course, which reads: Etnnological information also is significant to real estate The Institute of Appraisers' course included a slide show on the appraisal of single family homes. The accompanying sound track said of neighborhood analysis, ".. ...one exceptional factor which may affect value is the influx of inharmonious social or racial groups." The slide on the screen showed a burned out store. Finally, the text used in the course concludes: The value levels in a residential neighborhood are influenced No matter how attractive a particular neighborhood may The most recent edition of the American Institute of Real Estate Appraiser's text has eliminated the above quote. This change from the 1967 to the 1973 version represents a use of a more subtle language to make the same point about racial change. The latest text reads: No matter how attractive a particular neighborhood may be, Like this passage, the racial biases inbedded in real estate appraisal standards and educational materials are masked in actual practice and hidden behind arguments which do not directly mention race. The Federal Home Loan Bank Board forbids racial discrimination by the savings and loan institutions it regulates. The regulations note, "The racial composition of the neighborhood where the loan is to be made is always an improper underwriting consideration." But a later section adds these words, "However, a standard which has a discriminatory effect is not necessarily improper if its use achieves a sound business purpose which cannot be achieved by means which are not discriminatory in effect or less discriminatory in effect."15 F. Gregory Opelka, appraisal consultant for the U.S. League of Savings Associations, and author of a column on appraisal which appears in the trade journal of the savings and loan industry, has consistently spoken out in defense of the use of data on the racial composition and changes in racial composition in the neighborhood as a sound and important factor in appraisal, though he has never stated directly that racial changes cause values to decline. Rather he discusses the decline of values and the deterioration of neighborhoods as a process closely associated with FHA loans. In several articles, some of which use data created by the Society of Real Estate Appraisers (usually referred to as SREA market data), Opelka has tried to show how the level of FHA loans in a neighborhood is a good indicator of decay and declining values. comparing patterns of FHA and conventional financing, he concludes in one article that, "Such comparisons make strong cases for dramatic downward pricevalue adjustments in inner-city valuation analysis. 16 In another, he compares conventionally financed areas with FHA areas, after attempting to suggest that FHA areas are filled with crime and potential abandonment and foreclosures. He concludes by asking lenders the rhetorical question, "Is there any doubt where the prudent lender should invest the public's savings?" Finally, in yet another article listing the horrors of FHA financing, he writes, "While it appears that FHA has made matters worse in our In private lenders can ill afford to take over where FHA has let off. 18her cities, Thus, in these writings by the industry's appraisal consultant and certified by both professional organizations, conventional lenders are warned that FHA means deterioration and declining values, that they should adjust appraisals downward in areas with FHA lending and that the risks are so high in these neighborhoods that they should be avoided altogether. Is this argument against FHA--or is it a racial argument? Our own study of firm commitments issued to insure single-family mortgages from the Chicago Area HUD Office showed that in the City of Chicago, 89% of all prospective loans were to Blacks. Slightly more than 97% of all these loans were to some minority person. Further, 97% of the loans were to be made in Black neighborhoods or neighborhoods changing from white to minority. Thus, to speak of FHA loans in Chicago is to speak of Blacks. To influence lenders to avoid FHA areas is to influence them to avoid Black and minority areas. Yet, cloaking the argument in terms of FHA gives the argument the aura that the discrimination is simply an unintended result of sound business practices, which are permitted by the regulations. Mr. Opelka is a man who practices what he preaches. In records supoenaed by an investigating commission in Illinois, the savings and loan association where he sits as executive vice-president, (Fairfield Savings and Loan Association) had $42,000,000 in deposits from its primary service area in March of 1974, but made no mortgage loans of any kind in this FHA, and racially changing, service area. The advice which Mr. Opelka gives as an appraiser can devistate a community as much as FHA. Indeed, his advice can be the cause of FHA devastation. If conventional lenders follow his advice and remove their mortgage money when FHA loans appear in a neighborhood (Opelka does not mention how many), then homebuyers must turn even more to FHA for financing, making even higher the proportions of FHA loans and further causing conventional lenders to withdraw funds until the cycle has left the entire neighborhood under FHA financing. Our own study of neighborhoods in Chicago has verified that in some census tracts, virtually every single-family home there was sold via FHA within a four to six-year period. Today, about three years after that study, some of these tracts are 10% abandoned." This horror story is much like those Mr. Opelka tells, except our interpretation is different. If lenders, informed and supported by appraisal standards, anticipate decline as Blacks move in and remove the conventional money necessary for any community to maintain its viability, then their own action leads to the FHA horrors Opelka describes. Then, having participated in the crime, Opelka uses the same horror stories to justify their turning their backs on the neighborhoods once serious blight sets in. Is this discrimination or sound business practice? The anticipation of blight, and not factual data seems sufficient to the appraiser to recommend conventional disinvestment. The impact of this form of discrimination can be seen in a detailed study we are doing in the South Shore community of Chicago, This community of about 65,000 changed from a white neighborhood in the late 1960's to one which is more than 80% black today. Using the SREA market data information which Mr. Opelka recommends to appraisers to analyze the rate of FHA loans in an area (data which I might add is religiously guarded as confidential by those who subscribe to the information service), we found that in 1974, a year for which sources were able to supply these data, the SREA data shows 23 sales in South Shore, 18 of which, or 78% of which, were FHA. Thus by Indeed, our detailed study of all property transaction for every property on 32 sample blocks in South Shore for the 27 years since 1950, showed eight abandoned homes in 1974, among the 589 singlefamily homes in the sample. In addition, we found 34 foreclosures in those 27 years for the same 589 properties, 24 of these between 1970 and 1974, the period of heaviest FHA activity. But let us look again at Mr. Opelka's SREA data. On our 32 sample blocks, 24 of which were predominantly single-family homes, we found only two sales listed in his 1974 data. Both were FHA. Yet our complete title search lists 9 sales that year and only 3 of them FHA. Thus our sample suggests that the true proportion of FHA sales in South Shore is not 78%, but only 33%. I would suggest that the SREA data is not a random and representative sample of all sales. For one thing it never lists sales which have no financing, even though such sales represent a market where buyers have strong buying power. In South Shore, there has been at least one of these sales in the sample blocks every year since 1970. Moreover, the SREA data only reports those sales handled by those who voluntarily join and report to the service. It would appear that for South Shore this particular set of lenders overly represents FHA lenders and underrepresents conventional lenders. Thus, the SREA data has a systematic bias which greatly overestimates the extent of FHA activity. This is not a minor issue when Mr. Opelka suggests that lenders should use this data to decide when FHA levels are high and when to withdraw their loans from an area, In one article he describes how bad it is to have a high level of FHA loans and then publishes a map, using this biased data source to show the areas in Chicago which have, by SREA biased estimates, high FHA loan rates. My analysis of the South Shore data does in fact show that FHA lenders in South Shore have a terrible record. In our sample blocks, over the five years from 1970 to 1974, there were 19 FHA foreclosures. The rate of FHA foreclosures was 2.14%. Yet, in the same period the foreclosure rate for conventional mortgages (still the largest category in South Shore) was only .36%, a very respectable level. Indeed, for the region covered by the Chicago Federal Home Loan Bank, the rate of foreclosures for member institutions was about .5% higher than the conventional rate in South Shore. Of the eight abandoned homes in our sample in 1974, seven were Secretary held FHA foreclosed properties and the eighth, which was promptly demolished, had no outstanding mortgage at all. Thus foreclosure and abandonment are not a disease of the neighborhood, but largely the result of certain FHA lending practices. In spite of heavy FHA activity and racial change, South Shore remains a viable community threatened largely by those conventional lenders who follow the anticipation of decline pronounced by appraisers. It is some lax FHA procedures which have produced sporadic deterioration in South Shore, and not Blacks. The solid record of conventional loans bears this out. But if lenders remove their conventional money from South Shore, leaving only FHA, then it will be hard for the community to maintain its desirability. Actually, all the community wants is to have some of its own money returned. A voluntary survey by the Chicago Federal Home Loan Bank and a city disclosure ordinance have revealed that, in only a partial sampling of Chicago area banks and savings and loans, there are about $72,000,000 in deposits from South Shore in 1973-1974.23 Disclosure is most complete for banks. 32 banks hold almost $63,000,000 in time and demand deposits from South Shore, yet made only $886,000 in mortgages, for a rate of return of just 1.4%. Moreover, the South Shore National Bank, a local institution recently purchased by citizens and designed to be a community development bank accounted for over $600,000 of these loans. The largest holder of deposits was the First National Bank of Chicago, the second largest bank in the state. It held over $24 million in deposits but made only 2 mortgages for a combined total of $46,000. This is a rate of return of .2%. The largest bank in the state, Continental Illinois National Bank, held over $11 million in deposits but made only one mortgage for 24 $32,000. This is a rate of return of .3%. This data shows how the conventional lenders have undermined South Shore by withholding their resources and allowing a large part of the market to fall into the hands of poorly regulated mortgage bankers dealing in FHA lending, as the appraisal consultant for the U.S. League of Savings Associations advises. It is not race that makes South Shore deteriorate, and, as the data show it is not income. A special survey done for the South Shore Bank shows that the Blacks who now live in South Shore are wealthier than the whites who left.25 And, our analysis shows that the actual risks for conventional lenders are as low, or lower, than they are in the entire Chicago area. Yet, by Mr. Opelka's SREA data analysis and warnings, this neighborhood should be evaluated as in decline, rather in need of increased conventional lending. Is this discrimination or unavoidable sound business practice which unfortunately has an unintended discriminatory effect? Within the last few years, while the real estate industry and the social scientists have clung to their old models of neighborhood change and decline, research, which has largely been the product of the concerned and dedicated community organizations, has reached such a level of abundance and sophistication that it is destroying much of the foundations for these earlier models. It is forcing conscientious researchers to rely more heavily on models which take account of the impacts of the conscious decisions of appraisers and lenders rather than models which explain the processes as natural market or natural social phenomenon. But just as it appears that the lenders and members of the real estate industry must give up their cherished models, which justify discriminatory lending on the bases of sound economics and inevitable forces of neighborhood decay, a new publication has come out which gives the appraiser's models new energy. THE DYNAMICS OF NEIGHBORHOOD CHANGE, a report by Public Affairs Counseling, a subsidiary of the prestigious Real Estate Research Corporation, reaffirms the old model and graphically defines neighborhood change in terms of five stages: "Health, incipient decline, clearly declining, accelerating decline, and abandoned." The research is not based on new evidence but is based on past models and literature, heavily drawn from the folklore of |