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Byline: Sandra Yin

CONSIDER Luis Martinez an exception. Faced with the challenge of buying his first home, the 38-year-old navigated the financial obstacle course with few jitters about how potential lenders would judge his creditworthiness. Once he took care of an 11-year-old bill and got some help with the down payment and closing costs, the bank approved his loan application. He was able to move his family of six into a 3-bedroom home in Bradford, N.Y. in September. Looking back, he says the home buying process wasn't bad at all. "It was easy," he says, "not as hard as other people say."

Still, Martinez's confidence in the process and in his credit history is a departure from the attitudes of most prospective African American and Latino homebuyers. Many minority homebuyers tend to be more nervous than their mainstream counterparts when it comes to applying for a home mortgage loan. A fear of rejection can color their behavior and make shopping for that home loan a painful experience. And homebuyers like these may shy away from standard lenders, who could lose out on the fastest growing part of the home buying market.

Homeownership has never been just about taking legal title to a property. It's also a first step in creating wealth. Investing in a home has helped many people move into the asset-owning class, and more consumers than ever are joining the ranks of homeowners in America. By the end of 2002, 68 percent of all heads of households owned their home, according to a report released in June by the Joint Center for Housing Studies of Harvard University. But not all Americans have benefited at the same rate. Black, Asian and Hispanic Americans still lag the mainstream population in seeing the American Dream come true.

Despite the gains of the 1990s, minority homeownership rates still limp some 25 percentage points behind white rates. Among white heads of household, 3 in 4 own a home. But only 49 percent of black householders, 47 percent of Hispanic householders and 54 percent of Asian householders can make that claim.

Demographics go far in accounting for the disparity, says Nicolas Retsinas, director of the Joint Center for Housing Studies. Minority populations - including the foreign-born - tend to be younger in age compared with the U.S. population as a whole, with lower incomes. And the young, in general, are less likely to own a home than older people.

What's more, lenders prefer easy targets, and that preference, along with historical discrimination such as redlining and steering, also helps to explain the gap in homeownership. As lenders prepare for life after the refinancing boom that has been fueled by record low interest rates, they should take a good look at their best customers. The favored client during an interest rate decline was financially savvy. They knew precisely what they wanted, had relatively good credit and didn't need a lot of time and attention. As interest rates rise, such customers will vanish. Lenders who want to maintain their growth rates will need to adapt their services to the fastest-growing segment of potential homeowners.

That group is composed of minority consumers, who are set to play a greater role in the housing market. Growth in the housing sector, the primary driver of housing demand, is projected to top 12 million units between 2000 and 2010, according to the Harvard study. Minority consumers, the study says, are on pace to account for two-thirds of that total during the decade. The demographics of the home buying population will become more ethnic and lower income. "Unless the housing industry enthusiastically embraces those markets, they're not going to be able to sustain their historic growth patterns," says Scott Syphax, president and CEO of the Nehemiah Corp., a Sacramento, Calif.-based nonprofit group that administers a privately funded down payment assistance program.

To identify the needs of some of these home buying consumers, especially as they relate to mortgage and credit arenas, in 2002, Fannie Mae surveyed over 9,300 consumers, including more than 700 black households and 600 Hispanic households. Researchers discovered that a traditional model that segments consumers as first-time buyers, repeat buyers or refinancers is relatively meaningless. Six new consumer segments emerged from the study. They are classified based on varying levels of satisfaction with the current mortgage process, priorities when shopping for a home loan and levels of reliance on people versus technology when acquiring a mortgage.

Home buying consumers tend to feel alienated and frustrated by the process or comfortable and at ease in their relationships with financial and mortgage organizations. Up until now, lenders have pursued the "Financially Confident." They usually know their credit score and are familiar enough with the process of getting a loan to ask about annual percentage rates, closing costs and margin costs. As knowledgeable consumers, they're reluctant to pay anything above the cost of the loan. Lenders prize them as customers because they do not require much guidance, generally boast strong credit and therefore are not labor-intensive clients.

Lenders have tended to avoid those homebuyers who exhibit less financial confidence, particularly Fannie Mae's "Financially Challenged" and "Friends & Family" segments. More often than not, their credit score is a total mystery to them, and they are apt to worry that their credit rating is blemished, even if it's not.

The "Financially Challenged" prefer to deal one-on-one with trusted advisers who offer guidance as they make their way through financial transactions. A majority of these consumers say they have fallen behind on credit card payments. Not surprisingly, this group is less likely to own a home than average. They are more likely than average to describe the mortgage process as a humbling experience. Most tend to think they didn't get the best mortgage possible, compared with a majority of all surveyed who think the opposite. Less than half say they thought the loan officer was on their side compared with a majority of the total sample of mortgage applicants in the study. According to Fannie Mae estimates, one-fourth of African Americans fall into this "Financially Challenged" classification, as well as one-quarter of English-dominant Hispanics and 28 percent of Spanish-dominant Hispanics. The number of Asians in the sample was too small to be nationally representative.

Like the Financially Challenged, consumers in the Friends & Family group have poorer credit habits than average. They tend to have smaller mortgages, less equity and monthly payments that represent a higher than average share of their monthly salary. Although they believe they understand the process, they still feel it's a humbling experience. Consumers in this segment are far more likely than average to consider quick approvals a priority. They prefer to talk to a real person during the lending process. One-third of blacks fall into this category, as do 22 percent of English-dominant Hispanics and 57 percent of Spanish-dominant Hispanics.

Minority home buying consumers have less confidence in their credit than their mainstream counterparts do. African Americans and Hispanics are much more likely to worry that their credit rating is blemished, says Vada Hill, senior vice president and chief marketing officer of Fannie Mae's Consumer Insights marketing division. While less than one-third (28 percent) of whites surveyed said they thought their credit rating could be better, 64 percent of African Americans and 50 percent of Hispanics share that belief. Consumers who are more likely to fear rejection based on their credit ratings are also more than twice as likely to believe they'll have difficulty getting approved for a mortgage. These fears shape their behavior. "If you're worried about getting approved," says Hill, "you'll just get the 'yes,' take what you're given and run away as soon as you can." Giving priority to obtaining loan approval versus shopping for the most cost-efficient loan opens these consumers up to predatory lenders who lock them into high interest rate loans.