Note: George J. Benston is the John H. Harland professor of finance, accounting and economics at Emory University.
The charge that banks and savings and loans institutions won't grant mortgages on properties in some areas has become a big issue in Atlanta. But allegations of redlining are an old issue for many other cities.
Back in the early 1970s, community groups saw their neighborhoods deteriorating. They believed the banks were at fault. So they went down to the courthouses and painstakingly recorded the amounts of mortgages made by banks and savings and loans in various neighborhoods. Like the findings published recently in The Atlanta Journal-Constitution, the data showed that these institutions made relatively few mortgage loans in the central cities and apparently favored the suburbs. Because of this apparent bias by bankers, the groups charged, the older areas had declined.
But looking at the amounts of mortgage money lent to homebuyers by census tract, as the Journal-Constitution did, cannot provide much information for two important reasons.
First, these data include only mortgages made by certain Atlanta banks. Homebuyers and owners in the allegedly under-served areas may be getting funds from other institutions. Under "mortgages," the Southern Bell Yellow Pages lists 13 commercial banks, 18 savings banks and savings and loans, and 417 mortgage companies. An additional 70 lenders (excluding foreign institutions) are listed under "banks." Thus about 518 companies offer mortgages in the Atlanta area. Yet only 101 of these report data under the Home Mortgage Disclosure Act, and only 14 are listed in the May 1 Journal-Constitution article on banks' home lending practices.
Second, there is no reason to conclude from the census tract data that the Atlanta banks criticized are not providing all the funds demanded from them by qualified borrowers. These banks may have made relatively fewer mortgages in predominantly black neighborhoods because other lenders served the people there better in terms of prices charged, services provided or type of mortgage offered. In particular, mortgage companies rather than banks specialize in making low down payment, FHA-insured mortgages. These mortgages tend to be demanded by people with less wealth, and blacks tend to be less wealthy than whites, all other things being equal.
How, then, can we tell if there is unfair discrimination against older neighborhoods or black borrowers? One way is to look at the prices charged for the loans they received, compared to the prices charged to other borrowers. This comparison has been made for several cities where community groups accused banks of redlining, including New York; Miami; San Antonio, Texas; Cincinnati; Nashville, Tenn.; Indianapolis; Toledo, Ohio; Rochester, N.Y.; and Oakland, Calif. (A colleague and I did four of the studies.)
In each of these cities, researchers worked from samples ranging from more than 100 to almost 2,000 loans. They compared the mortgage terms -- interest rates and points, down payment and maturity -- in the areas alleged to have been redlined with the terms in areas said to have been favored. For these comparisons, the types of properties, the borrowers' incomes and any other non-racial or non-geographic variables were accounted for statistically.
No significant difference in mortgage terms was found, with one exception: The maturities of mortgages made in some central-city areas were shorter than those of mortgages made on suburban properties. But the pattern of shorter maturities was the same for FHA mortgages as for conventional mortgages. So, if this is taken as a sign of redlining, the U.S. government must "redline" in the same way as do banks. As redlining was explicitly against FHA policy during the period studied, the shorter maturities instead probably reflected the greater risk that the central-city properties would lose value.
Under-appraisals of properties in older or black neighborhoods might be another way that lenders discourage potential borrowers. This possibility was studied in Miami, San Antonio, Toledo, and five New York cities -- Syracuse, Buffalo, Albany, Rochester and New York. No evidence of under-appraisals was found.
A colleague and I also studied the availability of home improvement loans in Rochester, Cincinnati, Nashville and Indianapolis. Homeowners found no problem in getting funds that were related to the area in which their home was located. Furthermore, there was no area-related difference in the price they paid for these loans.
But these studies only measure the prices charged for mortgages that actually were made. What about redlining in the form of banks denying applications made by blacks or by people who want to buy houses in older areas? This possibility also was studied with data from 10 cities. One researcher found somewhat higher denial rates for blacks (but not in allegedly redlined neighborhoods) in Albany, Rochester, Syracuse, Buffalo and New York. Other researchers found no such evidence in Miami, San Antonio, Toledo, St. Louis and Columbia, S.C.
What about the possibility of lenders discouraging minorities, or people wanting to buy property in certain areas, from ever filing applications? This possibility was studied in two ways.
Researchers in St. Louis interviewed 104 community leaders, particularly those who had charged banks with redlining. They asked these leaders to identify specific persons who had been unable to get loans. After repeated requests, they were given seven names. Two could not be found, four denied they had had a problem, and the seventh (who got financing elsewhere) appeared to have not met the bank's credit standards.
A colleague and I took a second approach. We interviewed homeowners in the allegedly redlined areas of Rochester, Cincinnati, Nashville and Indianapolis. We reasoned that the people who would know best about potential homebuyers who could not get mortgages would be the homeowners who tried unsuccessfully to sell their homes. Of the 235 unsuccessful home sellers interviewed, 33 (14 percent) indicated that potential buyers had problems getting loans. But only 3 of these (1 percent) said that it might have something to do with the area of the house. None mentioned the race of the potential buyer, even when asked.
In summary, none of the studies of 14 cities found evidence of redlining by area of any sort, and one researcher found some weak evidence of a greater denial of mortgage applications by blacks in four New York cities that is contradicted by evidence from five other cities.
These findings should not be surprising. As noted above, dozens of companies in most cities (hundreds in Atlanta) offer mortgages and home improvement loans to the public. A bank that discriminates simply because of the area of the property or the race of the borrower gives up business to other lenders. The people who suffer are not the borrowers -- they have many alternatives -- but the banks' stockholders.
Why is it, then, that banks are charged with redlining by community leaders?
Chartered financial institutions make very attractive targets. They are regulated by the federal and state governments, and they and their customers often depend on city services. Therefore they are susceptible to political pressure. Furthermore, they appear to control a great many resources that can be directed in alternative ways. And since they often characterize themselves as serving the public, why should they not be required to serve a particular neighborhood or group?
The problem is that a program of forced lending by banks to particular neighborhoods or people is likely to do more harm than good, even to those it is intended to help.
Loans at below-market interest rates that are tied to properties in particular areas tend to benefit the owners of those properties, not the people who buy them. If a property owner can sell his house with a lower-cost mortgage, the property is worth more and its price will go up. Those who get the subsidized mortgages may be encouraged to buy houses they cannot afford. There is no reason to believe that qualified homebuyers and owners have any problem now in getting funds to buy and improve homes. Therefore, if loans are made to people who otherwise couldn't qualify, they are likely to get into financial difficulties.
If the city compensates banks for making such loans by depositing its funds with these banks or by doing other favors for them, it will be doing soat a disg uised cost to the taxpayers. If the banks absorb the cost, they will not be serving their stockholders. Or, the banks might go along with the program to avoid other costs, but then try to get out of the neighborhoods where they face pressure to make unprofitable loans. The result will be a reduction in the banking services that poorer people need the most - checking, convenient savings and consumer loans.
In short, there still is no such thing as a free lunch. Unless valid research shows that Atlanta is experiencing restrictive, venal behavior by banks, unlike all the cities already studied, only damage to the general public can come from interfering with the mortgage market.
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