Immigrant Policy Project

By David Lawson, NCSL
March 2003

Minorities accounted for 40 percent of net new homeowners during the past five years. Despite these recent gains, a substantial "homeownership gap" continues between white and minority households in the United States. More than 70 percent of white Americans own their own homes, compared to less than half of African Americans and Hispanic Americans. Homeownership is valued not only as a stabilizing factor for families and communities, but also for its contributions to the nation's economic stability through the housing sector.

According to the U.S. Department of Housing and Urban Development, the following factors or barriers have contributed to the homeownership gap:

Homeownership education and housing counseling is a key area for increasing minority homeownership according to the June 2002 White House Conference on Minority Homeownership: Blueprint for the American Dream. The report notes: "Education is especially important for immigrant families, who are often unfamiliar with America's homebuying process and the opportunity for long-term financing, and may face the additional hurdle of a language barrier." Other key areas are increasing the supply of affordable homes; giving families help with down payments; and improving mortgage lending by increasing funds for affordable loans and redoubling efforts to root out illegal discrimination, and cutting closing costs through federal regulatory reform.

This issue brief focuses on homeownership barriers as they affect minorities and immigrants and the use of homeownership education and housing counseling, in particular, financial literacy, to address the homeownership gap.

What is Financial Literacy?

Simply defined, financial literacy is familiarity with the money, banking, and credit system. Financially literate people know it is safer to keep their money in a bank, rather than in their home. They know where to go to apply for a loan, the power of credit, and how to establish a credit rating. While they may not know every detail of the home buying process, they know the basics and where to go to initiate the process. In general, financially literate people know how to best use their income to build wealth.

Immigrants face a learning curve with the U.S. banking system, with knowledge, familiarity and confidence that varies depending on country of origin, income, education, and personal experience. Some immigrants may operate in a cash economy, saving and paying cash (rather than using credit cards) for major purchases, resulting in a lack of credit history, and are therefore at a disadvantage in seeking loans or mortgages. Other immigrants may be simply unfamiliar or distrustful or unwilling to discuss financial matters with strangers.

The Culture and Knowledge Gap for Immigrants & Refugees

Recent studies have identified the lack of financial literacy as a significant problem for immigrants and refugees in the United States. Often, immigrants deal in informal cash economies and/or rely on ethnic savings and credit systems (such as the Korean kye or Mexican tanda, an informal 'round robin' system to pool savings for large purchases). In addition, by dealing primarily in cash, immigrants have become targets for muggers and burglars. Immigrants who have begun to navigate the U.S. financial system, such as by opening bank accounts, may still run into cultural or knowledge barriers later when they attempt to purchase a home due to the differences between the American system and their country of origin. For example, in Korea, homes are paid for in cash with very high down payments and loans are often only 20 percent of the home's value. Similarly, in Hong Kong, homebuyers typically put down 30 percent of the cost as a down payment. In Mexico, most citizens do not seek mortgages because the barriers to home ownership are so high. Instead, they "pay and build as you can", saving to buy land and then each piece of construction material.

 IDAs and Low-Cost Loans and Related Financial Literacy Requirements

Several public and private organizations have begun programs to help new Americans build wealth and buy their own homes. Two of the most common types of programs to help low-income consumers, a group in which many immigrants fall, are Individual Development Accounts (IDAs) and low-cost mortgage programs. An increasing number of these programs require participants to undergo some sort of financial literacy training. Given immigrants' tendency to be unfamiliar with the American financial system, these training courses have distinct benefits.

Aside from offering classes and materials in foreign languages, states primarily support financial literacy training efforts through funding. Although no state government specifically targets immigrants (singling out ethnic groups for services would be discriminatory), many states have taken steps to better serve new Americans. For instance, several states offer homeownership education materials in Spanish and can direct Spanish-speaking customers to courses conducted in their native tongue (for example, Pennsylvania offers counseling and training in both English and Spanish). Minnesota, responding to their sizable southeast Asian population, has developed programs for homebuyers who speak Hmong and Khmer.

Operating in a manner similar to 401(k)s or Individual Retirement Accounts, IDAs were created to help low-income individuals develop assets. At least 31 states have enacted IDA legislation. States can support IDAs through direct appropriations, tax credits for contributors to IDAs, and use of federal Community Development Block Grant and Temporary Assistance for Needy Families to match individual contributions to an IDA. IDA programs help low-income individuals save a portion of their income and offer a matching contribution. Participants can withdraw the funds without penalty for specific purposes, most frequently for mortgage down payments and higher education. The programs typically include a financial literacy component, requiring participants to take a certain number of hours of training about the American banking and mortgage system.

An IDA program for refugees was created by the Office of Refugee Resettlement (ORR) in the U.S. Department of Health and Human Services. This federal agency issues grants to local non-profit organizations to administer the accounts and to provide financial literacy training for recipients. (ORR, and its' state and private partners, aim to help newly-arriving refugees acculturate and become self-sufficient through a short-term, comprehensive set of social service and vocational programs.) For the IDA program, the non-profits can provide an account match of up to $2 for every customer dollar, and can contribute a total match of $2,000 per person or $4,000 per household. The funds accumulated in the IDAs may be used for homeownership or renovation, microenterprise capitalization, post-secondary education, vocational training and recertification, purchasing an automobile, and purchasing a computer. As of 2000, ORR's program had reached 19 states. While many of the grants have gone to non-profits in traditionally high-immigrant states such as California, Florida, New York and Texas, some states not known for high immigrant populations, such as Iowa, Kentucky, Ohio, and Wisconsin, have received some of the largest grants and, according to ORR, have some of the most successful programs.

The federal and state governments, as well as numerous private organizations, offer reduced-cost mortgage loans for people with low to moderate incomes. Throughout the 1960s, the federal government established programs to help families purchase their own homes, creating the Department of Housing and Urban Development (HUD) and organizations such as Fannie Mae and Freddie Mac. The Community Reinvestment Act of 1977 (CRA) furthered these efforts by forcing private lenders to extend their services to low-income neighborhoods that they had previously avoided. While HUD had always had legislative authority to provide or fund counseling to low- and moderate-income homebuyers, CRA spawned a homeownership education explosion. Concerned that loans to lower-income individuals carried substantially more risk, lenders decided to provide training to their customers to keep their default rates down.

Today, borrowers have a variety of homeownership education services from public and private providers at their disposal. The U.S. Department of Housing and Urban Development provided $20 million in grants to state, local, and private organizations to conduct homeownership counseling. Most states also operate some sort of homeownership training program, often using money from flexible federal grants, such as the Community Development Block Grant (CDBG) and Temporary Assistance for Needy Families (TANF). Lenders and non-profit organizations also pour resources into funding and providing such education.

The vast majority of homeownership education training is provided by private organizations. For the most part, state housing finance agencies partner with local groups to provide training services. Frequently, state housing finance agencies provide curricula, material, and training to groups who aim to educate homebuyers. They then refer potential consumers to the local agencies in their area for the actual classes. In some states, like Alaska, the state housing finance agency actually provides the instruction. Given the low population density of Alaska, the Alaska Housing Finance Corporation decided to offer homeownership training directly.

Under the assumption that homeownership education drives default rates down, many loan programs require recipients to complete pre-purchase classes. Many state and local governments have this mandatory education policy, such as the state of Maryland's recent regulation requiring borrowers to meet local counseling requirements for state loan programs, if the local requisites are more stringent. Private lenders have also added homeownership training to their loan requirements.

Government programs do not specifically target immigrants, with the exception of ORR's refugee IDA program. However, many states and the federal government have taken steps to better serve new Americans. For instance, several states offer homeownership education materials in Spanish and can point Spanish-speaking customers to courses conducted in their native tongue. Minnesota goes further, pointing homebuyers who speak Hmong and Khmer to programs taught in those languages.

The State of New York Mortgage Agency, (SONYMA) has also supported efforts to offer homeownership education to immigrants. For example, SONYMA works with the non-profit Asian Americans for Equality to provide home ownership education and a number of loan packages targeting low-income borrowers. The nonprofit offers homeownership counseling classes in Cantonese, Mandarin, Fukinese, Korean, Vietnamese, Hindi, Urdu, Khmer, Japanese, and Spanish.

Language Access.

Federal civil rights law prohibits discrimination on the basis of race, color, or national origin. New federal guidances have been issued to recipients of federal funds reminding them of their obligation to provide meaningful access to their services for limited-English proficient individuals. The U.S. Department of Health and Human Services and the Housing and Urban Development (HUD), the two agencies that support IDAs and low-cost home loans, have not yet finalized their guidance.

However, HUD does provide funds to state housing finance agencies for general operations and offers grants to public and private organizations to provide funding. HUD also offers referrals to training organizations, and endorses specific programs that meet its requirements. While HUD has yet to release its LEP guidance, it does offer some materials in Spanish. Additionally, the aforementioned programs in Minnesota and New York are among the recipients of HUD grants and appear on the list of HUD-approved homeownership trainers.

Benefits to Immigrants and the Local Community ---An Example from Arkansas

Financial literacy education helps not only the immigrants who receive it, but it also benefits the local community. A training program run by Arvest Bank in Rogers, Arkansas offers an illustrative example of the economic benefits accruing to the community at large. In the mid-1990s, the Arvest Bank in Rogers decided to examine how well they were serving the large population of immigrant residents. Noting that they had few Mexican clients despite the large community living in Rogers, the bank proposed a financial literacy training program to the poultry plants just outside the town that employed a large segment of the area Mexicans. Faced with a high turnover rate and the cost of $3,000 to $4,000 per employee on recruitment and training, the plants had been considering relocation. The bank hoped that the training program would create a more stable workforce, which would help convince the plants to remain and retain the millions in revenues for the local economy.

Georgetown University found that a particularly innovative and effective practice to improve financial literacy was that the poultry plants agreed to offer classroom space on-site and to pay their workers (immigrants and citizens alike) to take the bank's classes on the basics of the American banking system and homeownership. The plant's support of paid work time and classroom demonstrated their support of the workers and their families.

In addition to the training program at the plant, Arvest Bank created special loans to help immigrants build their credit history. The bank issued a small loan to the individual, who reinvested the loan in a Certificate of Deposit at the bank, and then made monthly payments repaying the secured loan to establish a credit-history.

The training and loan program has been an enormous success for Arvest Bank, the poultry processing industry, and the town. Since the beginning of the program, the bank has closed on 586 home loans to Hispanics (without a single default over the last eight years) and generated an estimated $80 million in business. The poultry processing plants saw their employee turnover rates drop as their workforce planted roots in Rogers (one plant saw its turnover rate drop from 200 to 15 per cent from 1992-1999). The plants remain in the Rogers area, keeping millions of dollars in business and taxes in the region.

For More Information: Center for Social Development, http://gwbweb.wustl.edu/csd/ Corporation for Economic Development, Federal and State IDA Policy Overview, June, 2000. http://www.cfed.org/home.m University Joint Center for Housing Studies. The State of the Nation's Housing, June 2002, available on the Fannie Mae Foundation's website/Knowledgeplex: http://www.knowledgeplex.org/kp/report/report/relfiles/jchs_0624_son2002.pdf Kearns, Monica and Andrea Wilkins, "Fighting Poverty with Individual Development Accounts" NCSL Legisbrief (Denver: National Conference of State Legislatures), Vol. 11, No. 7, February, 2003. Let Everyone Participate Web Site (federal website on language access). http://www.lep.gov/ Listokin, David and Listokin, Barbara. "Asian Americans for Equality: A Case Study of Strategies for Expanding Immigrant Homeownership," Housing Policy and Debate, 12(1). Fannie Mae Foundation, 2001. http://www.knowledgeplex.org/kp/text_document_summary/scholarly_article/relfiles/hpd_1201_listokin.pdf Office of Refugee Resettlement, U.S. Department of Health & Human Services. IDA Program Web Site: http://www.acf.dhhs.gov/programs/orr/programs/individual.htm Rist, Carl. "Self-Sufficiency through Individual Development Accounts (IDAs): What's the Role for State Policy?" Fannie Mae Foundation: Housing Facts & Findings, Vol. 4, Issue 1, April 2002. www.knowledgeplex.com Schoenholtz, Andrew and Kristin Stanton Jones. Reaching Emerging and Underserved Home Ownership Markets. Georgetown University: Washington, D.C. (forthcoming). Slide presentation at http://www.liscnet.org/whatwedo/programs/homeownership/shtmls/ReachingUnderserved.pres.ppt Suro, Roberto, Bendixen, Sergio, Lowell, B. Lindsey, and Benavides, Dulce. "Billions in Motion: Latino Immigrants, Remittances and Banking," Pew Hispanic Center and the Multilateral Investment Fund, November 22, 2002. U.S. Department of Housing and Urban Development. Economic Benefits of Increasing Minority Homeownership at http://www.hud.gov/initiatives/blueprint/econreport-101502.pdf U.S. Department of Housing and Urban Development. White House Conference on Minority Homeownership: Blueprint for the American Dream. http://www.hud.gov/initiatives/blueprint/ and http://www.hud.gov/news/releasedocs/blueprint.pdf

This publication was made possible by the generous support of the Fannie Mae Foundation.

For additional information, please contact Ann Morse, Program Director of NCSL's Immigrant Policy Project.