Here’s a conundrum the mortgage industry faces as it hopes to return soon to some version of its pre-collapse vigor.

Minorities are expected to make up nearly half of the first-time homebuyer market in the next ten years. Yet mortgage lending to minorities has dropped spectacularly since the mortgage bust, declining by 360 basis points over the last 10 years, 25% more than for whites.

The decline has been most stark in the years since the mortgage blowout, obviously. The minority homeownership rate has declined 320 basis points in the last five years, a dramatic drop of 64 basis points a year, according to the latest “State of the Nation’s Housing” report by the Harvard Joint Center for Housing Studies.

 Enlarge This ImageFor the decade of 2004-2013, the most shocking drop in homeownership rates has been for blacks. That rate has fallen by 590 basis points, from 49.7% in 2004 to 43.8% last year. That’s more than double the falloff in the rate for whites.

As the report notes, “By 2025, minorities will make up 36% of all US households and 46% of those aged 25-34, thus accounting for nearly half of the typical first-time homebuyer market.”

So this is what mortgage lenders will have to figure out. How will origination volumes prosper in the face of a death spiral in lending to half their target base?

Absent a booming overall economy, which few foresee in the near term, the answer is stark but inevitable.

Credit standards will have to be lowered.

The report puts it this way: “their [minorities'] demand for owner-occupied housing will depend in large measure on the availability of mortgage financing that accommodates their limited resources.”

The scope of that challenge is underlined by the report’s table on “severely cost-burdened households” (that’s those paying more than 50% of their income for housing).

The percentage of blacks in this category is double the percentage for whites. More than a quarter of black families are severely cost-burdened, and Hispanics and Asians are not far behind. Even more fall into the bucket of those who spend more than 30% of income for housing, the accepted highest “normal” standard.

The collapse erased some hard-earned gains for minority owners.

For the five years from 2004 to 2008, their ownership rates cracked the 50% mark for the first time. (They reached a high of 51.3% in 2005 and 2006.) By contrast, in 1995, minorities were homeowners at a rate of only 43.7%.

In 2013, just the “Asian/Other” category was above 50%, at 56.9%, second only to the white ownership rate of 73.3%. (The “others” refer to American Indians, Alaska Natives, Native Hawaiians, and Native Pacific Islanders from Guam and American Samoa, who number more than five million in aggregate but don’t rate their own category in the mind of the Census Bureau.)

Looking at the overall housing market, the Harvard report tries to see the silver lining (current household formation rates would “provide a strong lift to the rental and starter home markets”) but is more sharply focused on the headwinds the industry is facing. They include:

*Doing the stretch. “Higher home prices and interest rates have made homeownership more of a financial stretch for many households.” The report points out monthly payments for median-priced homes “jumped 23% in just one year,” with a 10% climb in median home prices and a nearly 100 basis point jump in interest rates in 2013.

*Not in the money. “Between 2007 and 2012, real median household incomes dropped eight percent among 25-34 year olds and seven percent among 35-44 year olds.” Incomes in those categories climbed during the mortgage boom and fell in the bust. Recent signs were a little more encouraging, with 2012 incomes up 1.2% for the 35-44 age bracket and down just 30 basis points for those between 25 and 34.

*Til debt do us part. The report quantifies the heroic (so to speak) increase in student debt in recent years. Debt-burdened young adults are much less viable mortgage candidates, and for much smaller houses. “Between 2001 and 2010, the share of households aged 25-34 with student loan debt soared from 26% to 39%, with the median amount rising from $10,000 to $15,000.” More scarily, the percentage of young adults in that category with $50,000 or more in student debt tripled.

*The No Loan stamp. Lenders have dusted off their “No Loan” stamps and made it tough to qualify for a mortgage. “The average [credit] score for Fannie Mae-backed securities rose from 694 in 2007 to 751 in 2013,” the report says. And Federal Housing Administration scores rose from 640 to 692 during the same period.

Harvard’s conclusion: “An easing of credit constraints will be one of the most important determinants of how strongly the national homeownership rate rebounds in the coming years.”

That means unless the industry is content to be a boutique player with a hugely smaller pool of potential borrowers, it had better emulate the Fed and ease on down the road.

Mark Fogarty, Editor at Large at National Mortgage News, brings more than 30 years of experience to his analyses of the mortgage market. The views expressed are his own.