James Gray is black and he sells real estate for Century 21 on Cascade Road in southwest Atlanta, an area that includes some of the richest black neighborhoods in Atlanta, including the mayor's.
"Banks and savings and loans: We don't use them," Gray said. "First of all, they don't solicit us. Banks and savings and loans do not have loan officers out looking for business. They don't solicit in white areas, either."
But they do. Loan originators from banks and savings and loans "come by every day" at the Century 21 office in Alpharetta, said broker Richard Blalock. He is white, and Alpharetta is almost entirely white.
Where the banks look for business is one of many factors that help explain the results of an Atlanta Journal-Constitution study of lending. The study found that Atlanta's banks and savings and loan associations rarely make home loans in black and integrated areas, even the highest-income black areas.
Some other possible explanations of the study results:
-- Most black Atlantans live on the Southside. The Southside mortgage office for Citizens and Southern Bank (C&S) is in Fayetteville -- 20 miles south of Atlanta. The Southside mortgage offices for Trust Company Bank and First Atlanta are also south of the Perimeter. These three banks, the largest in Georgia, take applications only at the mortgage offices, not at branch banks.
-- Several banks have closed branches in black and integrated areas. In 1986, Trust Company closed its branch on Wesley Chapel Road after the area shifted from white to black; in Belvedere, which was becoming blacker; and in black East Atlanta, although it kept open 23 branches in white areas with less in deposits. Bank South replaced its South DeKalb branch with an automatic teller machine.
-- Many banks keep their branches in black and integrated areas open less often than in white areas. Bank South, for example, advertises that it is open on Saturday to give "the personal attention you deserve." Bank South is open on Saturday in Alpharetta and Snellville, but not in East Atlanta or the West End.
-- Some Atlanta banks won't consider home-loan applications for loans of less than $40,000. A lot of homes on the Southside sell for less.
Courts have found similar practices in other cities to be violations of the federal Fair Housing Act and the Equal Credit Opportunity Act, which forbid discrimination in lending based on race or color. Courts have said discriminatory effect, not just discriminatory intent, is enough to prove a violation.
`It's institutional racism'
Atlanta bank officials say their lending practices are not discriminatory. They say something else, too.
"We are not a charitable institution," said Willis Johnson, spokesman for Trust Company. "We are not the United Way."
Federal law encourages banks to seek a profit. It also says they have a "continuing and affirmative obligation to help meet the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with safe and sound operation."
That last phrase, "consistent with safe and sound operation," brings into play one of banking's basic principles.
"It's called the First Rule of Banking," said James Wallace, vice president of Fulton Federal Savings and Loan. "Don't lend money if you won't get it back."
It has a corollary, the Second Rule of Banking: "When in doubt, don't."
Don't lend more than borrowers are able to pay. In case they don't pay it back, don't lend more than can be recovered by foreclosing and selling the property. Don't lend $100,000 on a $60,000 house. And don't lend $40,000 on a $50,000 house in a neighborhood so bad that the house may someday be worth only $38,000.
In effect, lending money to homebuyers is an expression of faith -- faith in the borrower, faith in the property, faith in the neighborhood.
In the United States, such questions of lending faith historically have been influenced by race. That influence used to be easily defined -- with a list.
In 1933, a respected economist at the University of Chicago, Homer Hoyt, published a list of racial groups, ranking them from positive to negative influence on property values:
1. English, Scotch, Irish, Scandinavians.
2. North Italians.
3. Bohemians or Czechs.
7. Russians, Jews (lower class).
8. South Italians.
The next year, Hoyt was hired by the federal government to develop the first underwriting criteria -- who is a good credit risk and who is not -- for the new Federal Housing Administration (FHA). His list wasn't included, but warnings on racial influence were.
The same views were included in the first text of the American Institute of Real Estate Appraisers in 1933, which warned appraisers of the harm to property values caused by the "infiltration of inharmonious racial groups." The list appeared in the bible of appraising, McMichael's Appraising Manual, as late as 1975.
Appraisers were not alone. The prevailing racism in society was institutionalized in the rules of bankers and real estate agents as well. The National Association of Realtors developed a code of behavior forbidding members from selling homes in white areas to minority buyers.
These racial views persisted through the civil rights era. Publications from the U.S. Department of Housing and Urban Development (HUD), the parent of the FHA, reflected Hoyt's views as late as 1975. In that year, "The Dynamics of Change," a HUD publication, defined racial change, or the fear of racial change in nearby neighborhoods, as the most significant predictor of "incipient decline."
As late as 1977, it took a lawsuit from the U.S. Justice Department before such racial standards were purged from guidelines of the Society of Real Estate Appraisers, the Mortgage Bankers Association of America, the American Institute of Real Estate Appraisers and the United States League of Savings Associations. Appraisers opposed the settlement, contending their right to free speech was abridged if they could not consider the effect of race in their appraisals.
Real estate is still essentially a white person's business -- selling it, appraising it, insuring it, financing it. Ninety-five percent of the officials, managers and professionals at real estate companies in metro Atlanta are white. At savings and loans 90 percent are white. At banks and insurance companies, 87 percent, according to the latest figures (1985) from the federal Equal Employment Opportunity Commission. Most appraisers in Atlanta, at least 80 percent, are white too, appraisers say.
Bankers say they have tried to hire more minority employees.
"We make a steady effort to make sure we're hiring officers in sufficient supply to make sure the numbers come out good," said Thomas Boland, vice chairman of First Atlanta.
Most senior bank executives interviewed for this article said differences in lending to black and white neighborhoods in the Journal-Constitution study can be explained by factors beyond their control -- such as a lack of applications.
"The Realtor usually guides them," said Bill VanLandingham, president of C&S. "If they don't refer the homebuyer, we can't make the loans."
Real estate agents in black neighborhoods, however, said they usually don't refer homebuyers to banks and savings and loans. One reason is that the banks don't come around looking for business.
Ruben James is black and he works in predominantly black south DeKalb County for Precision Realty. "I haven't seen anybody from a bank in a couple of years. There used to be a woman from C&S who came by this office, but I haven't seen her in a long time."
Teresa Jones said bankers don't figure much in her business, either. She is black and she sells houses in predominantly black areas of south DeKalb for Century 21. "Bankers -- those are types who just sit at a desk and wait for somebody to come in. They're not really in the mortgage business, are they?"
Bank officers said that almost all of their loan originators -- the salespeople who drum up loans -- are paid on commission. A good originator will notice two things: First, more homes are sold in the mostly white areas than in black areas. Second, homes in white areas usually cost more.
Two $50,000 houses mean $100,000 in sales. One $100,000 house means the same profit -- and half the work.
"A loan originator is going to go where he can make the most money for the least work," said Wilbur Kurtz III, senior executive vice president of Decatur Federal.
Most big banks don't make smaller loans at all. Several make no loans below $40,000, and others charge additional fees below that amount.
Donald Cullins, 34, a black disabled Vietnam veteran, pays rent on a fixed income in the Pittsburgh neighborhood on the Southside. The home next-door was offered for sale at $25,000. Just before Christmas he received a certificate of eligibility from the Veterans Administration and went to C&S for a VA loan. He said he was told C&S has a minimum loan amount of $30,000.
"The funny thing is, I'm paying $380 in rent right now. The man said, if he could have made me the loan, my payments would have been $280 a month," Cullins said.
C&S officials say they have no stated minimum loan amount, "but the reality of the situation does in fact define a minimum," said a C&S spokesman, Dallas Lee. Below about $30,000, because of fixed costs, "it can become not an economically sound situation."
Blacks rejected more often
Real estate agents also say their black customers have a preference for a bank or savings and loan less often than whites. Community groups say that's because banks avoid black and integrated neighborhoods.
Fifty-two percent of Fulton County residents are black, but 82 percent of the 208,089 residents who live in census tracts without a bank branch are black.
Trust Company, which closed its East Atlanta branch, maintained in a letter to the Federal Reserve Bank of Atlanta that it was "a sound business decision" because the community had failed to "pull itself together and improve."
The East Atlanta branch was located in census tract 209, which was 88 percent black in 1987. In 1985 and 1986 combined, Trust Company made no home-purchase loans and eight home-improvement loans totaling $35,000 in the census tract, which has 2,215 single-family households, according to the bank's reports to the federal government.
"The East Atlanta branch had been unprofitable for eight years and was located in a neighborhood which continues to experience decline," Trust Company told the Federal Reserve Bank last year. "Most of the local merchants and many of the branch's customers have moved out of this area. The area has experienced such an alarming increase in crime that the branch hired off-duty Atlanta SWAT policemen to replace the usual bank guards."
As for branch hours, the chairman of Bank South, Frank Burke, said he was not aware that his branches in black areas were closed on Saturday. He said he is mindful of the Community Reinvestment Act.
"The CRA doesn't say you have to lend to black folks. It says low- and moderate-income. We have tried very diligently to listen to community groups, even though we don't have the branches in the neighborhoods that the other banks do."
Even if a borrower prefers a bank, real estate agents see a difference of convenience.
"The mortgage company man, he'll come see you at the office or at the home after 6 p.m. The bank, a working man's got to take a half-day off to go see the bank," said agent James.
Beth Williams, the receptionist in the Southside office of C&S Mortgage in Fayetteville, said, "If our mortgage officer were to leave, he'd have to travel an hour for an appointment and travel an hour back. If he stays here he can do three appointments in that time."
The Georgia production manager for C&S Mortgage, Jack Johnson, said its mortgage offices are outside the city of Atlanta "because there's just not enough volume there to justify putting in an office."
Some bankers acknowledged that location could be a problem.
"If you're on Campbellton Road and you call and they say, `Go on up to Galleria,' that could have some effect," said First Atlanta's Boland. "It may be as simple as that. Maybe we haven't realized that."
Bank officers said it would not be feasible to accept mortgage applications at all banks, since the applications are so complicated.
When black applicants do get to a bank or savings and loan, they're more likely to be turned down, several real estate agents who work with black clients contended.
Banks and savings and loans are required to report their rejection rates for blacks and whites to the federal government; they are not required to disclose the information to the public. But two of the largest savings institutions in Georgia did volunteer that information to the Journal-Constitution for all their offices statewide. Georgia Federal Bank rejected black applicants 4.2 times as often as whites in 1987. Fulton Federal Savings and Loan rejected black applicants 3.6 times as often as whites in 1985-87.
``That could only be explained by a lack of ability to qualify for the loan," said Don Stout, senior executive vice president at Georgia Federal.
"Those are statewide figures. It may be that older properties in some of these rural neighborhoods are not able to qualify for a loan," said Shepherd Marsh, executive vice president of Fulton Federal. "Our underwriters don't look at the color of the applicants."
The rejection rates tell nothing about the creditworthiness of those who applied. However, many real estate agents said they don't refer homebuyers to lenders unless they can qualify at least on the two most important lending criteria: income and debt. Some agents also have lenders check a homebuyer's credit history before an application is made.
"The first thing we do is pre-qualify them," said Precision Realty's James. "Otherwise we're wasting our time, everybody's time."
Law requires fair lending
If black applicants succeed in getting themselves approved for a home loan, they still have to get the property approved. That brings in the appraiser, who is hired by the lender to make sure the property is worth enough to cover the loan. Appraisers also said they don't look at race anymore.
Willie Clyde isn't so sure. He's a real estate agent on the Southside, he's black, and he had a house to sell. He almost sold it last summer -- he had a buyer and a signed contract. Then the buyer went to a bank, whose appraiser came down from the Northside.
"He called me and asked for directions. He said he didn't work down here that often," Clyde said. "I knew that was trouble."
Clyde bought and remodeled the house, at 53 Bisbee Avenue off Jonesboro Road in South Atlanta. It's an older neighborhood, mostly black, with a lot of vacant houses and a lot of houses being renovated.
"I showed him that we had put on a new roof, that we had redone the interior walls, sanded and varnished the floors, added a sunroom, new plumbing, cabinets, rehabbed the bathroom, rescreened the front porch, new paint. He didn't say anything negative when he came out."
The appraisal came back at $28,000, about 25 percent less than the contract price of $38,000. Clyde lost the deal.
"They just don't trust the neighborhood," Clyde said.
He later found another buyer, who chose a mortgage company not affiliated with a bank or savings and loan. Its appraiser said the property was worth $38,000.
Willie Clyde's first appraiser wrote nothing on his appraisal report about race.
"A conscientious appraiser will forecast property values as best he can, but to avoid liability he might not attribute it to race," said Jim Verner, who teaches appraising at Georgia State University and serves on the curriculum committee of the American Institute of Real Estate Appraisers. "He might attribute it to something more bland -- `wearing out of the public infrastructure' -- something that isn't such a dangerous area."
Underappraisals -- called lowballs -- do more than discourage sales. By definition, they lower property values. Appraisals not only judge the market, they help set it.
The effects can show up in how fast homes appreciate in value.
The median sale prices of homes in Atlanta increased by 58 percent from 1975 to 1984, according to the city Bureau of Planning. Prices increased by 68 percent in white Garden Hills, but by 20 percent in black Cascade Heights; 84 percent in white Sherwood Forest, but 26 percent in black Adams Park; 71 percent in white Peachtree Hills, 6 percent in black Collier Heights.
Low appraisals also deter further investment in a neighborhood by current owners. The amount of a home-improvement loan is usually limited by the owner's equity -- property value in excess of debt. If the value of a home drops, there may be no equity left for a home-improvement loan.
Lower-income also affected
If a black homebuyer gets the appraiser's stamp of approval, there's still the issue of what kind of loan to get. In a black neighborhood, it's rarely what is called a "conventional" loan. Instead, it's likely to be one guaranteed by the federal government through the FHA or Veterans Administration (VA).
In middle-income black neighborhoods of metro Atlanta, 52 percent of home loans were insured by FHA or VA, according to 1986 real estate records sampled by the Journal-Constitution. In white areas of comparable income, only 13 percent of loans were government-backed. Even in upper-income black areas, 31 percent were FHA or VA.
Few of those FHA or VA loans come from banks and savings and loans. Twelve of 17 banks and savings and loans in the newspaper's survey made no FHA or VA loans in 1986. Bank officials said that was usually because those loans carry lower interest rates and more paperwork.
For many buyers, FHA and VA loans are the best way to buy, because of the lower down payment (or none at all) and low interest rate.
However, FHA and VA loans can have disadvantages for the neighborhood. If an area has many FHA and VA loans, banks and savings and loans may not make conventional loans there.
That may be the case in metro Atlanta. Banks and savings and loans made 50 percent of the conventional loans in white middle-class areas, but only 22 percent of the conventional loans in comparable black areas where FHA and VA loans predominate, according to the real estate records.
Conventional lenders said they believe FHA and VA neighborhoods have higher foreclosure rates, since lenders whose losses are covered by the government may be less likely to choose borrowers carefully.
As far back as 1974, Savings and Loan News, the industry newsletter, issued this warning:
"Since the entry of FHA into the inner-city finance business, these areas have taken on new appearances -- mostly depressing. The chronology looks something like this: (1) abandonment; (2) board-up and padlock time; (3) the vandalize and burn period; (4) wait-to-wreck interval (playtime in the Rockies); and (5) demolition."
The author, appraisal expert Gregory Opelka, began his article with what he called the "chicken or the egg caveat":
Are these neighborhoods deteriorating because lenders that make FHA and VA loans are there, or because the banks and savings and loans are not?
Opelka said it didn't matter.
"It is not my intention -- nor should it be the appraiser's job function -- to debate the morality of `causes' and `effects.' "
Whatever the cause and effect, homebuyers and homeowners in black neighborhoods can be trapped in an endless Catch-22:
-- Bank loan officers have become conditioned to steer clear of neighborhoods with a preponderance of FHA and VA loans.
-- Without a good mix of credit to fuel it, including conventional lenders, the housing market in the neighborhood sputters and property values stall.
-- Stagnant property values discourage investment and reinforce bank skepticism about the neighborhood, and the cycle begins again.
The Catch-22 has a second part:
Even if black borrowers can prove they deserve conventional financing, lenders will prefer to work in white neighborhoods, where higher sale prices and more sales mean higher commissions.
That's why Congress created the Community Reinvestment Act -- to encourage banks and savings and loans to lend in all neighborhoods. The law has been on the books for 10 years.Go to the next article or back to the Color of Money index or Power Reporting
Reprinted with permission from The Atlanta Journal and The Atlanta Constitution. Further reproduction, retransmission or distribution of these materials without the prior written consent of The Atlanta Journal and The Atlanta Constitution, and any copyright holder identified in the material's copyright notice, is prohibited.
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