According to a recent Federal Reserve study, there are wide racial disparities in mortgage lending nationwide.

In low-income and minority neighborhoods, substantially fewer mortgage loans are granted per one-family to four-family home. And within broad income groupings, black applicants have been denied home mortgage loans more than twice as often as whites.

These are troubling facts. Efforts to improve the quality of life in inner cities depend in part on the availability of loans for buying homes and improving them.

New Approaches Needed

The geographic distribution of loans reflects an entire lending process, from marketing and advertising loan products to issuing bank underwriting policies to evaluating individual applications.

Traditional approaches at each stage may lead to inadequate of mortgage activity in low-income and minority neighborhoods. New approaches are needed.

The impact that innovative lending practices can have on mortgage availability is exemplified by the Delaware Valley Mortgage Plan, a unique community reinvestment program in Philadelphia.

Over $215 Million Lent So Far

Originally known as the Philadelphia Mortgage Plan, this cooperative effort of several Philadelphia banks (Beneficial Savings, Continental, CoreStates, Fidelity, Germantown Savings, Mellon, Meridian, Meritor Savings, and Provident) has been a major provider of mortgages in the inner-city of Philadelphia for about 17 years.

In fact, the plan has provided more than $215 million in home mortgages to 15,000 families since its inception in 1975. Surprisingly, however, it has received little attention outside the Philadelphia banking community.

A low-income household seeking a mortgage under the program applies at a participating bank. There the application is evaluated in accordance with lending policies designed to make mortgage credit more accessible, while keeping default and delinquency risks at manageable levels.

Data available under the Home Mortgage Disclosure Act demonstrate that the plan has succeeded admirably at broadening the availability of mortgages.

Disparities Fade Away

For instance, the program has enabled participating banks to increase their lending in minority neighborhoods to the point where differences in racial composition across low- or moderate-income neighborhoods do not lead to discernible differences in mortgage activity.

Moreover, in neighborhoods where overall mortgage activity is relatively low, plan members are considerably more active than other institutions

Several factors have made the mortgage plan a success.

First, the program's innovative underwriting policies enable applicants who might not qualify under more traditional criteria to qualify for loans.

Perhaps the most important innovation is that appraisals are based on the structural condition of the property and on the condition of properties on the immediate block, including vacancy and abandonment insofar as they effect the block. The general condition of the broader neighborhood is not a consideration.

Getting the Word Out

Second, participating banks help create demand for their product by marketing their plan to neighborhood real estate agents, by advertising, and by maintaining contacts with community organizations.

Third, member banks have formed working relationships with community development corporations engaged in housing rehabilitation.

Fourth, when appropriate, applicants are referred to qualified sources for counseling on budget, credit, home maintenance, or other pertinent matters.

Fifth, no application is denied without being reviewed by a committee of representatives from other member institutions. This review process helps ensure that credit decisions remain consistent with the programs policies.

A Burden for Smaller Banks

It is not clear that all mortgage lenders should participate in a program like the Delaware Valley Mortgage Plan.

For example, participation may entail a commitment of resources that is burdensome for small or medium-size institutions. Or the strategy of focusing appraisals on the condition of individual blocks may not be appropriate in some cities.

However, it is clear that by modifying traditional approaches to lending, and by strengthening ties to community organizations, financial institutions may be able to broaden the availability of mortgages to low- and moderate-income households.

Home ownership provides important social benefits for inner-city residents. Ownership fosters cooperation among neighbors, provides incentives for improving and maintaining property, and helps prevent neighborhood abandonment and decay.

In addition, home ownership offers a vehicle for family saving and a hedge against inflation as housing values appreciate over time. But these social benefits can be realized only to the extent that mortgage credit is available to potential purchasers of houses in inner-city neighborhoods.

Philadelphia banks deserve credit for extending credit in nontraditional ways, thereby bringing the benefits of home ownership to a wider cross-section of the community.

Mr. Calem is senior economist in the research department of the Federal Reserve Bank of Philadelphia.

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