Mention low-income home buyers and some mortgage lenders point to their Community Reinvestment Act (CRA) programs. But where others see regulators twisting their arms to make loans, Stephanie Smith sees an untapped market which will drive profit growth in the cut-throat industry.

At some point, you are going to tap out the market for white homeowners, says BankAmerica Mortgage s Smith, national manager for community lending. She cites statistics showing that 72 percent of white households own homes, while 43 percent of blacks and 45 percent of Hispanics can say the same. This is a growth market for us.

Serving those passed over

To tap that market, BankAmerica rolled out two innovative mortgage structures this year to serve the low-income market and reach minorities and immigrants still largely passed over by conventional programs. The rollout took a scant three months from idea to execution. The San Francisco-based bank created the programs after studying data from rejected applicants and from existing low-income borrowers. It also conducted eight extensive focus groups with blacks and Hispanics in Los Angeles, Chicago and Phoenix.

This spring, it introduced the Zero Down program, a 100 percent loan-to-value product which requires no cash down from low-income borrowers with established credit. The program, which has gotten a strong consumer response since being introduced in most of BofA s markets, is believed to be the first of its kind.

The launch of the program comes as Home Mortgage Disclosure Act data shows that in 1997 mortgages to low-income and minority homebuyers slowed from the double-digit pace of recent years. While some say the drop in originations reflects a normalized pace after a pent-up demand was met, industry executives including Smith suggest that existing programs do not go far enough to close the gap.

She says that research shows that even larger numbers of applicants have been passed over because they had little or no traditional credit history. To answer that, BankAmerica introduced Neighborhood Advantage Credit Flex in partnership with PMI Mortgage Insurance Co. in July.

The mortgage product is distinctive in that it streamlines how low- income homebuyers are approved when they have no credit history. The program does not use traditional credit scores. Instead, it relies on the homebuyer s history within the previous 12 months, making it easier for the borrower to demonstrate that they paid rent and other bills on a timely basis. Smith says that as much as two-thirds of the low-income market can not meet traditional credit scoring criteria.

The Credit Flex program is also flexible in key areas of underwriting. Borrowers can have a higher debt-to-income ratio than is allowed under existing community lending mortgage products, with a maximum ratio of 45 percent. The down payment is only 3 percent and just 1 percent needs to come from the buyer s own funds. The other 2 percent may come from a gift, grant from a family member, nonprofit agency, or a loan from a nonprofit government agency. The 30-year, fixed rate mortgage is now available in Washington, D.C., and selected counties in 24 states. If BankAmerica can make (Credit Flex) work, other lenders will figure out a way to offer the product, says Juliette B. Madison, vice president who oversees affordable housing programs at PMI. But it also has its risks.

While lenders traditionally view low-income homebuyers as riskier, BankAmerica is not pricing the mortgages to penalize borrowers in the Credit Flex program. Smith declined to discuss specifics, but she says the risks associated with low-income buyers are within our hurdle requirements set by the bank for mortgages. These are not deeply credit-impaired borrowers, she says. We should be serving them and not charge them a higher price.

In BankAmerica s major markets in the South and West, the minority and immigrant populations are driving long-term demand for financial services. Observers say the new products are key to serving those customers and winning their loyalty. There s a strong business case for this program, Smith says, noting that the loans will be profitable under the bank s parameters. The bank believes the mortgage is the cornerstone of the relationship. This provides a cross- selling opportunity.

The research which created the two mortgage programs also gave strong indications of how to market them more effectively. The bank introduced educational materials in several languages, including Spanish and Vietnamese; heavily promoted the program in the ethnic media; and prompted the company to test direct-to-consumer marketing in L.A. for the first time.

breaking new ground

BankAmerica also hired two dozen bilingual loan officers, opened an office in heavily Hispanic East Los Angeles and staffed regional call centers with at least 40 bilingual customer service representatives.

Except for a few pilot programs, BankAmerica is alone in rolling out a nationwide $600 million commitment to this emerging market. The products that BofA and others are piloting are very important, says Nicholas P. Retsinas, former Federal Housing Commissioner and now director of the Joint Center for Housing Studies at Harvard. A new study by the center on the outlook for housing needs shows that low- income buyers will play a vibrant role in the future of mortgage lending. Retsinas says that about 40 percent of net new homebuyers in recent years have come from the low-income and minority markets. He says that mortgage lenders are only now institutionalizing their belief in the potential of the market, adding, It becomes clearer and clearer just how important this market is.

J. Racine

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