Helping the Undocumented Achieve the American Dream

Juan Rodriguez is 38 years old and has worked in a factory since he arrived in the United States eight years ago. His wife, Maria, 34, followed him to the United States five years later. Together they have four children—one born in Mexico and three born in the small Illinois suburb of Cicero, about forty-five minutes outside Chicago, where they now live. They stayed with family members in Chicago at first, but a job promotion allowed Juan and Maria to save. As city living grew more expensive, the family bought a small house in Cicero, a suburb closer to Juan’s job.

So far this sounds like the typical American dream: work hard, save, move to the suburbs, buy a house and live happily ever after. But what’s different about the Rodriguez family is that neither Juan nor Maria resides or works in the United States legally.

Undocumented workers like Juan and Maria may cash their paychecks and buy money orders at the corner grocery store, where the environment is safe and familiar. But they are also beginning to trust and patronize mainstream financial institutions, saving a few dollars in the process. Now, a small but growing number of banks—including giants like Banco Popular and Citibank─ are actively seeking out business from undocumented residents like the Rodriguez family.

New immigrants typically make a personal connection to a financial institution because of its location, participation in community events, or bilingual staff. They might hear about bank services from a friend of a friend. If the bank sees that a couple works and pays bills regularly, the discussion may turn to how to qualify for a mortgage using an individual tax identification number, or ITIN, which many undocumented workers use in lieu of a social security number to pay taxes. (The IRS has issued more than 7.5 million ITINs since 1996.) After a hands-on process of alternative underwriting and documentation, the bank establishes three key things: borrower identity, income, and credit worthiness. If there is no credit history, lenders assess credit worthiness through third parties. For example, if an immigrant is regularly sending money to family in another country, this can be used to evaluate and document income, along with utility bills and rent payments. If all this goes well, the loan is made, and the starter house becomes a reality. Juan and Maria tell all their friends and acquaintances about their experience at the bank, and the cycle continues.

The Rodriguez family represents a significant and largely untapped potential market in the US. The Pew Hispanic Center estimates that there are 11.5 to 12 million undocumented residents living in the United States. They are no longer limited to traditional ports of entry like New York City– new immigrants live almost everywhere: on farms, in suburbs, and in high-growth communities such as Dalton, Georgia, Elgin, Illinois, and Denver. According to a study conducted by the National Association of Hispanic Real Estate Professionals (NAHREP) in 2004, there are an estimated 225,000 potential homeowners (those who would probably qualify for mortgages) among Latino undocumented immigrant households. While New York State accounted for nine percent of the total, seventy percent, more than 150,000 people, live in Southern and Western United States. Although the homeownership rate in 2002 was 67.6 percent among naturalized citizens and 34.9 percent among non-citizens, according to the Census Bureau (compared to 70.3 percent among native born Americans), immigrants continue to be relatively “unbanked” for a number of reasons. They are often unfamiliar with the US financial system and have no credit history. Many are averse to taking on debt, and they lack proper identification. While some large banks are pursuing undocumented immigrants as customers, most are still hesitant─especially because the choice comes in the midst of the largest public debate on immigration policy in decades. This means working with immigrants to achieve home ownership is left to smaller players.

Niche community lenders in markets in Milwaukee, Atlanta, Dallas, and other cities have gone on record regarding their heavy pursuit of new business from undocumented customers. One place where local organizing has resulted in banking thousands of immigrants is in Durham, North Carolina. The Self-Help Credit Union was established there in 1984 to work with African Americans, women, and other communities underserved by financial institutions. But as the number of Latinos in the Durham area grew starting in the mid-nineties, the organization began working with them more frequently.

In the beginning, says Randy Chambers, CFO of Self-Help, around three Latinos each week were reported to be victims of violent crimes─mainly because they were carrying large amounts of cash on payday. Self-Help helped establish the Latino Community Credit Union in 2000 to offer services including bank accounts, as well as financial education. The new credit union later expanded to four additional offices in North Carolina, and has 45,000 members today. “Credit unions and community development corporations have done the best lending in this area [to the undocumented] around the country,” says Deyanira Del Rio of the Neighborhood Economic Development Advocacy Project, a financial justice advocacy group based in New York City.

About two years ago, the Latino Community Credit Union began offering mortgage loans to serve a growing number of members ready for homeownership. It has provided about 120 home mortgages. The average loan is roughly $95,000, for purchases of homes that cost about $105,000. Interest rates start at 7% for 90% financing – slightly better than the market rate. So far, according to Chambers, the union has had no defaults on these loans. Not one payment is more than 30 days past due. “It makes sense that if an individual does not have as much access to something, they will value it and will take care of it,” says Del Rio of NEDAP. Freddie Mac, a federally chartered agency, says it is addressing general homeownership challenges by working with lenders that require lower down payments or accept limited domestic work histories. It also partners with community-based organizations to educate immigrants and dispel myths about homeownership. “Clearly this is where the market is headed,” says Brad Jerman, a spokesperson for Freddie Mac., “Based on growth rates, the lion’s share of lending over the next ten years will to go new arrivals.”

And yet Freddie Mac, Fannie Mae, and the Federal Home Loan Bank system are not active in the ITIN mortgage market for undocumented residents. Nor are a number of large and small financial institutions – for a variety of reasons. The majority of home loans made by banks and other lenders are eventually sold. When a bank sells its loans, it is able to dedicate this capital to new loans. To date, none of the federally-chartered secondary market providers, which purchase the bulk of home mortgage loans, will purchase loans made using alternative identification. Institutions that offer these products must tie up their own assets and assume the cost of managing these loans. 1 Jerman, of Freddie Mac, says that purchasing ITIN mortgages is not a priority for Freddie Mac right now. “There are a number of political issues that would need to be resolved before we look at it.”

The Hispanic National Mortgage Association (HNMA), whose mission is to increase Hispanic homeownership, began to purchase non-traditional and non-secondary mortgages from lenders about a year ago. Leonardo Simpser, Managing Director of HNMA, explains that his organization’s goals are two-fold. “We purchase these loans because the borrowers pay and they pay well—it is good business. It is good for society as well. The reality is these people are hard workers, and they are looking for chance. We are providing them a chance.” When purchasing loans from primary lenders, HNMA does not know the immigrant status of the borrower. There are some immigrants with ITIN numbers who are legal residents, he says. “We do not discriminate based on immigration status, race, gender or any other factor,” says Simpser.

Community development proponents argue that, in addition to the individual benefits of owning a home, expanded immigrant homeownership increases home equity, which is often used to invest in the US economy. It also increases property tax revenues and neighborhood stability. It seems logical that banks, motivated by their bottom lines (and the Community Reinvestment Act, which requires them to reinvest in their local communities), would want to do good in immigrant communities, while at the same time providing mortgages to customers who can repay them. Yet despite recent increases in lending options for immigrants, particularly the undocumented, Del Rio points out that the menu remains limited. And where options are few, there is room for abuse. Thus far, many products targeted to immigrants have high interest rates. And because they require minimal documentation of a borrower’s income and qualifications, predatory lending is a danger. According to an April 2006 report commissioned by the Mortgage Bankers Association, so-called “low-doc” or “no-doc” loans “are open invitations to fraudsters.” In a sample of one hundred such loans, the report concluded that over sixty percent of loan applications overstated the homebuyer’s income by over fifty percent. In other words, these loans provide room for homeowners, brokers, or bankers to fraudulently state a buyer’s income in order to facilitate the loan, and its sale on the secondary market, while increasing the likelihood that the buyer will one day default.

In places like New York City, where the immigrant population is less homogenous, there are substantially fewer incentives for private banks and credit unions to offer such mortgage products. New York’s undocumented immigration population is estimated at 500,000, but no one immigrant group makes up a majority. Lenders are hampered in their ability to develop and market products that are tailored for a particular population. While a few smaller banks offer such products in New York, larger banks, guided by national offices that may not fully understand New York’s singular market, seldom provide immigrant-specific products. Some major lenders await changes in national immigration policy. In the meantime, where there is governmental approval of financial services for immigrant populations, banks have not hesitated to provide such services.

About 150 banks participate in a United States Federal Reserve program, Directo a Mexico, which allows workers in the United States to send money to individuals in Mexico using the Federal Reserve’s own clearinghouse. The service is significantly cheaper than the more common services provided by wire transfer companies. In a recent article in the Wall Street Journal, bankers hailed the program as a means to encourage more immigrants to open bank accounts. An advocate for restrictive immigration policies told the Journal that, “Anything that makes it easier for people to live in this country illegally is an inducement for illegal immigration,” and added that facilitating such money transfers drained money from the United States economy. Participation in Directo a Mexico does not require a social security number or, for that matter, proof of legal residency. Thus, certain barriers to use of financial institutions by immigrants, particularly undocumented immigrants, are removed.

To address barriers in the homeownership market, the FDIC (Federal Deposit Insurance Corporation) has been convening the New York chapter of the New Alliance Task Force since 2005. The Task Force, started in Chicago, is a coalition of financial institutions, community-based organizations, bank regulatory agencies, government agencies, and representatives from the secondary market and private mortgage insurance companies. The Alliance is committed to expanding access to the banking system for established and recently arrived immigrants in New York City and elsewhere in the US. It is currently developing a loan pool to serve as a local secondary market to purchase mortgages made to undocumented immigrants in New York City. Howard Banker, Executive Director of All Ahead, a not-for-profit organization, and member of the Alliance, says they hope to secure investors by the end of the year. Borrowers will receive homeownership counseling from community-based organizations assisted by Banker’s organization, which will also provide data collection services. Like Simpser, Banker stresses that purchasing these loans makes good business sense. “It is a loan product for a market that is expanding; there is no default rate on the loans; they come with mortgage insurance. There are two national mainstream, private companies insuring alternative ID mortgages. Lenders receive CRA credits [under the Community Reinvestment Act], and [immigrants] pay above market rate. So if you are in the lending business, it should be a no-brainer.” The Alliance hopes to have a loan pool of twenty-five million dollars, which would enable it to purchase about a hundred loans a year. A pool this size will encourage other investors to participate in this market in the future.

To tap the full market potential, federally-chartered agencies must come in and bring the secondary market for these products to scale. NATF and HNMA both are attempting to shift the market by proving that purchasing these loans can be profitable over the long term. Yet profitability alone likely will not shift the political thinking of those who oppose the loans on what they consider to be moral and legal grounds.