I would also recommend that the disclosure law be expanded to include members of the secondary mortgage market and that the analysis must be mandatory. The attempts to get voluntary efforts have been a failure. They must be mandatory and uniform and I have also suggested in my detailed recommendations that as a uniform process is set up it ought to be set up in a way in which there are few options to avoid a full enforcement. Essentially, there ought to be a uniform analysis of disclosure data and it's been set in California as a signaling system which tells you that a particular institution may be in violation. If they are in violation there's an automatic analysis and automatic examination, and I suggest the reports of those ought to be filed with HUD and the Justice Department.

I must suggest that there's a false issue that has been raised, about the cost. I have a system which was done for the city of Chicago which allows you to match census tracts just like the ZIP code record you can get in the post office. It takes about 30 seconds to match one, so I don't think those costs are prohibitive. I submit extracts from that document.

The CHAIRMAN. Thank you, Mr. Bradford. We will insert in the record at this point the papers referred to.

[The material follows:]

Real Estate Appraisal and Racial Discrimination: A Conspiracy of Beliefs

A Statement Prepared for a Meeting of the Office of Fair Housing and Equal Opportunity, U. S. Department of Housing and Urban Development, Concerning "Redlining and Disinvestment as a Discriminatory Practice in Residential Mortgage Loans" - Philadelphia, July 16, 1976

by

Calvin Bradford

Associate Director of the Center for Urban Studies

Two years ago in May, I spoke before a similar meeting of the Equal Opportunity Office. That meeting was in Hartford. At that meeting I introduced several sets of data to show how lenders in Chicago had withdrawn their support from Black neighborhoods in an 18 square mile area on the southwest side of Chicago while continuing to invest in the white sections of that area. I showed how they first withdrew as conventional lenders in Black areas and then showed how the lending institutions actually moved their offices out of Black or changing areas westward into white areas. Since that time, in hearings before the Senate Committee on Banking and Urban Affairs, a large number of community based studies have documented different facets of this kind of "redlining".1

Today, I would like to address the question of appraisal and underwriting practices. Behind the decisions of lenders not to loan in an area there is a set of beliefs, or standards, about what types of neighborhoods are good risks. The lender's standards about what types of buyers, homes and neighborhoods are good risks are called underwriting standards. These standards, as they apply to homes and neighborhoods, are rooted in real estate appraisal practices. Thus I shall address the role of neighborhood factors, especially race, as they affect real estate appraisal. I am submitting a copy of a report, THE ROLE OF MORTGAGE LENDING PRACTICES IN OLDER URBAN NEIGHBORHOODS: INSTITUTIONAL LENDERS, REGULATORY AGENCIES AND THEIR COMMUNITY IMPACTS, in which I have a chapter dealing in detail with the issues of neighborhood analysis, appraisal quality, and biases in appraisal standards. In my oral statements, I shall use excerpts from that report as they relate to racial discrimination and appraisal practices.

An appraisal is an attempt to determine the market value of a property. Lenders are required by law to have a property appraised before they can grant a mortgage. This is done to insure that the lender is not making loans which are a poor risk, or loans which are too large for the value of the property. A lender makes a loan for a portion of the estimated value of a property, but not all of the value. In this way, the lender tries to insure that if the property must be foreclosed and the lender has to sell it to get back the principle amount of the loan, unpaid interest, and other fees and costs, the home will sell for enough to cover these potential losses. Since mortgage amounts are based on these estimated values, and since the appraisal is the lender's protection against the criticism that his loan policies are not sound, appraisals and appraisal standards are extremely influential in helping to determine a lender's policy. Discrimination in appraisal, may well express itself in discriminatory lending practices.

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While many states do license or otherwise regulate persons who do these appraisals, there are no uniform legal criteria. However, most lenders will hire appraisers who have been trained and certified by one of the two major professional organizations of appraisers, the American Institute of Real Estate Appraisers or the Society of Real Estate Appraisers. Both of these associations require members to take courses in proper appraisal and submit evidence of their work and ability before they receive full membership as qualified appraisers. Certification by these associations represents the highest level of professional training and expertise in real estate appraisal.

While there are two different associations, they are very similar and their underlying standards of appraisal are almost identical. Indeed, the most recent book on appraisal terminology was issued by the two organizations jointly. Thus, for reasons of brevity, I shall concentrate on the literature and teachings of just one organization--the American Institute of Real Estate Appraisers. Material will be drawn from their texts, and from materials used in their basic course as offered in the Fall of 1973.

The key element of appraisal of concern for us at this meeting is the question of how race affects appraisals. This becomes a question of what appraisers call "neighborhood analysis". The typical appraisal of a singlefamily home involves two sets of information. The first set involves information about individual properties. This ranges from data on the size or amenities in the home to information about the type of financing, legal restrictions, or covenants which affect the title to the property. Generally, appraisers estimate the value of one house from an analysis of this information which they collect on a small group of similar houses. By making adjustments in the value of these similar properties, to allow for differences between them and the house being appraised, an appraiser comes up with an estimate of value.

Aside from this information about individual properties, the appraiser will take account of the social characteristics of the neighborhood where the house is located. It is in this analysis that questions of the effects of racial change may be translated into dollar values affecting an appraisal.

The analysis of the neighborhood is considered the most essential part of the appraisal. One text reads, "The value levels in residential neighborhoods are influenced more by the social characteristics of its present and prospective occupants than by any other factor."2 In analyzing the impact of the social characteristics of a population on the neighborhood, appraisers draw on two models of neighborhood change and neighborhood life cycles. Both of these models developed in the 1920's and 1930's at the University of Chicago.

The first is called the filtering, or trickle-down, model of neighborhood change. It was originated by Homer Hoyt.3 This model suggests that as properties get older, they filter down into the hands of poorer

abandoned. Since most of the properties in an area are built within a short time span, this filtering takes place in entire neighborhoods.

The model which more clearly deals with race was developed in the Chicago School of Sociology by Robert Park and Ernest W. Burgess." .4 This model stems from a strong social Darwinistic tradition, where not only animals, but people were seen to survive and reach positions of power and status because they were innately the strongest species. This school was also heavily influenced by plant biology, particularly studies of how various plants would take over a piece of land previously filled by a different species. It was believed that the "invading" plant, as it was called, drove out the original inhabitants because the invaders were better suited to that particular environment.

When applied to human society and the neighborhood patterns of urban areas in particular, this model held that different groups of people "infiltrated" and invaded" territory held by others and that through a process of "competition", which was a kind of war of survival, the group most suited to that environment would win out and eventually take over completely. As these members of this school watched neighborhoods decline or watched ghettos form, they suggested that the wealthier and more politically organized and powerful residents of neighborhoods once invaded by poorer people, lose the battle for their territory and eventually leave the area to the poorer people. While this flies in the face of all we know about human political and social power it is clearly consistent with a model of human behavior based on studies of how weeds can drive oak trees out of a forest.

This model is not based on considerations of human intelligence or the ability of humans to make intentional decisions, or any other considerations of the features of humans which distinguish them from plants. Thus 'if weeds can muscle out oak trees, despite the clear strength of oaks, then poor people, usually described as a low-status ethnic group as well, can invade and conquer the domain of the wealthier established residents. Neighborhoods were seen as natural areas produced by natural forces, not shaped by conscious decision or human intentions.

Finally, one must understand how this model molded human behavior to spatial locations and conditions of neighborhoods. Plants are located in a particular place because they are naturally and innately suited to that environment. If people, then, live in the filth of a ghetto, they are seen as well suited to that environment. Robert Park writes of the Jews, who at that time, occupied the ghettos of Chicago:

In the great city of the poor, the vicious, and the delinquent, crushed together in an unhealthful and contagious intimacy, breed in and in, soul and body, so that it has often occured to me that those long generations of the Jukes and the Tribes of Ishmael would not show such a persistent and distressing uniformity of vice, crime, and poverty unless they were peculiarly fit for the environment in which they are condemned to exist.