Seeking Racial Fairness in Mortgages

September 06, 1992|By MICHAEL A. FLETCHER

Across the country, blacks applying for home mortgages are more than twice as likely to be rejected as whites with similar incomes. In Baltimore, the situation is similar: A recent survey of six banks found rejection rates for blacks as much as five times greater than those for whites.

Some see that disparity as proof positive of raw racism and rampant redlining. Why else would blacks be rejected more often than their whites counterparts of similar, and even lesser incomes, as the mortgage data show? Why else would banks reject mortgage applications in black neighborhoods at rates as much as 3.9 times higher than in predominantly white areas?

Others -- bankers mostly -- say the lending gap merely reflects racism's effect on the economic position of blacks. They explain that blacks tend to have far less wealth, higher debt and shorter credit histories than whites with similar incomes. They say black families tend to have less money for down payments, and many fewer blacks than whites can look to a parent or rich uncle for financial help in buying a home.

Higher loan rejection rates are a logical outcome of that mix, bankers say.

Regardless of the cause, the mortgage disparity carries a high price for many blacks: deteriorating neighborhoods, depressed housing values, and simmering frustration for being locked out from the American dream.

"Whether these patterns are incidental or deliberate does not matter. What is crucial is that there is a clear pattern of mortgage discrimination that must be reversed," said U.S. Rep. Kweisi Mfume, D-7th, a member of the House banking committee. "This key to the stability and prosperity of any community."

For James McGee, a member of the Baltimore Unemployed Council, a group that has explored the mortgage rejection issue, the challenge is fundamental. "The banks have more or less a moral obligation to try to preserve some of the neighborhoods in Baltimore by making loans," he said.

Mr. Mfume, who testified at a recent hearing called by City Council member Sheila Dixon, D-4th, to explore the loan rejection gap, said banks must make radical changes if they are to fulfill their obligation to do the same level of business with the entire community.

For one, he said, banks must begin to see the value in inner city neighborhoods. Currently, assumptions by many banks tend to undervalue many black neighborhoods, he said. Those assumptions include pegging home values to the number of vacant properties in the area, depressing appraisals and leading to loan rejections. And that fuels the cycle of deterioration.

Also, Mr. Mfume said, banks must recognize the untapped business opportunity in mortgages under $100,000. Many institutions frown on small loans because they represent a lot of work for a relatively small, if secure, return. Overlooked, he said, is that people seeking small mortgages often look to buy homes for life. They don't trade up as much as more affluent folks, making the projected appreciation of a property less of an issue. Also, they tend not to default on their loans.

Finally, Mr. Mfume said, banks must re-examine the criteria used to evaluate whether an applicant is a good mortgage risk. In many poor communities, there are few bank branches, and people operate in a cash economy. They cash checks and buy money orders in check cashing stores. They may always pay their bills, but often have few of the credit experiences mortgage underwriters look for.

"In many ways, some of the loan criteria exacerbate the problem," Mr. Mfume says. "Banks for instance, might want to look at someone's rent payment record in doing an evaluation. . . . They have to find other ways to get a fix on whether a person is a good risk."

All of that may seem risky for banks, but reform advocates point out that few banks have gone down under the weight of bad home mortgage loans. Usually, it's high flying investments and speculative real estate loans to developers that run a bank into the ground.

Moreover, some banks already are changing their ways. Maryland National Bank, the state's largest, grants mortgages to blacks at about the same rate as it does to whites in Baltimore, according to an analysis by the Maryland Alliance for Responsible Investment, a group working with banks to help them meet community reinvestment obligations. A 1987 survey had found Maryland National to have one of the worst track records when it came to making home loans to blacks.

In the wake of that finding, Maryland National created a new community development office to targeting low- and moderate-income families. The bank also has made small annual grants to non-profit community organizations for housing counseling.

The bank found success making the type of loans to the group of people it had once frowned upon. Banking lobbyists in the state say other institutions should take similar steps.

"There is a relatively untapped market out there," said John B. Bowers Jr., executive vice president of the Maryland Bankers Association. "Just because somebody does not meet the old credit criteria does not mean he is a bad risk. [Banks] have to take a look and re-evaluate the process. Clearly, there are ways to lend in this market."

Michael Fletcher covers Baltimore city government for The Baltimore Sun.

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