aggressive goal and has garnered attention in the media, our political leaders, and community leaders in all communities of color.  For more details about the plan click here.

Homeownership is still the American Dream for everyone, but minorities are not seeing that dream come to reality.  A recent report by the Urban Institute states that African Americans will fall further behind all racial groups in homeownership. For at least the next fifteen years, whether the economy grows slowly or quickly, the homeownership rate for African Americans will decrease while the rate for Hispanics will increase. They are also predicting that by 2030, the homeownership rate for African Americans will be forty percent, a large drop from forty-six percent in 2000, or fifty percent in 2004.   The basis for their prediction is that African Americans were hit much harder in the financial crisis than any other racial or ethnic group, and their homeownership rate declined far more than their white and Hispanic counterparts. African Americans are starting out behind and, absent policy changes, will fall further behind over the next fifteen years.

NAREB’s campaign for two million African American homeowners in the next five years has brought serious attention to the plight of African American homeownership in the community and the government.  In fact, the U.S. Secretary of HUD, Julian Castro, will be attending and speaking at the NAREB conference.  NAREB is seeking the help of policy makers to remove or ease the barriers to homeowner for African American, but it will not happen overnight and it will be a fight.  African American history has already conditioned us to believe that new policies, new legislations or new laws that can solved many of the disparities in the African American Community or end the unfair treatment of African American will not be enacted without a fight in congress or with legislators who are not concerned about the issues that affect African American.  We will have to march, protest, conduct town hall meetings and even boycott to get the government to move.   This is the template for justice and the history of an oppressed people who want all that America has to offer.  But, in spite of the struggle, America is still the greatest country on earth.  We cannot complain about the struggle because complaining never moves you forward and cost time.  All we can do is embrace struggle and go to work on achieving the goal.

There are many strategies that if implemented can improve the homeownership rate for African Americans.  Here are the big three that I see:  The first and most important strategy involves expanding the underwriting standards and making loans easier to obtain with low down payments.  I believe that if you can afford to pay rent on time, then you can afford a mortgage payment. I have been a mortgage banker and now mortgage broker for thirty-four years and I know experientially the impact that expanding the underwriting guidelines could have for African American people.  African American and other minorities will pay the rent before paying anything else.  Family is important to us and it is the number one responsibility of father and mother to keep a roof over their children’s head. So what does a late payment on credit card (if they have one), or auto loan have to do with a keeping roof over your head?  Absolutely nothing to an African American, which is precisely why the payment was late.  The rent come first before anything else. There are other socio-economic factors involved here, so I do not mean to oversimplify the issue, but it is pretty simple. We need to rethink how we are underwriting loans because of the value system, the culture, and other factors.  Some cultures do not trust banks and do not have a bank account.  Other do not believe in debt and have no credit debt at all.   I have many clients who have very low FICO scores and have been living and renting at the same place for five, ten, and fifteen years and have never been late with the rent.  Because of the rising cost of housing, and soon interest rates, they will most likely remain a renter for the rest of their lives.  That is good news for the landlord whose mortgage will soon be paid off.  Vacancies are at an all-time low and rents are increasing at a rate of eight percent a year according to Property Managers survey.  Rents who are caught up in this situation are in a crises and are on the pathway to homelessness because eventually their rent increases will outpace their income.  It’s happening now for many baby boomers who are retiring in the African American community and have never owned a home.

Secondly, we need to use a different credit scoring model to evaluate credit other than FICO, that may be more accurate and fair, in determining the risk to the bank in lending to an African American borrower.  I am skeptical of all the models, because they are inherently flawed. I believe we should eliminate FICO scoring and any credit scoring models and require manual underwriting on all loans, because you cannot program common sense in the software/algorithms that produces the scores from the data provided.

Credit scores can determine your creditworthiness only, but they cannot determine your credit capacity or ability to make the mortgage payment or if you will make your mortgage payment in a time of crisis.    Credit scores do not consider your rent history, education, employment status, income or type of income, debt ratio, net worth, your position in the community, whether you are married and have children or not, your character and references from people in the community, or an explanation that might explain why your scores or low and if the situation that caused the score to drop still exist or not.  But most importantly credit scores do not take into consideration that you have been paying rent to same landlord for years and have rarely if ever been late.  Now the areas that can be measured are changing but it really does not matter how much they can improve the scoring model we need people and not automated underwriting decision engines and FICO to make loan decisions.

It is because of the limitations of software programing that attempts to solve all of our problems in business, and eliminate jobs at the same time, that we have this issue.  The software programmer’s intention is good because as a community do want our banks to make good loans and the loan to be repaid.  Of course we need our banks to be strong and to be here for us when we need them.  But their well-intended attempts to determine the loan risk upfront has had an unintended discriminatory impact on people of color.  The most recent HMDA data clearly shows that we are not making conventional loans to African Americans.  The loan denial rate is twice the rate of Caucasians.   The banks are making more FHA and USDA loans to African American because of less restrictive government underwriting guidelines but at a very high cost in interest rate, mortgage insurance and loan level price adjustments.

I do not understand why there is not one well financed Fair Housing Agencies, or Civil Rights Organizations, because of their recent lawsuits victories and Federal grants, that have not filed a lawsuit naming all the parties involved to eliminate credit scoring because of it disparate impact.  Do they care?  It seems ridiculous to me that not one Fair Housing Agency has even attempted to do so. If anyone knows of any Fair Housing Agency or Civil Rights organization that has filed a lawsuit on this issue, and it is pending in Federal court, I will retract my statement and publish the complaint in the magazine.  FICO Scores, Vantage Scores and other credit scoring models used by banks disproportionately affects African American and people of color.  This in and of itself is a Civil Rights issue that should be address in Federal court.  It is discriminatory and I do not see how anyone can say that it is not.

Finally, eliminating loan level price adjustments that make the cost of borrower higher for African American needs to happen now.  The GSEs aka Fannie Mae and Freddie Mac, who are still under conservatorship of the Federal Government, credit pricing includes Loan Level Price Adjustments aka LLPAs and guarantee fees (g-fees).  These cost are borne by borrowers as part of their up-front closing costs and/or part of their ongoing monthly payments. LLPAs are based on loan terms including borrowers’ credit scores, loan-to-value ratios and other risk factors that can total up to 4.0 percent of the loan value for some borrowers.   The GSEs’ income has achieved new records and they have unprecedented liquidity provided by the U.S. Treasury Department and Federal Reserve.  The Great Financial Crisis is now over and the GSEs are more profitable and stronger than ever.  Why are they still under conservatorship and why do the GSE fees and LLPAs still exist?  We need them to be eliminated now.

The impact on these fees is primarily on the low and moderate income borrower and first time homebuyer who can least afford the higher cost and interest rates.  NAREB has formally ask that these fees be reduced or be eliminated because the risk to FNMA and FHLMC has significantly reduced due to more restrictive underwriting requirements, full income documentation and the ability to repay rule just to name a few things.  Credit requirements are also more stringent for lenders and MI insurers.  Capital requirements for banks are higher.  Tougher regulations from the new Consumer Financial Protection Bureau and Dodd Frank Act has turned the mortgage industry negative about lending to Loan to Moderate Income borrowers because it has become too burdensome to make the loans and they are existing FHA and other community lending programs.  The LLPAs and G-fees where necessary at one time but now they are not.  Where is the money going anyway, and how are LLPAs and the G-fees being determined?  There is no transparency in how these pricing decision are being made which leads to suspicions of mismanagement and most like the waste of important financial resources that could and should be spent on furthering the goals of home ownership, maintaining a stable housing marketing and the secondary market that are essential to achieving the goals of homeownership for everyone.

So, can NAREB achieve the goals of this campaign?   According to President Cooper, NAREB can and will achieve the goal if realtists work together and NAREB gets the support of policy makers to eliminate some of the barriers to homeownership.  As the founder of The Power Is Now and a member of NAREB Orange County, I am committed to doing my part as real estate and mortgage broker. I am conducting educational seminars online and working with churches throughout Orange County and the state of California to empower African American borrowers with information and loan programs that can help them buy a home. I cannot wait to help more and more of my clients to achieve their dreams.  I can help you today to find your dream home and be able to afford it without sacrificing family or financial security.

Thank you reading The Power Is Now Magazine!  Please share the magazine with your friends, family, and coworkers. We are your resource for all that is real estate, and everyone needs somewhere to live. Your Power Is Now!

Eric Lawrence Frazier, MBA
President and CEO
The Power Is Now Inc.