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Home Loans to Illegal Immigrants Sturdy But Show Some Cracks

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By Miriam Jordan, The Wall Street Journal Online

RISMEDIA, Oct. 15, 2007-Despite the downturn of the mortgage market, a type of home loan has remained surprisingly sturdy: one extended to illegal immigrants.

Now, the question is whether these loans will continue to hold up. A number of factors — including a possible government crackdown on illegal workers and a slowdown in job prospects for undocumented laborers — threaten the ability of these borrowers to keep paying. And there are signs of a slowdown as some lenders have raised the interest rates they charge because of the recent mayhem in the credit markets.

Known as ITIN mortgages because applicants must have an individual taxpayer identification number, the fixed-rate loans are designed for immigrants who can prove they are creditworthy and pay taxes even though they don’t have legal permanent residency in the U.S.

The mortgages represent a fraction of the $2.8 trillion mortgage market. But they are a bright spot in today’s gloomy mortgage industry.

For loans more than 90 days in arrears, ITIN mortgages have a delinquency rate of about 0.5%, according to independent estimates. That compares with 1% for prime mortgages and 9.3% for subprime mortgages extended to those with spotty credit histories.

Many lenders who have sought this business remain bullish.

“Our default level is almost zero,” says Scott Hastings, director of marketing for Citizens Home Loan Inc., a Charlotte, N.C.-based lender that is active in 33 states. The bank has been originating ITIN mortgages for almost two years, and the loans now make up about 20% of the institution’s mortgage business. “It’s an absolutely promising market. These Hispanic families will pay their mortgage before anything else.”

Undocumented workers normally use an invalid Social Security number to obtain work. But they can pay taxes with a nine-digit alternative number that the Internal Revenue Service started issuing in 1997 to foreigners who aren’t eligible for a Social Security number.

The objective is to encourage all workers in the U.S. to file an income-tax return, regardless of immigration status. Banks, which normally use Social Security numbers to report income to the government, began accepting the individual taxpayer identification number from mortgage applicants in 2000.

ITIN-mortgage applicants are largely blue-collar, illegal-immigrant workers with only modest incomes. But they undergo more scrutiny — and provide more documentation — than candidates for stated-income mortgages and other subprime loans, for example. Most banks also ask applicants to show they have been filing taxes — with an ITIN — for at least two years.

Checking the Rent Bill

In evaluating applicants, banks review utility, rent and cell phone bills as well as receipts for money sent to relatives abroad. Operating like micro-credit lenders in the developing world, some banks even check a family’s running tab at a Latino neighborhood grocery.

“They’re evaluated with alternative criteria, but they are fixed-rate, fully underwritten mortgages,” says Michael Zimmerman, vice president for investor relations at MGIC Investment Corp., the Milwaukee-based mortgage insurer. “Their performance reflects that,” he says.

Still, until recently, ITIN mortgages couldn’t be sold on the secondary market. Fannie Mae and Freddie Mac, for instance, don’t deal in loans for illegal immigrants as a matter of policy. That forced banks to hold the loans in their portfolios.

“There was a bottleneck in meeting demand for ITIN mortgages because there weren’t folks willing to hold the paper,” says David Flores, chief executive of Nuestro Banco, a new bank in Raleigh, N.C., that caters to Hispanics and has begun offering ITIN mortgages.

‘Hannie Mae’

A few months ago, Hispanic National Mortgage Association, a privately held company nicknamed “Hannie Mae,” began buying ITIN mortgages from lenders. Once it has bought the loans, HNMA packages them into securities for investors. HNMA, which is based in San Diego, puts the ITIN mortgage market potential at $85 billion. But it estimates that the niche market has generated only $2 billion in loans overall because relatively few banks offer them.

The company has devised an automated underwriting system to help lenders evaluate ITIN borrowers. For example, its system enables banks to take into account secondary cash income, such as free-lance work performed on the side, as well as nontraditional households, where an extended family pools resources and income.

Banks in the Midwest have been the most aggressive in offering ITIN loans, following an initiative by the Federal Deposit Insurance Corp. to encourage banks in Chicago to lend to immigrants, regardless of their immigration status.

But the advent of the secondary market and the strong performance of ITIN mortgages have attracted more banks across the country. Currently, Illinois, Georgia, Indiana, Wisconsin and Texas are the top producers of ITIN mortgages, accounting for about 70% of the volume insured by MGIC.

Despite the high-yield potential of ITIN mortgages, the majority of players in the ITIN-mortgage segment are small banks rather than large national institutions. Concern over the controversy that can erupt over serving the illegal-immigrant community is widely regarded as preventing big banks interested in the Hispanic market from joining the fray. Wells Fargo & Co., for example, launched a pilot ITIN-mortgage program in southern California in December 2005, but hasn’t expanded it. A representative of the bank declined to give a reason.

Nerves for Banks

A Department of Homeland Security plan to crack down on employers of illegal immigrants is giving some banks that issue ITIN mortgages the jitters. The new policy, which has been delayed by a court challenge, would force employers to terminate workers whose Social Security numbers and names don’t match. Those that don’t comply would face stiff penalties or criminal prosecution.

Only one of 120 homes financed by Mitchell Bank in Milwaukee, an ITIN-mortgage pioneer, has gone into foreclosure in seven years. But, “if these immigrants start to lose their jobs, they may have trouble paying their loans,” says James Mahoney, chairman of Mitchell Bank. “That would severely hurt the bank.”

Last month, the bank sent a letter to ITIN borrowers, encouraging them to contact the bank in the event that they have difficulty making payments. “We want them to know we want to work with them, if they have problems,” says Mr. Mahoney, whose bank tends to hold the mortgages in its own portfolio. “We’re in this together.”

Still, the tiny ITIN market hasn’t been immune to the subprime-mortgage crisis that has battered investor confidence and generated a liquidity crunch. In the spring, HNMA’s interest rate for a 30-year fixed ITIN loan hovered around 8%. In recent days, that rate has reached 10%, according to the company’s lender partners, which are the banks that originate the loans.

“There is little appetite to take on what appears to be a risky asset,” says Leonardo Simpser, HNMA’s managing director. But, “the reality is that their performance is nothing like subprime.”

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