Are Banks Easing Lending Practices?

FIFE

Bankers, realtors and community activists who attended an affordable-housing conference here last week say many of the state's banks are improving their records of making mortgage loans to low- and moderate-income people.

"There's been a pattern of discrimination in the past, but it's rapidly changing," said Bill Smitherman, executive director for the Upper Tacoma Renaissance Association, a community group in Tacoma's Hilltop neighborhood.

The Hilltop area is home to a large minority population that has had trouble getting home loans, Smitherman said.

But many barriers to home ownership still exist, including bad credit records of would-be buyers, tight restrictions on lending by federal agencies, inaccurate home appraisals and lack of manpower at banks to do more low-income loans, the conference attendees said.

Those barriers continue to be a source of frustration for all players in the mortgage-lending game.

The conference, "Homeworks," was sponsored by the Tacoma Pierce County Housing Council and was held at the Best Western Executive Inn here.

Several reasons were given for the banks' more active role in helping lower-income homebuyers: housing activists are using the federal Community Reinvestment Act to force banks to make more loans in the areas they serve. The law requires banks to make business and home loans in all their market areas.

"There's a whole lot of heat on a whole lot of people right now to handle this problem," said Torris McCall, community outreach manager for U.S. Bancorp in Washington. He said the law "is forcing banks to focus in a little more."

But loans to creditworthy borrowers also make good business sense, even in lower-income neighborhoods and rural areas where banks have not historically made many loans, McCall said.

"It helps to rebuild a community, and as the community prospers, so does the bank," said McCall.

Banks are using programs that help them sell marginal mortgage loans into the secondary market, which consists of agencies such as the Federal National Mortgage Association and Government National Mortgage Association. Such agencies buy mortgages from lenders, allowing the lenders to make more loans.

By setting standards of what types of loans they will buy, these secondary-market agencies effectively control who gets mortgages.

Their standards involve borrowers' incomes, credit histories, assets and other criteria.

In the past two years, the agencies have gotten tougher in their requirements, bankers and mortgage brokers say.

"The secondary market controls most single-family lenders out there," said McCall. "Every year that goes by, there's more documentation required of borrowers."

But lending-assistance programs are helping banks sell marginal loans to the secondary market, allowing the banks to make loans they could not otherwise make.

Bankers say the federal agencies have started to loosen up, making loans to more people possible.

Under current rules, the biggest obstacle many would-be homeowners face in qualifying for mortgages is their credit history.

"They've got bankruptcies, collections against car loans and collections against phone bills," said Realtor Karen Turner of Hawkins-Poe Inc. Realtors in Tacoma.. "They have all kinds of things I can't help them overcome."

Smitherman asked bankers at the conference if they could help people with spotty credit by setting up high-risk loan pools to augment available programs.

Many would-be home buyers in the Hilltop area do not have good credit records and that prevents banks from lending to them, says Smitherman.

He said many people who grew up in impoverished households get credit cards and, understandably, use up their credit to buy things, then run into trouble with meeting payment schedules.

"The standard set by banks denies reality," Smitherman said. "The people dynamics (in the Hilltop neighborhood) are not the same as other neighborhoods."

Smitherman's proposed high-risk loan pool would let banks package loans to credit-risky borrowers, in order to cover deficiencies, if payments are late. He suggested the borrowers could be required, as part of the loan, to take credit counseling and home- maintenance courses such as those offered by the renaissance association.

The banks could hold these loans in their portfolios for a year or so, then sell them to the secondary market when the credit records of individual borrowers improves, says Smitherman.

But bankers don't like his idea.

"No lender is going to make a loan to somebody with a poor history of credit use," said Lonnie Wheeler, manager of Seafirst Bank's housing-rehabilitation center.

"Not even the feds told me I have to make a bad loan in the name of community reinvestment," she said. "They told me to make prudent loans."

Many banks don't have the capacity to keep high-risk portfolios, bankers say. They must be able to sell them to the secondary market right away, to raise money to make more loans.