It has become something of an inside joke in financial services that the so-called “emerging markets” already are here and well established. What’s more, they represent a potential windfall for financiers who serve them right.
“We’re mainstream already,” declares Hernan Guaracao, publisher of Al Dia, a Spanish language newspaper based in Philadelphia. And, if buying power is proof, Guaracao is correct. The disposable income of Hispanic immigrants will top $1.08 trillion by the end of the decade – just four short years from now, according to the University of Georgia’s Selig Center for Economic Growth.
But institutional lenders in the U.S. are beginning to question whether their well-honed methods for identifying, measuring and controlling customer behavior will not fit the new breed of customers.
Consider recent comments by the chair of the Mortgage Bankers Association, discussing the industry’s much-prized automated underwriting procedures, used most often by lenders making loans in conformance with limits set by Fannie Mae and Freddie Mac, currently at a ceiling of $417,000 for single-family loans.
“I have had controversial discussions with both the GSEs (government-sponsored enterprises) on this,” reports Regina Lowrie, president and CEO of Gateway Funding Diversified Mortgage Services. Lowrie is serving a one-year term as MBA chair, expiring in October.
“We are of a mindset that at the time of application we can run [any] borrower through an AU system and get a decision,” says Lowrie, noting that industry has moved so much to an automated underwriting.
“My concern (is) we do need to deal with better service to diverse customers. I’m not sure they can (all) fit in the black box. It’s a big issue,” the MBA chair says.
This is especially true with many Hispanic immigrants who shy away from mainstream lenders, illegals due to fears of deportation, others simply used to cash transactions, born from decades of financial crises and currency devaluations in Latin America.
“We need to do a better job of serving this customer; finding systems and ways that we can deal with the differences in their credit and their savings and their employment history that are part of a socio-economic culture,” Lowrie says.
Beyond a failure to fully capitalize on this new market, Lowrie says lenders may open themselves to charges of discrimination. “I think what happens is, because we rely so much on AU (automated underwriting) systems, we run the risk of having disparate impact or disparate treatment of those segments of the market.”
Jorge Caceres, director, emerging markets, Genworth Mortgage Insurance, says by 2010 fully one-fifth of the U.S. population will be Hispanic in recent origin and of that share, three-quarters will reside in only seven states: Arizona, California, Florida, Illinois, New York, New Jersey and Texas. Two-thirds of Hispanics in the U.S. are of Mexican nationality, with the next largest contingent (14 percent) from Central and South American countries.
“Not only do you have a growing population (but) it’s a young population: 66.8 percent of Hispanics in the U.S. are 34 years old and under,” says Caceres, adding: “We like this because that’s the age of the first-time home buyer; it really falls into that ‘sweet spot’ of opportunity.”