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The Color of Money

Follow-ups and reaction

Banks' business brisk
in new home loans,
but regulators wary

By Bill Dedman, The Atlanta Journal-Constitution

Published October 9, 1988, Page A1

Copyright 1988, The Atlanta Journal-Constitution

Atlanta banks are backing their promises with cash, making more than $30 million in reduced-rate loans, mostly to black homebuyers.

After three months, a consortium of nine lenders participating in loan pools reports it has closed or tentatively approved loans for 42 percent of the $72 million it promised.

The loan pools were created in response to "The Color of Money," a series in The Atlanta Journal-Constitution. The articles documented that banks and savings and loans made few home loans in black neighborhoods regardless of income level.

Bankers and neighborhood activists say the loan programs are fulfilling the goals: making mortgage money available to areas where banks had not been active, and helping working-class families buy homes.

But federal bank regulators sound a note of caution.

Officers of the Federal Reserve Board praise the loan pools as a small step toward fair lending and affordable housing in Atlanta. But they call it a knee-jerk step, a crisis response born of adverse publicity and community pressure.

The regulators contend that the special loans invite defaults, avoid dealing with the roots of institutional racism, and reinforce a mistaken notion that the only way to lend to blacks is to lose money.

Because banks are holding down costs paid by the borrower, they automatically lose as much as $1,300 on each loan.

"We can show them how to make loans to low-income people and make them profitably," said James W. Lowell, program manager for community affairs at the Federal Reserve Board in Washington, D.C.

And because banks have stretched credit rules, regulators say they are on dangerous ground.

"By deviating from standard underwriting criteria, they're asking for defaults," said Ronald N. Zimmerman, vice president of the Federal Reserve Bank of Atlanta.

"This is a unique area of lending, and the lenders don't have any expertise in it," Mr. Zimmerman said. "They throw up their hands and don't see how it can be done without any giveaway. And our position is we don't encourage giveaways. It's been difficult to educate the bankers."

`We're Not Making Bad Loans'

Bankers say their programs are no giveaway, but that some subsidy is necessary for working-class borrowers to obtain loans.

"I would agree that we must be awfully prudent and careful to see we don't get people in trouble, but I don't think we're making bad loans," said James C. Mynatt, first vice president of Trust Company Bank and president of the new Atlanta Mortgage Consortium, which includes nine banks and savings and loan associations. "This is not designed to be a giveaway program. We're not losing our shirts on it, and we have nine lenders sharing the risk."

The special loans for home purchase and home improvement are offered to people of any race, although bank officials said about two-thirds have gone to blacks. The loans primarily target black and integrated neighborhoods on Atlanta's Southside, but one program is open to homebuyers in any part of metro Atlanta, and another sets a ceiling only on the loan amount, not on household income.

In the first three months the banks have closed or approved 638 loans totaling $28.4 million. The banks have loaned another $1.9 million at low interest rates to non-profit housing developers.

At the current rate, the loan pools apparently will be exhausted within a year -- with more than 1,800 families receiving loans, based on the average loan amount so far.

The money has gone faster at some banks than others.

The First National Bank of Atlanta, which has the most liberal credit terms and allows the lowest down payment, promised $10 million but has already closed or tentatively approved 266 loans for $11 million. First Atlanta officers said the bank will chip in at least another $10 million, raising the overall amount promised by the nine lenders to $82 million.

"I thought it would take us a year or longer to put out the $10 million," said David C. Swann, executive vice president of First Atlanta. "I am quite pleased."

Citizens and Southern National Bank (C&S), which also has low closing costs but tighter credit rules, has closed or tentatively approved 214 loans for $8.5 million of its promised $25 million.

Other banks are receiving fewer applications.

Trust Company has approved 83 loans out of 120 applications, for $4.6 million of its $10 million.

The nine lenders in the Atlanta Mortgage Consortium have approved 75 loans for $3.5 million of their joint pool of $27 million. The consortium accepts applications at 69 locations but so far has received only 135, fewer than 10 applications a week.

"It's very attractive money. It's hard to believe there haven't been any more applications," Mr. Mynatt said. The consortium includes Bank South, C&S, Citizens Trust Bank, First American Bank, First Atlanta, First Union Bank, Fulton Federal Savings and Loan, Georgia Federal Bank and Trust Company.

Apparently many homebuyers still are attracted by the lower closing costs and lack of an application fee at First Atlanta and C&S. To increase applications, the consortium has dropped its application fee to $50 from $150 and has increased advertising in newspapers and radio stations with large black audiences. And consortium leaders suggest that their applications will pick up as the more attractive programs fade.

Bending Rules on Debt Ratios

Another reason for lack of applications could be dissatisfaction among real estate agents, who usually suggest a lender.

The large banks said they have stepped up their contacts with agents in black and integrated areas in the past three months, but in a non-scientific survey of 75 black real estate agents by the Journal-Constitution, most said they had not been solicited for these programs.

Many agents also criticized the banks for being slow to act on applications, and questioned the banks' commitment to working in their areas.

Still, the number of applications has steadily increased, and the number of loans has been enough to worry bank regulators. They don't suggest that the programs harm the banks' financial condition, but they raise several concerns.

First, the banks have bent the rules on how much debt borrowers can assume. The normal rules allow borrowers to commit no more than 28 percent of gross income to house payments, and no more than 36 percent of gross income to all long-term debt. In the special programs those two ratios are pushed back: 30 percent and 38 percent at Trust Company, 35 percent and 50 percent at First Atlanta and the consortium.

Even advocates of affordable housing, who note that many families already pay 50 percent of their gross income on rent, think the banks may have gone too far.

"I like these programs, but the only point where I differ is on these ratios," said the Rev. W. Craig Taylor, a non-profit housing developer with the South Atlanta Land Trust and a member of the consortium advisory board. "We have never wanted the banks to make bad loans. That doesn't help anybody."

The banks vary on how far they will bend. Banks are rejecting as many as 54 percent of the applications (at C&S), and as few as 19 percent (at First Atlanta), usually for bad credit history or excessive debt.

"We're trying to find a reasonable basis to make all the loans we can," said Mr. Swann of First Atlanta. "You could fund a program and write the rules so you don't make any loans. We're not throwing money away. We feel that everything we have booked so far is sound."

Of particular concern to regulators is that First Atlanta is not conducting normal property appraisals, skipping some of the research into comparable properties. An appraisal measures the value of property to ensure that the bank does not lend more than the property is worth.

"We're not requiring the appraisals that would be required under the normal situation," Mr. Swann said. "We are waiving some of the requirements for bells and whistles."

The short appraisals are being done to save about $200 per loan, money the bank would otherwise lose because it is holding down closing costs paid by the buyer and seller.

Those low closing costs mean the banks lose money on each loan.

First Atlanta and C&S, which cap the costs on each loan at $300, are losing about $1,300 per loan. The programs at Trust Company and the consortium have closing costs of about $1,300, so they lose about $300 per loan.

Public-Private Effort Suggested

"We have subsidized the closing costs because the biggest obstacle people have to buying a home is coming up with the up-front money," Mr. Swann said.

Regulators said public-spirited banks in other cities have found ways to serve low-income homebuyers without losing money. These efforts usually involve setting up development corporations or combining public and private funds.

In other areas, for example, city and state governments have set aside money as a loss reserve for low-interest loans, or to buy the loans from the banks.

The city of Atlanta has offered to provide such help. The Urban Residential Finance Authority (URFA) has proposed to raise $27 million by selling bonds. That money would buy loans from the consortium, allowing the consortium to lend its $27 million twice.

The proposal has been received coolly by the nine lenders.

"If we sold loans through URFA, loans would be closed in its name, and the lenders wouldn't get credit for them," Mr. Mynatt said. He also maintained that the URFA loans are not competitive with the consortium, but he said the door to working with the city is not closed.

Nevertheless, "without some sort of public commitment, the consortium won't reach its full potential," said Richard A. Guthman, a vice president of First American Bank and former city councilman.

The Federal Reserve and other bank regulators have worked with banks in many cities to establish community development corporations, to encourage bank-government participation and other methods of making loans to low-income borrowers profitably. Lenders in Atlanta have participated in such programs less than lenders in other major cities, regulators said.

Finally, some regulators question whether the loan pools get at the root problem.

"The banks' response is so irresponsible," said Mr. Lowell of the Federal Reserve. "You don't get rid of institutional racism by putting a Band-Aid on low-income neighborhoods. Everybody knows low-income neighborhoods are getting screwed."

The largest banks point out that they have taken steps to attack institutional racism -- or what they call a failure to market loan products aggressively in black areas.

The four largest banks -- C&S, First Atlanta, Trust Company and Bank South -- have said they are addressing several of the points raised in the newspaper articles: calling on black real estate agents; increasing the hours of Southside branches; accepting home loan applications on the Southside; eliminating minimum loan amounts; offering government-backed loans; advertising in black newspapers; hiring black real estate appraisers; issuing written policies of non-discrimination; and "adopting" poorer black neighborhoods.

"The premise of your articles was that we weren't down there fighting for a market," said Dallas M. Lee, spokesman for C&S. "Now we're fighting. We have always been active in the black community, but we weren't with home loans. We're going to compete for every dollar."


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