In the past five years, mortgage lenders have learned, sometimes painfully, that there is no simple way to improve their minority-lending performance.
Driven by necessity - as well as a hard-nosed quest for profit in new markets - they have turned to labor-intensive, hands-on programs that include liaisons with local community groups, specialized marketing, and program support from the secondary-market agencies.
One of the earliest and harshest demonstrations of the pitfalls of one- dimensional programs came after the formation of the Atlanta Coalition in 1989. Lenders formed the group to extend more mortgages to low-income and minority households in the area, following the much-publicized Atlanta Constitution series that spurred exposure of Home Mortgage Disclosure Act figures.
But within two years, the coalition's loan pool showed unusually high delinquency and default rates. The group simply "stretched the credit criteria too far," said Mark Willis, president of Chase Manhattan Bank's community development corporation. "You can't do this in a rush."
Lenders now emphasize that understanding the local market - important in all lending - is particularly crucial when approaching a new pool of borrowers.
Many bankers say that one of the best ways to approach a new community is by forming partnerships with grass roots housing groups. Such groups have often done intensive research on the area and are willing to provide it to institutions.
Neighborhood Housing Services is one of several nationwide nonprofit groups that works with banks to identify potential borrowers, provide counseling before and after loans are made, and suggest more flexible underwriting standards.
In the New York metropolitan area, the community organization works with more than 50 banks, which contribute grants and commit lines of credit to targeted neighborhoods.
Partnering with one bank in one neighborhood has sometimes led to a new nationwide standard. For example, Acorn Housing, which is active in 28 metropolitan areas, convinced Mellon Bank in 1992 to accept "cash on hand" as an asset for meeting underwriting standards, contrary to established practice.
Acorn had found that more than a third of its clients would qualify for home loans if banks took cash on hand into account.
The money-in-a-shoe box practice arises because new immigrants are uncomfortable with banks, and inner-city residents often have few bank branches nearby. "We asked one of our clients why they didn't put their money in a bank," said Bruce Dorpalen, director of loan counseling for Acorn. "He said, 'What bank?'"
To fix this problem, Acorn has created a process for documenting cash on hand, which is now used by several lenders when evaluating loan applications.
The organization is also trying to convince the Federal National Mortgage Association, or Fannie Mae, that it can safely buy loans made to borrowers whose earnings have been credited to more than one social security number. This situation often crops up with immigrants who entered the country illegally, but have become legal residents.
Acorn says its success has not come without conflict. It is quick to point out that lenders have had to be dragged to the table.
"Banks still like to believe that these communities are too hard to lend to. In virtually all our agreements with lenders, it's we who have approached them," Mr. Dorpalen said.
Having data available as a result of the Home Mortgage Disclosure Act means that lending records are well documented, he said. But the Community Reinvestment Act provides the real impetus for banks to improve their records, he added.
Banks looking to improve their Home Mortgage Disclosure Act figures have often had to completely rethink their marketing strategies. For many, pitching mortgage loans to inner cities has meant marketing from the ground up - opening branches in new neighborhoods.
Bankers are discovering that lending in areas they had avoided can be lucrative, said William Apgar, director of the Harvard Joint Center for Housing. "There are bankable loans out there."
In fact, the South Bronx in New York City, which had been shunned by banks and mortgage lenders, is now home to one of Fleet Bank's busiest branches, said John Tugwell, president and chief executive of Fleet Bank. Dime Savings Bank and European American Bank have also started South Bronx branches in the past year.
"The way our business is growing in the Bronx is ample evidence that if you take an interest in the community, they will do business with you," Mr. Tugwell said.
Convincing a community's residents to take out mortgage loans at a new branch can be difficult, Mr. Apgar said. One of the largest hurdles, he said, is a community's distrust.
Lenders can build trust with potential customers by increasing their visibility through targeted advertising in another language if English is not preferred in the neighborhood, by hiring employees from the community, and hosting local homebuyer fairs, he said.
Affinity lending, which partners a mortgage lender with a trade or professional organization, is another way to market mortgage loans to minority groups.
Chase Manhattan's partnership with the AFL/CIO, a powerful conglomeration of 79 labor unions, is helping to pull in a steady stream of minority loan applications, Mr. Willis said.
Banks looking to lend in inner cities tend to benefit from grouping together. Coalitions allow banks to pool their marketing resources and share the risks.
Chase Manhattan's participation in the New York Mortgage Coalition, a consortium representing 14 banks and community groups, has helped the bank increase its lending presence in the New York metropolitan area, Mr. Willis, the bank's community development chief, said.
Both lenders and housing experts have applauded the efforts of Fannie Mae and the Federal Home Loan Mortgage Corp., or Freddie Mac, to improve lending to minorities.
Fannie Mae entices banks to lend to minorities and low-income households by allotting increasing amounts of money for home loans to these groups. It made a commitment more than two years ago to provide $1 trillion to fund homeownership for minorities, low- and moderate-income households, immigrants, and other targeted groups by the year 2000. By March, Fannie Mae had financed $186 billion in home loans as part of the program.
The agency's minority borrower pool climbed to 17.8% of loans bought last year, from 12.9% in 1993.
Bringing people into a "conversation" about buying a home is one of Fannie Mae's biggest challenges, according to Barry Zigas, executive director of the agency's national housing impact division. "People find this process intimidating, and often they don't even think homeownership is a possibility."
The agency co-sponsors homebuying fairs with local banks to help facilitate that conversation. Last year, 55,000 potential homebuyers attended Fannie Mae-sponsored housing fairs in eight cities.
Fannie Mae also offers a variety of programs that lenders can use, including a 3%-down loan and homebuying information in several languages.
Freddie Mac has concentrated its efforts on the research side, studying underwriting options to come up with sharper definitions of what it takes to make a good loan. It is now urging all its lenders to use automated credit scoring on all loans to help weed out the weakest credit.
Fannie Mae followed Freddie Mac last fall, asking lenders to do the same.
Observers stress that the industry's improving lending record represents less of a sea change in attitudes toward minority lending than an economic necessity.
"The bottom line here is if the loans are not going to be profitable, they're just not going to be made," said Doug Duncan, senior economist with the Mortgage Bankers Association of America.
Lenders' forays into previously underserved neighborhoods in the past five years have as much to do with a slump in mortgage volume following the refinancing boom of 1993 as a desire to improve Home Mortgage Disclosure Act numbers, he said.
Tomorrow: A case study
