The Asian-American market: culturally different, this market makes certain demands of lenders in return for profits. Pursuing this niche requires products for the self-employed, understanding thin credit files and making time to educate borrowers.

As loan volumes continue to fall, mortgage lenders are desperate to find new markets. It's getting crowded in the conforming loan business, and not everyone is excited about dusting off the old government-insured programs. Unfortunately, the days of creating a new option adjustable-rate mortgage (option-ARM) loan and sending it out to the sales force to pump up volume are over as liquidity for exotics has dried up and investor guidelines have tightened. [??] For the past few years, forward-thinking lenders have been looking to emerging markets as a source of future loan business. Fannie Mae says minorities--many of whom are immigrants--will account for nearly two-thirds of household growth from 2000 to 2010. Because the homeownership rate of immigrants continues to trail that of native-born residents by as much as 30 percent, according to statistics from the Harvard University Joint Center for Housing Studies, Cambridge, Massachusetts, there is opportunity here.

The problem now is that, even though lenders have been hearing about the appeal of emerging markets for years, the current credit crunch is making it more difficult to fund loans made to nonprime borrowers--or any type of loan that is nonconforming. But this may not be the problem it appears to be at first glance because not all emerging-market borrowers are buyers with poor credit. There are certain segments of the emerging markets niche that pose lower risks at the same time they promise higher profits.

The Asian-American lending opportunity

According to the latest data from the U.S. Census Bureau, some 33.5 million foreign-born residents live in the United States, making up 12 percent of the country's total population. Of these, 25 percent--or about 8.3 million--are from Asia.

Of American-born citizens, 4.4 percent of the total population, or about 13.1 million Americans, list Asian as their only race on the census forms, up from 12 million in 2000. The Census Bureau indicates that the Asian-American population is the second-fastest-growing racial group in America, with a growth rate of 69 percent. Only the Latino population is growing faster, at 77 percent.

The Census Bureau also tells us that 53.8 percent of Asian households earn more than $50,000 annually--more than any other foreign-born/immigrant households surveyed. Asian households also have the lowest percentage of households making less than $20,000 per year, at 18.5 percent. Finally, they have the lowest rate of unemployment of any other race in the country. It is estimated that this market segment will have nearly $600 billion in purchasing power by the end of the decade.

Asian Americans have the means to buy new homes, and they come to this country with that goal in mind. The federal government reports that in 2002, among the naturalized-citizen householders born in Asia, 81 percent of those who entered the United States in 1974 or earlier were homeowners, and 66 percent of those who entered in 1975 or later owned homes as well. And when they do buy, they buy higher-value properties. Studies indicate that Asian-American families buy higher-priced homes than their non-Asian counterparts.

These homeowners are not in the market just because they saw a low teaser rate, according to data collected by the Asian Real Estate Association of America (AREAA), San Diego. AREAA is a trade organization committed to closing the home-ownership gap for Asian Americans. It currently serves more than 12,000 members in 38 states.

According to an AREAA study, only 17 percent of the mortgage loans made to Asians in 2006 were subprime loans, which compares with 30 percent for all loans made to white borrowers.

Asian-American homebuyers have the highest median household income; the highest median down payment, the highest average home purchase, the highest educational attainment, and some of the lowest delinquency and foreclosure rates, according to AREAA.

From a mortgage lending perspective, this is an attractive market. AREAA's report puts Asian Americans at a much younger age than the general U.S. population, and says that nearly half of all Asian-American homebuyers are purchasing their first home. The average age of Asians living in the United States is 31 years old, compared with 35 years old for the total U.S. population, according to AREAA.

Despite the attractiveness of this market from a lending perspective, there is still a significant gap between home-ownership rates for this population and for other market segments.

According to the AREAA study, Asian-American home-ownership experienced the most rapid growth among all ethnic groups in recent years. Only 52.9 percent in 2000, the Asian-American homeownership rate grew to almost 60 percent by 2005. No population, including non-Hispanic whites, has attained such rapid growth in homeownership, according to AREAA.

But in its 2007 Annual Report on Minority Lending, Compliance Technologies Inc., Washington, D.C., and Genworth Financial, Richmond, Virginia, reported that Home Mortgage Disclosure Act (HMDA) data for 2004-2006 indicated that the growth rate for this market had fallen off sharply. In fact, among all minorities, the greatest decrease in home buying during this period was among Asian-American homebuyers, with a drop of 21.5 percent in 2006. One expert believes that option ARMs and other exotic loan programs that became popular in 2006 and 2007 did not appeal to this conservative market.

The challenges to overcome

According to Jim Park, president and chief executive officer of AREAA, these Asian-American borrowers are still out there; they're just not being served.

"The Asian community, from a finance point of view, on average, is much more conservative," Park says. "If you think about the 2006 book of business and the high number of alt-A and option-ARM loans that made up the bulk of the originations in that year and on into 2007, it's really no surprise that the loan volumes were down in the Asian community. Those loans just don't match up well with this market."

Park says Asian borrowers typically use large down payments and choose fixed-rate mortgage (FRM) loan products.

"The Asian community wasn't really a big part of the feeding frenzy we've seen in the industry over the past couple of years, and I think that is going to serve borrowers in this segment well. So I don't see the drop in loan volumes last year as a bad thing," Park says.

But it might be a bad thing for lenders that need to shore up falling volumes. The problem is that, while the Census Bureau tends to create a single group it calls "Asian" out of many countries throughout that region, from a marketing perspective, there are actually many different targets--including Chinese, Asian-Indian and Filipino. The population is very diverse, with many different groups built around ethnicity, culture, language and religion. Statistics that aggregate data from these different groups tend to mask the differences among them.

Language is a huge barrier. For many Asian immigrants, English is a second language and their experience and proficiency with it is limited. In 12 major metropolitan statistical areas (MSAs), 36 percent or more of Asian households are linguistically isolated, according to the AREAA study.

When the trade group surveyed real estate, housing and mortgage professionals across the country, the language gap was the No. 1 barrier that Asian homebuyers faced. Other barriers were lack of knowledge of the home-buying process, unverifiable income, lack of adequate credit files and lack of trust, in that order.

Overcoming the challenges

This is a serious list of challenges to overcome for a diverse market that may not account for more than a small percentage of a lender's total volume. But lenders able to create a niche here can become more relevant in these communities, says Park--and profit. Some real estate companies and mortgage lenders have already started working in association with AREAA to build inroads into these communities.

Last year, the Southland Regional Association of Realtors[R], Van Nuys, California, joined forces with AREAA to launch an educational program for new Asian homebuyers.

"In the Asian market, one of the biggest issues is a lack of understanding about how the credit system works," Praveen Sharma, marketing and initiative manager for AREAA, said in a press release at the time of the educational program's launch. "Our courses help agents understand the unique concerns of this community and cater to a more diverse market. One of our most popular courses teaches agents how to reach out to the Asian market and how to understand the differences in culture. This way, they can cater their sales and marketing strategies to this target market."

On the lending side, Charlotte, North Carolina-based Bank of America (BofA) issued a joint release with AREAA in December 2007 to announce the launch of a BofA initiative to help real estate firms understand and serve this fast-growing market segment.

"With the emergence of Asian-American consumers as a market force, the housing industry has witnessed the growth of real estate and mortgage companies attempting to cater specifically to these homebuyers," said Emily Fu, chair of AREAA, in a press release last year. "While many are doing a terrific job of servicing our community, there are some firms that have not fully complied with regulatory requirements and consumer-protection laws. It is critical that we serve the Asian-American community with integrity and transparency," she said.

AREAA and Bank of America have developed a continuing education course on regulatory compliance for real estate firms to ensure all immigrant home-buyers, many of whom may face cultural isolation and language barriers, are not taken advantage of during real estate and mortgage financing transactions.

But when it comes to compliance, mortgage loan brokers may be the ones that can benefit most from the education. A study, Subprime Mortgage Lending and Older Borrowers, prepared for Washington, D.C.-based AARP, indicated that broker-originated loans accounted for a larger share of loans among non-white borrowers, with 66 percent of the loans made to Asian or Pacific Islander borrowers initiated by brokers. That's compared with 38 percent for white borrowers and 64 percent for black borrowers.

Many of the larger banks have cut back on their wholesale lending, but most have not done a good enough job of building trust in emerging markets. There are many things that must be considered, according to Sharma.

"There are little nuances in how you need to conduct business. Written contracts have different meanings in different cultures. You have to consider that when you have a meeting and many other things," he says.

But for lenders, the biggest hurdle is the fact that these borrowers tend to have non-traditional credit histories--making their deals difficult to underwrite. Thin or nonexistent credit files push many of these borrowers into stated-income or other nontraditional loans, many of which are becoming more difficult to fund.

"I am concerned that as the market clamps down on these products, that access to these loan products might become severely limited," Park says.

Building a niche in the community

Despite the challenges, Park maintains that this market is a great opportunity for the mortgage industry. But he says it will depend upon active outreach and underwriting innovations. For real estate agents, the key will be more education. But players here agree that it's worth it.

"Given the educational level, credit profile and income of the Asian-Pacific-American community, its homeownership rate has tremendous room for growth," said Winnie Davis, Southland Regional Association of Realtors president, in a past press release. "Our industry must reach these prospective homebuyers."

According to Park, it won't be all that hard to do. Sure, this market is diverse and the infrastructure required to communicate with it effectively is nontrivial, but the advantage for lenders is that these communities are concentrated in a limited number of states. This could allow for a significant return on marketing investment for those firms that target Asian-American homebuyers and borrowers.

"Remember, 50 percent of this community resides in only three states: California, Texas and New York," Park says (see Figure 1). "Fully 75 percent of the population resides in just 10 states. So this community is very concentrated. Lenders may be concerned about throwing marketing dollars at a segment that may only comprise a small percentage of their overall business, but because this community is concentrated it doesn't involve as much investment to target it," he says.

If lenders do choose to make lending in this market a priority, Park has some advice.

First, he says, lenders must find a way to communicate with these borrowers in their own language. That's tough, but Park says it doesn't mean that every mortgage document has to be translated. However, building an infrastructure that will facilitate effective communication is essential if lenders hope to build trust. With 60 percent of this population being foreign-born with limited proficiency with English, it must be a priority.

Second, lenders must offer products that are relevant to this market. That means that loans that serve the self-employed are necessary. People in this group have the money to get into the market, but they need financing instruments that make it possible after they lay down the initial payment.

Third, Park says, government-insured products--especially those offered by the Federal Housing Administration (FHA)--must become more relevant to this population. Because many Asians live in high-cost areas, loan limits have been a problem in the past. Now that those limits are being raised, Park suggests that FHA lenders do more outreach into this community. Of course, it would be nice if the FHA would offer a stated-income program, he adds.

Finally, from a product-innovation perspective, credit scoring and loan underwriting must advance to the point that these tools enable lenders to make sound lending decisions without alienating good borrowers with non-standard files.

"These borrowers are fairly new to our way of evaluating credit," Park says. "Many of them have thin files, if they have credit files at all. But this doesn't make them a bad risk. Just because you don't have a credit history doesn't mean you are a bad risk."

A number of companies are working on this problem now, and there are offerings in the market that will allow lenders to effectively evaluate thin files. But if lenders hope to capitalize on this market, they'll have to implement these new tools.

Asian-American homebuyers may be the most attractive emerging market in the years ahead, even if some other communities are growing faster. To take advantage of it, lenders will have to change the way they look at this population and change their operations to create a tighter fit with the cultural and economic realities of the borrowers they hope to serve.

Park says it will be worth it. As he has said more than once in his work to advance the cause of these homebuyers, "For any real estate and mortgage company to thrive in the future, the ability to tap the dynamic Asian-American market can no longer be viewed as peripheral to business success."

Rick Grant is a freelance writer based in Jim Thorpe, Pennsylvania, specializing in writing about technology for the financial services industry. He can be reached at [e-mail].

Figure 1 Asian-American Population Centers

These states represent 75 percent of total

 1  California
 2  New York
 3  Texas
 4  New Jersey
 5  Hawaii
 6  Illinois
 7  Washington
 8  Florida
 9  Virginia
10  Massachusetts

Note: More than half of the population lives in the top three states
SOURCE: ASIAN REAL ESTATE ASSOCIATION OF AMERICA (AREAA)