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Banking on illegal immigrants
Banks are seeing an untapped resource in providing home loans to undocumented U.S. residents
August 8, 2005: 3:39 PM EDT
By Shaheen Pasha, CNN/Money staff writer

NEW YORK (CNN/Money) - The banking industry is opening its doors to a controversial new market: illegal immigrants.

Despite heated political debate in Washington over illegal immigration in the United States, an increasing number of banks are seeing an untapped resource for growing their own revenue stream and contend that providing undocumented residents with mortgages will help revitalize local communities.

It's a win-win situation, they say.

But skeptics worry about the message these home loans send to illegal immigrants: break our laws and we'll reward you with a home.

"It's institutionalizing illegality," said Marti Dinerstein, president of Immigration Matters, a New York-based think tank. "Now there's no distinction being made between the people that follow all the rules and those who break our laws by entering the country or overstaying their visas."

Dinerstein also worried that lack of knowledge on the part of illegal immigrants could pave the way for abuse in the form of predatory lending.

But advocates of the practice say the benefits outweigh any potential downside.

According to the Center for Immigration Studies, one million illegal immigrants cross the U.S. borders every year. About 500,000 illegal immigrants lose that status every year either by getting legitimate green cards or returning to their native countries. That leaves a 500,000 annual net increase of illegal immigrants a market that has unmet banking needs.

"This is a huge untapped market with people that live and work in this country and are capable of buying homes to realize the American dream," said Chan Peterson, executive vice president and head of community banking at Banco Popular, one of the earliest banks to enter this field.

He added that there's a common misperception that illegal immigrants will be more likely to default on their loans than a documented resident. But the company has found that there is no higher rate of default in this loan portfolio than any other market the company serves.

"There's a pride that comes with people moving from renting to owning and we've found that these borrowers are driven to hang on to their homes," Peterson said.

Bill Schumer, vice president of product development at Fifth Third Mortgage Co., a unit of Fifth Third Bancorp. (Research), said the company entered the marketplace due to the belief that providing these low-to-moderate income loans will help revitalize communities in the United States, as borrowers buy more run-down properties and rebuild.

He added that by introducing this segment of the population to home ownership education, they are also building a foundation to cross-sell their other products.

"We've been at this program for the last 8 or 9 months and 68 percent of these borrowers have established three or more banking services with us," he said.

While Schumer wasn't willing to disclose how many of mortgages the company provides, he said the product has been well received in the marketplace and is already 4 percent above the level the bank had targeted for the year. And it's growing.

That's not surprising, said Alenka Grealish, manager of the banking group at Celent, an independent research and consulting firm.

Grealish said while the mortgage banking business in the U.S. continues to be red hot, veterans know that it's a highly cyclical industry that moves with interest rate trends. She said that forward-looking banks are already considering how to grow their business when the pipeline of traditional mortgages begins to dry up.

"Illegal immigrants are here to stay and banks are recognizing that," she said. "If you do a niche market well and know how to price it, banks can have some attractive margins."

She added that while criticism is rampant, banks are careful to follow guidelines that the government already has in place.

Case in point: the government's issuance of individual taxpayer identification numbers, or ITINs.

ITINs are a nine-digit tax processing number issued by the Internal Revenue Service to individuals who are required to have a U.S. taxpayer identification number but who don't have, and aren't eligible to obtain, a social security number. Since the IRS doesn't require legal residency to obtain an ITIN, many illegal immigrants use this form of identification to pay U.S. taxes and buy homes.

"Illegal immigrants are a huge gray area and it becomes even more gray when you start issuing ITINs," Grealish said. "There's complicity already within the government in which they're saying that they're kind of fine with these people here as long as they pay their taxes."

The IRS for its part says that ITINs aren't valid for identification purposes outside of the tax system. But there are no explicit rules banning the use of ITINs in obtaining mortgages.

Banco Popular's Peterson added that it would be discriminatory to deny a loan based on an ITIN.

For now, community banks are leading the charge when it comes to providing home loans for illegal immigrants. Banking experts say that community banks often have the bilingual capabilities and are more in tune with local community needs and markets.

And larger banks are holding out for secondary markets such as Fannie Mae or Freddie Mac to agree to buy illegal immigrant mortgages from the banks thus lowering their risk.

Bank of America (Research), which accepts ITINs to open interest-bearing deposit accounts, currently isn't offering a mortgage product to this market but the banking giant is looking into it, said spokeswoman Julie Davis.

"Banks are counting on the fact that we do a lousy job with interior enforcement," said Celent's Grealish. "Once you're in the country and you haven't done anything wrong, the chances of being deported are very slim. Banks are banking on that."

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