Challenges aside, mortgage leaders see benefits of offering SPCP

although Lack of affordability continues to plague the housing market, Mortgage and housing leaders are looking for ways to address the racial wealth gap; special purpose credit programs are often touted as products that could deliver results.

With a slew of SPCPs set to enter the market in 2023, lenders are recognizing their potential to open up homeownership to Black communities and other historically underserved groups. Renewed target in the wake of the racial justice protests three years ago. But even for veterans of the home finance world, navigating the intricacies of these plans can be a complex task.

The opportunity to create an SPCP (which could also cover a range of consumer loan products in addition to mortgages) has existed since the passage of the Equal Credit Opportunity Act in the mid-1970s. However, home lenders rarely try to bring them to market, mostly out of concerns that they will violate fair housing laws. At the end of 2021, things changedHowever, when regulators assure industry that a project complies with the Fair Housing Act.

Gabe del Rio, president and CEO of the Homeownership Council of America, said the development “paved the way for us to be able to bring this into the mortgage space without the need for defense arguments.” ”. Provide fair credit opportunities.

and Lenders have taken notice, sees the SPCP as a tool that can reduce wealth and homeownership gaps, particularly between white and black Americans. According to U.S. Census data, the black homeownership rate was 43.4% in 2020, which was lower than 10 years ago. On the other hand, the white population grew to 72.1%.

“I think the industry is coming together, particularly in the independent mortgage bank space, to try to solve problems that we haven’t been successful in solving in the past,” said Justin Messer, president and CEO of Prosperity Home Mortgage.

While the specifics can vary widely from lender to lender, SPCPs are designed to have specific income and geographic eligibility requirements for both the borrower and the property being purchased.The credit provided by these programs can be used to reduce down payments or other purchase costs and also Includes homebuyer education.

A year ago, when Freddie Mac announced plans Introduce one of your own in 10 pilot cities.Since launch, several leading non-bank lenders including rocketCrossCountry and Pennymac began offering a product called BorrowSmart Access.

As of July 2023, Freddie Mac had purchased more than 4,000 SPCP-originated loans through BorrowSmart Access, or special purpose credit programs developed by lenders themselves, according to the government-sponsored enterprise.

Del Rio, who is also a certified mortgage banker, estimates that 50 to 60 mortgage lenders have launched SPCPs in the past two years. His organization regularly assists depository institutions and nonbank institutions in developing their own programs or partnering with government-sponsored enterprises (GSEs) to offer their products.

But despite assurances from regulators, companies he has worked with remain hesitant.

“When you work in credit, you’re told that you need to do this in a non-discriminatory way. With SPCP, you need to think through some of the different rules and understand how, when and where to verify, and how that works, ” Del Rio said.

For example, understanding the details that determine which borrowers or properties are eligible for a special purpose credit program requires knowledge and expertise that is not required with other loan products. Messer said the required scrutiny could appear “overwhelming” for sponsors. In addition to the SPCP offered in Philadelphia, Chicago and Atlanta by government-funded enterprise Prosperity, it is developing its own proprietary version.

One of the factors that makes project management challenging is that rulemakers have established strict geographic boundaries in some projects, which may make one home eligible while a neighboring property across the street may not.

“The concept that’s really driving these projects is MSA [metropolitan statistical areas] and census slips, that’s not the lingo that real estate agents use and it’s not the lingo that homebuyers use when they’re considering a home,” Messer said.

Del Rio said many of the MSAs where SPCPs appear can be described as “affordable areas, where the inventory is priced at a price tag that matches people’s income levels.”

As a result, affordability is generally higher in these MSAs. And the minority population is also very large,” he said.

But some in the real estate industry point out that this strictly location-based focus is flawed.

“We’re looking for potential homeowners who are best positioned to own a home as quickly as possible. That doesn’t necessarily match the demographics of census tracts that are majority-minority,” said Bryan Green, vice president of policy advocacy at National The Association of Realtors held a roundtable discussion on special purpose credit programs in September hosted by four major U.S. government housing regulators.

“The reality is that the most potential homebuyers are probably in likely suburbs rather than minority census tracts. So that’s one of the reasons I think there hasn’t been success so far in terms of homeownership policy. We haven’t” We don’t have the math to logically connect the goals we need,” Green said.

Michael Innis-Thompson, senior vice president and head of TD Bank’s Center of Excellence for Community Lending and Development and Equitable Lending, said challenging geographic requirements have also complicated marketing efforts to drive its growth. More complex. In early 2022, it will launch its own designs in 18 markets on the East Coast.

“It’s a little bit challenging to do direct, pure advertising,” he said. “Most of the programming today is really geographically based, so if you just do a broad marketing effort, there’s going to be people who think that doesn’t qualify. .” Innes-Thompson said: “This will only lead to a poor customer experience.”

But those restrictions haven’t stopped some lenders from proposing their own SPCPs to attract borrowers outside of eligible government-designated areas, including smaller cities or rural areas. While KeyBank is launching a special purpose credit program in select metropolitan statistical areas in fall 2022—an effort that has yielded nearly 250 originations to date— It recently launched two other products Available in all census tracts nationwide that meet eligibility requirements.

“Some of the smaller communities are often overlooked because these programs from different banks are so focused on some very large MSAs,” said Dale Baker, president of KeyBank Home Lending. “But there are other underserved communities as well.”

Del Rio said the broader strategy could eventually open the door to black and minority ethnic communities in higher-priced markets through bank portfolio products.

“I think you’re going to see some more creative products, but you have to remember when you’re working with people of color, it’s not just about affordability. We have high-income people of color,” he said. “Those who are not homeowners actually have considerable ability to own a home.” In some markets, the income parameters for the SPCP may be expanded, he added.

Higher-income minorities without the generational wealth to support a down payment would benefit from such products.

“You see in the data that in those higher-cost areas, people of color have much lower ownership rates. So you have to raise incomes to find people who have opportunities,” Del Rio said.

Buyers in the secondary market also welcome loans administered through the SPCP because their purchases help meet fair lending requirements. Some businesses that work with the American Home Ownership Council specifically seek features like minority loans when considering a loan to purchase.

“For anyone who understands the secondary market segment, it’s easy to see that these loans – especially when you can identify them – have a higher value. And they may sell for many times the additional value,” Del Rio said.

Despite the challenges of administering it, companies are not ignoring the potentially lucrative revenue stream that special purpose credit programs could bring in the future as more projects are launched.

“There’s a huge amount of people who are preparing for a mortgage that haven’t received a ton of education on how to do it from start to finish,” Messer said. “So a program like this is a great way to really reach out and educate the community about homeownership, and it’s It’s very achievable when you have a product like this.”

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