Mortgage lending (PT1)

WHAT'S WRONG WITH MORTGAGE BANKERS?

For another year, the Federal Reserve Bank and NCUA have released HMDA
figures showing that financial institutions consistently reject minority
home loan applicants. The income penalty for being a minority is about $14,000!

The same statistics show that loans to low income single family home
borrowers have default and delinquency rates significantly lower than
multifamily housing and a little lower than middle class borrowers.

What causes this negative approval statistic coupled with this positive
repayment statistic? Are bankers racist? If not, why do they act that way?
As CDFIs, we had better figure out and respond, to avoid CRA by being
pro-active.

There is a certain myopia in bankers that can't see value through
difference. They consistently over estimate the value of middle class
borrowers and under estimate their loan income applicants. Underwriting
standards are looking for sameness. What we need is an underwriting rainbow.

How would you evaluate the following two credit applicants:
- a couple, each making $90,000 and having many credit sources, borrowing
for a luxury boat.
- a family with no credit history, low income and a small savings account
borrowing to buy the home they have rented for 15 years.

Almost universally, banks would prefer the wealthy couple. They ignore the
bankruptcy rate in high credit users, the risk in lack of ties to the
community, the strength of will of first time home buyers, and the price
stability of low cost homes compared to luxury items. National Federal
Reserve Bank statistics released in 91 and 92 show Banks reject minorities
applicants at twice the rate of whites: for the same income levels. Our
work shows that the low income family is more likely to repay. This is the
subtle discrimination of underwriting standards - Gatekeeping for the old
economic order.

Many banks have responded to their CRA obligations by what I call the "ten
foot pole approach". They give money to a NHS, they ask for a government
guarantee, they write off the loans upon origination. In short they do
anything but actually evaluate the real risks involved and get in there and
lend.

Some programs address one or two secondary market flaws without giving a
thorough analysis of the possibilities open to low income borrowers. For
example, we have a seen a program supposedly targeted to this market that
lowered the down payment requirement to be raised by the borrower to 3%, BUT
included a requirement that a relative give the borrower an additional 2%
down payment. This program makes the unlikely assumption that a low income
borrower has rich relatives! Programs like the one described provide lip
service only. We can't realistically talk about gifts, co-borrowers or
larger down payments to avoid PMI.
************************************************** **********
William Myers
Alternatives Federal Credit Union
301 West State Street, Ithaca, NY 14850-5431
Voice (607) 273-3582 ext 817 FAX 277-6391
E-Mail Alternatives-Myers@Cornell.edu
************************************************** **********



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