Note: Mary Houghton is president of Shorebank Corporation, the holding company that owns South Shore Bank of Chicago.
My colleagues and I commend The Atlanta Journal-Constitution for the effective attention it is drawing to the issue of bank financing in minority communities.
Recent commitments by nine Atlanta banks of $65 million for the funding of new home loan programs is a very commendable response by the banking community. We trust that they will learn, as we have, that there are many credit-worthy customers in minority neighborhoods with long histories of employment and residency.
My small bank began making real estate and commercial loans available in a beautiful, but redlined, Chicago neighborhood 15 years ago. South Shore is a community with a superior housing stock, whose only misfortune was that it was suffering from the disinvestment that accompanies rapid racial change. Not only was our own real estate department surprised by the number of strong borrowers buying well- maintained homes who knocked on the bank's door, but soon two other savings and loan associations "discovered" South Shore as well.
It is not easy for conventional banking institutions to play an effective role in low-and moderate-income minority communities. White bankers are more comfortable dealing with whites than blacks. In addition, they work for shareholders who expect them to maximize profits.
They can do this best by seeking the largest, lowest-risk loans. Clearly, it is easier and more profitable to make a $200,000 mortgage loan in an appreciating suburb than four loans of $50,000 each to working-class blacks in a city neighborhood.
The problems of unfamiliarity with borrowers and their communities get even thornier when the transactions are more complicated than a home mortgage loan. Professional risk assessment of a small business expansion or an apartment building purchase by a conventional lender must overcome even more obstacles. Not only must the banker decide if the borrower will be able to make the monthly payment over the long term and if the property will hold its value, he must also analyze markets and management capacity, working with a clientele that is unfamiliar and with a transaction that is smaller than the banker's other alternatives.
It may be that it takes specialized intermediaries or subsidization of the transaction costs (rather than the interest rate) for these customers to get access to the large funding resources of the conventional banking system. It is our experience in Chicago (documented by University of Chicago sociologist Richard Taub in a book released this March) that public funding of large, visible projects and a professional staff of development bankers and developers have been necessary to make a significant impact in our targeted, mixed-income neighborhood.
The investment process takes time. But our rewards have been great: creation of an industry of black apartment building operators who have rehabilitated more than 4,000 housing units with conventional financing.
These loans are very attractive assets in the bank's portfolio because their yields are high and losses are low. Even those loans that take more work than may be profitable, namely small-business loans, can be structured by professionals so that loss rates are manageable.
As bankers who specialize in neighborhood development in Chicago, we suspect that bankers in Atlanta will discover that there are neglected, profitable markets in black areas of the city. We hope that this round of financing is successful, and we urge them to consider as a second round putting their smartest loan officers to work on the tough business of professional, market-rate lending to the city's black investors and entrepreneurs.
If they are willing to do this, the public and philanthropic sectors might consider working in partnership with the bankers to cover the extra transaction costs of working in low-and moderate-income communities.
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