Real Estate Rout: Ownership dreams risk being deferred

African-Americans who dream of owning a home or commercial property are finding it harder to realize that dream as soaring mortgage delinquencies and foreclosures force air out of the real estate balloon. This balloon had been flying high for some five years, until last year. According to the Mortgage Bankers Association, late mortgage payments and foreclosures reached record highs in the last quarter of 2006, signaling a deflating real estate sector.

The rout in the home buyers market has continued into 2007, prompting fears that African-Americans and those in a weak financial position may have to defer or scrap their buying plans.

Still, an appreciable number of African-Americans and other minorities in the New York tri-state region took advantage of the commercial and residential real estate boom.?

?A number of minorities were able to cash in and capitalize on the equity they were able to get out of their homes on the value they got over the last five years,? says Bill Collins, regional vice president for Region II of the National Association of Real Estate Brokers, the trade group for minorities in the realty profession. Buyers also were able to acquire properties as a result of the financial products offered by lenders, says Collins, who oversees the New York and New Jersey markets.

African-American developers also cashed in on the boom, notes Eugene Giscombe, a member of New York?s Greater Harlem Real Estate Board and a specialist in commercial real estate since 1972. Harlem developers such as Walter Edwards and Carlton Brown, chief executive officer and chief operating officer, respectively, of Full Spectrum of New York L.L.C., and Joe Holland, president of Uptown Partners, built market-rate condominiums, Giscombe says.

Condos and cooperatives are especially popular among younger professionals who are opting to buy homes rather than rent, says Lois Manning, president of the Greater Harlem Real Estate Board. Indeed, African-Americans have reached ?a remarkable level of achievement in home ownership,? she says, citing U.S. Census figures that show nearly 48 percent of African-American households owning their own home.

Commendable though that figure is, it pales beside the 72 percent home ownership among whites. Moreover, it represents a drop in African-American home ownership from the historic high of nearly 50 percent in 2004.

Mortgage Traps
With their lack of knowledge and fear or inability to navigate the labyrinth of financial institutions? rules, regulations and practices, many African-Americans were unable to take advantage of the boom. Many were sucked into mortgage traps by such predatory lending schemes as ?reverse? mortgages and ?80/20? mortgages, only to find themselves responsible for repaying huge sums of money at high interest rates. The subsequent slew of defaults and foreclosures has wreaked havoc in the real estate and securities markets.?

In an 80/20 mortgage, the lender gives a mortgage to a borrower without requiring a down payment. Essentially, the lender gives two loans totaling 100 percent of the purchase price: a first mortgage at 80 percent of the purchase price and a second mortgage at the remaining 20 percent. Since mortgage insurance is almost always required for less than 20 percent down, the 80/20 scheme allows borrowers to avoid that expense.

?Any loan with a greater value of 80 percent of the purchase price needs mortgage insurance to protect against borrower?s default. This means that if a borrower defaults on a loan with a 90 percent loan-to-value ratio, the bank would be at risk for only 10 percent of the loss,? explains mortgage banker Emerson Atkins, former president of the Bedford Stuyvesant Real Estate Board in Brooklyn, N.Y. ?That?s why mortgage insurance was created and provided by the Federal Housing Authority, Veterans Administration, FannieMae for residential properties and FreddieMac for commercial properties?to induce the lender to provide money?allowing lenders to lend money without the use of private mortgage insurance but supported by the government,? he says.

Under ?reverse mortgage? terms, those who wish to pass on the equity in their home to their children may not be able to do so, Manning says. Available only to individuals 62 years old and older, a reverse mortgage provides the equity in a property as one lump sum or as multiple payments to the owner. The obligation to repay the loan is deferred until the owner either dies or the home is sold. Meanwhile, the interest keeps piling up and is added to the lien on the property.

?If [home owners] haven?t made sufficient provisions in their negotiations, then there?s a greater chance of them not having anything to pass on,? Manning says. She advises anyone considering a reverse mortgage to first consult either a U.S. Department of Housing and Urban Development counselor, or an independent reverse mortgage counselor.???

Commercial Challenge
African-Americans have not gained as much ground in ownership of commercial properties as in residential ownership. For every 100 residential brokers, Giscombe notes, there is one commercial broker even though commercial brokers on average earn commissions of $80,000 to $90,000 per transaction compared to 6 percent of the property value for residential brokers.

?African-Americans haven?t gained ground because they lacked the ability to pay for and run commercial properties. The average down payment for commercial properties is higher, a minimum of 25 percent to 30 percent,? says Keith Tinker, founder of Tinker Real Estate in Hartford, Conn. The acquisition price is also higher, he says. On a property valued at $1.5 million, for example, the purchaser is required not only to come up with the down payment, but also to show the lending institution that they are capable of handling the operating costs of the building.

Moreover, commercial lenders have different pro forma requirements from residential lenders, which appear to be biased in favor of Caucasian borrowers, Tinker says. And U.S. Small Business Administration programs aimed at assisting minority entrepreneurs to develop and expand their businesses are not forthcoming enough, he says. ?They are not as aggressive and willing to help,? Tinker says.

Small wonder that there is a very short list of African-American commercial real estate firms in New York, Giscombe says. ?This is one of the last fields where Blacks have got to get in. It is the lack of access to major corporations and chain retailers [that keeps Blacks out],? he says.
Edwards and Holland were able to work with major white builders because they had a base knowledge of real estate and construction, he says. ?Other Black people are not aggressive enough. Real estate is a real aggressive business. No one gives another a break and those interested need to learn the business, take courses, and then they could invite others to join forces with them,? he says.

Tinker agrees with Giscombe?s assessment, stressing that African-Americans can impact the commercial market by pooling their resources and demonstrating to lenders a group, rather than an individual, effort. ?If we?re going to overcome the differences in commercial acquisition, we need more aggressive cooperation among minority commercial interest groups. Two or three people can band together to buy a building,? Tinker says.

Educating Minorities
The National Association of Real Estate Brokers, together with HUD, conducts training courses nationwide to educate minorities about home ownership and avoiding foreclosures. The National Urban League unveiled a six-point ?Homebuyer?s Bill of Rights? to encourage home ownership, especially among African-Americans. It establishes the right to:

? Save for home ownership free of taxes

? High-quality home ownership

? Truth and transparency in credit reporting

? Affordable housing for working

? Be free from predatory lending

? Aggressive enforcement of fair
housing laws.

The hope of is to keep alive the dreams of property ownership that risk remaining unfulfilled or being snatched away if the current rout in the market continues. ?Greater home ownership means greater personal wealth, which, in turn, means greater economic empowerment, the civil right of the 21st century,? Urban League president Marc Morial said at the Bill of Rights unveiling.

Such efforts are timely. ?There is a new generation of African-Americans looking for more than what is tied to a paycheck. Instead, they are looking to greater financial growth and are not afraid to go out and take chances or risks in real estate,? Giscombe says.