Greg and Bernadette Johnson started looking in March of 1994. The two had some scratches and dings on their credit records but had been working diligently for some time to pay off their bills. Greg had just changed jobs after working at one company for years. When Greg got back the money he had put into the company's profit-sharing plan, the Johnsons knew what they wanted to use it for: the down payment on a home.

Neither had ever owned a home, and for years they had thought homeownership was out of reach--an impression the Johnsons' initial foray into homebuying reinforced.

"The problems that we ran into had to do with the area," Bernadette says. "I call it the East Valley. Other people still call it South Phoenix."

Actually, the house the couple wanted to buy was in southeast Phoenix, near Tempe Diablo Stadium. Though the clean, quiet, middle-class neighborhood is hardly what some people think of when they hear the words "South Phoenix," the couple still found it difficult to get anyone even to talk to them about buying a house.

"You know how you can tell if somebody's really interested in your deal, the enthusiasm they show? It was like they knew in the back of their minds that we weren't going to get financed, but they wouldn't tell us up front," she says.

A few lenders, including First Interstate Bank, wrung their hands and refused to give the Johnsons a loan, despite the couple's good work history and combined income of more than $40,000. Then the two started looking at mortgage companies. One, Countrywide Funding Corporation, had taken on their case and been giving them "conditional approvals"--in effect, telling them not to worry, that they were approved as long as this or that formality was taken care of. Representatives of both First Interstate and Countrywide said they would not comment on individual applications.

A week before the couple was supposed to close on the house (and after the Johnsons had told their current landlord they would be moving out), Countrywide told them it would not finance the purchase, after all.

"You're already on pins and needles because you're trying to get a house," Bernadette says, "and they're doing this."

About that time, the Johnsons heard about Whitni Smith at Thunderbird Bank. Though a small player in the Phoenix mortgage market, Thunderbird had a solid reputation among area realtors for working with lower-income borrowers to get homes financed.

What mighty First Interstate Bank and a host of other lenders couldn't do in six months, Thunderbird Bank did--in four days.

The Johnsons ended up getting their house, but their happy ending is hardly typical for African Americans in Phoenix. More commonly, prospective Valley homebuyers who happen to be members of minority or low-income groups are repeatedly turned down for loans--until they give up the quest for homeownership.

Government records show that Phoenix financial institutions continue to rank in the bottom third of the country's 20 largest metropolitan areas in lending to minorities and low-income individuals. In fact, a national watchdog group has given almost two dozen Valley institutions "D" or "F" grades in regard to minority and low-income lending.

A New Times survey of mortgage-loan data from South Phoenix shows that prospective buyers of properties there--buyers like the Johnsons--are at least twice as likely to be turned down for financing than people in more affluent parts of town.

In short, the government's own records show that despite fair-lending legislation going back 20 years, "redlining"--the refusal to approve mortgages for minorities in less affluent parts of town--is alive and well in Phoenix.

The small, brick, two-bedroom house sits on Monte Vista Road a few blocks east of 16th Street. It has a neatly trimmed front lawn dotted with cactuses and hibiscus trees, a smooth concrete driveway and a carport. It was built in 1963, but within the last two years has been substantially renovated. Most of the appliances in the kitchen are new, as is the carpeting in the living room and bedrooms. There is an elementary school less than five blocks away. The house is attractively priced around $40,000, and would seem to be an ideal first home for a young couple thinking about starting a family.

Next month, it will have been on the market for a year. There has been no shortage of prospective buyers, the current owners say, but none has been able to obtain financing.

The problem with the house is not amenities, condition or price, but location. It sits near the center of census tract 1116, which stretches from 16th Street to 24th Street and from McDowell Road to Thomas Road.

Most of the people who live in census tract 1116 rent their homes. The relatively low rate of resident homeownership in the area may be explained, at least in part, by the reluctance of local banks and other lenders to approve mortgages in the area. Though there are at least two dozen homes on the market there now--some admittedly in better shape than others--federal data show that last year only two purchase loans in the neighborhood were approved. Three were turned down. The two who got loans were white. The three who didn't weren't.

The Community Reinvestment Act, a federal law passed in 1977, requires banks to make their services available to residents in areas where the median household income is below 80 percent of the national average--areas like census tract 1116. Regulatory agencies can stop banks from merging or otherwise expanding if they don't comply with the law.

Community groups have successfully used the CRA's powers against some institutions with poor middle- and low-income mortgage records. Just a few years ago, several Phoenix and Ohio community organizations banded together, persuading regulators to delay the merger of Banc One with Valley National Bank. The advocacy groups stopped their protests after Banc One agreed to make $67 million in inner-city loans and neighborhood-improving investments in Cleveland. The merger went through, and Bank One Arizona was born.

But Phoenix activists say that such tough enforcement actions are too few and far between. Because of changes in the lending industry, they say, the CRA has relatively little impact on loans to low-income communities.

The proof of the act's impotence, they say, is as close as a drive through South Phoenix.

"If you look at the area that has been traditionally looked at as the minority area, that area has the lowest amount of recorded loans of any area throughout the city," says Henry Wade, housing chairman for the Maricopa County NAACP. "That is redlining."

Once banks and mortgage companies stop lending money for home mortgages, the battle to keep a neighborhood viable is half-lost. Since no one can get financing to buy a house there, property values plummet. Eventually, prices on homes in the neighborhood drop enough that bigger fish move in, buying the houses as rental property.

Renters, generally, do not maintain homes as well as owners. Longtime residents of the area, watching rental properties in their neighborhood decay, decide to sell their houses and leave. Others, forced to move for family or business reasons, often simply walk away from their property. Homes are foreclosed upon; as they sit vacant, they become vulnerable to vandalism. Crime in the neighborhood increases.

Residents of surrounding areas, alarmed at what they see happening in the next neighborhood over, begin to get jittery themselves, and think about moving into the suburbs. Eventually, many will.

The previous account may draw an oversimplified picture of the urban decay cycle. By most all accounts, though, census tract 1116 began going through that cycle about 20 years ago. The situation in South Phoenix is even worse, though at first glance it may not appear to be. In 1994, there was actually high mortgage activity taking place south of the Salt River. But most of the loans were large--ranging from $150,000 to $300,000--and they went to whites who purchased apartment complexes, rather than to people buying the single-family homes that stabilize neighborhoods.

A New Times survey of government data on census tracts in South Phoenix, Scottsdale, Glendale and Ahwatukee reveals startling correlations between geography and mortgage approval rates.

The federal data show that in 1994, regardless of race, applicants for mortgages on properties in South Phoenix were two and a half times more likely to be turned down than those attempting to purchase homes in Glendale. They were four times more likely to be turned down than buyers in Ahwatukee. And they were seven times more likely to be turned down than Scottsdale applicants.

Banks and mortgage companies answer charges of neighborhood redlining by flatly denying they avoid lending money in any particular area of town. Rather, they say, the people who want to buy homes in certain areas have poor or no credit histories, and simply do not qualify for financing.

In the eyes of activists, however, the claim doesn't stand up.
"It's just a way that the banks are able to justify it," says the NAACP's Wade. And applying conventional standards of credit across the board, Wade says, deprives solid, reliable citizens of the chance to become homeowners, and to improve their communities.

Federal law requires banks to make a certain percentage of their mortgage loans to members of minority and low-income groups, regardless of their creditworthiness.

Some large banks have whole offices that do nothing but handle CRA information. Staffers examine loan-rejection rates by race and income level and study lending records in low-to-moderate-income neighborhoods.

There is a weakness in the CRA, though. It applies only to institutions where deposits are insured with tax money. That covers banks, but excludes private mortgage companies. Several years ago, when the law was passed, mortgage companies made up much less of the national mortgage business than they do today. Now they hold the bulk of the money in the country's mortgage lending pool.

Mortgage companies differ from banks in that rather than holding some of the notes themselves ("portfolio lending," in the parlance), they "bundle" huge groups of loans, then sell them to investors in the so-called "secondary market."

Often, mortgage companies are owned by or affiliated with banks.
For example, Bank One Arizona, a financial monolith, has one of the better fair-lending records among local institutions. It shares its parent company, however, with Banc One Mortgage Corporation, which has one of the poorest patterns of lending to minorities and low-income groups. The two entities write comparable numbers of home loans in Phoenix.

Bank One Arizona has an entire staff ensuring it complies with the CRA. Banc One Mortgage has no such worries.

In order to offer the most attractive bundles to investors, mortgage companies shy away from making loans that would be considered anything but low risk--such as loans in lower-income areas, or to lower-income applicants.

Critics say the CRA's effectiveness has diminished every year since the law's passage, as the importance of mortgage companies as lenders has increased. And there are other reasons fair-housing advocates say the law has resulted in little real progress against redlining in Phoenix.

If lenders were serious about minority lending, activists say, they would make loans and other banking services more accessible, by opening branches in lower-income neighborhoods. Also, lenders would adjust their credit requirements--not lower them, but modify them--so that lower-income people could use good payment histories on debts other than credit cards or car loans (which they often do not have) as documentation of creditworthiness.

"There are certain underwriting practices that don't make it easy for lower-income people to get loans," says Martin Shaloo, of the Association of Community Organizations for Reform Now. "For instance, a lower-income person might do all their transactions in cash. They might not have any credit."

Shaloo says lenders must be willing to examine noncredit payment histories--such as utility and telephone bills and rent--and accept timely payments on those accounts as evidence of financial responsibility.

Also, Shaloo says, the extended families that appear in many lower-income households often pool resources. This practice can work against younger members of the family when they seek to buy a home.

"The children or young adults may be kicking money into a pool," Shaloo says, "so you have somebody who reports an income of $12,000 a year and somehow they manage to save $8,000. You have to document how you got that money for the lender."

It may come as a surprise to some people that in many low-income groups, it is common not to have a checking account. It is not at all surprising to Thunderbird Bank's Whitni Smith, the loan officer who gave the Johnsons a mortgage after other companies refused to lend to them.

"There's a lot of things in traditional [loan] guidelines that don't make room for real-life cultural differences," she says. "It may be easier for some people to not have a checking account. It's easier for them not to hassle with it. Plus, there aren't very many banks in some parts of town, like South Phoenix."

Smith says that in the last six months, she has written about 40 loans for properties all over town, including Glendale, Tolleson and Phoenix. This year, she says, she is proposing that her bank write $40 million in loans for affordable housing. That's a lot of loans, at just $40,000 or $50,000 each.

Often, Smith says, the hard part about lending money to lower-income people is convincing them it is worthwhile to apply.

"They're very scared," she says. "They don't understand what you're asking for. They don't understand things that I think a lot of middle-class people take for granted. They're filled with a lot of misconceptions, like, if you've had one credit problem, forget it. If you've changed jobs in the last two years, forget it. Little things like that.

"I'm willing to take some bad credit if it makes sense."
These misconceptions, Smith says, are exacerbated by larger, less-flexible institutions that either can't or won't lend money to low-income people and minorities. Also, most loan officers are paid by commission; they may be hesitant to put in the extra time a nontraditional application takes, because the loan amount is usually small.

And a small loan means a small commission for the loan officer.
"I think so many lenders have all these inexperienced, unknowledgeable people out there who want a commission check," she says. "And they don't have time for these $40,000 loans, because they're not going to make any money. They see one little problem [in the loan application] and boom, it's not going to work.

"People have been scared off."

The Home Mortgage Disclosure Act, a 20-year-old federal law, requires banks and mortgage companies to reveal detailed data about their lending patterns on the basis of location, race and income. An extensive survey of HMDA data by the National Community Reinvestment Coalition, a Washington, D.C.-based watchdog group, shows that if you are a minority or lower-income borrower, getting money to buy a house in Phoenix is hard.

According to the federal data, the approval rate for mortgage applications by minorities in Phoenix is just 7.9 percent--lower than in all but six of the nation's 20 largest cities.

Of the nation's 50 or so "worst lenders"--institutions that fail to seek, encourage or reward prospective lower-income borrowers--three are here in the Valley of the Sun. Many more local lenders did not make the national list but nevertheless have dismal low-income lending records of their own. The local list is dominated, as is the national one, by mortgage companies. And over the last five years, the worst Phoenix lender for minorities and low-income people has been Mellon Mortgage Company. Application rates are considered an important indicator of how serious a commitment lenders have made to serving low-income customers. Of the 55 institutions that make up nearly the whole Phoenix mortgage market, Mellon has the second-worst record when it comes to attracting minority borrowers. In 1993 (the last year for which data were analyzed for the NCRC study), just over 3 percent of Mellon's applicants were nonwhite. Even in Phoenix, where minority and low-income application rates are on the low side compared to the rest of the country, this is barely a third of the market average.

Federal data also show that the few minorities who actually applied for a home mortgage at Mellon in 1993 were six times more likely to be turned down than their white counterparts.

Mellon Mortgage Company's Phoenix office referred questions about the data to Margaret Cohen, a spokesperson at the company's corporate headquarters in Pittsburgh. Cohen said that Mellon is not a big player in the Phoenix market, and that the study's data ignore the performance of Mellon Mortgage's parent company, Mellon Bank. Mellon Bank either does no business in Phoenix or does less than one-half of 1 percent, the threshold for lenders listed in the study.

Cohen said that Mellon Mortgage does most of its business through mortgage brokers and therefore doesn't have a great deal of control over what prospective loans are brought to it. She said the company strives to be a fair lender in all the markets that it serves.

Mellon may be the most statistically egregious example of minority redlining in Phoenix, but it is hardly alone. In 1993, the Prudential Home Mortgage Company actually had a lower minority application rate than Mellon's--just 2 percent. Minority borrowers who did ask Prudential Home Mortgage for financing were turned down almost twice as often as whites.

The Prudential Home Mortgage Company's Phoenix office declined to comment on the study or its local minority and low-income lending practices.

Of the study's worst lenders in Phoenix, perhaps the one with the most to lose is the State Savings Bank in Scottsdale. As a bank (rather than a mortgage company), State Savings has a poor minority-lending record that could arouse the wrath of federal regulators if the institution attempts to merge with or buy another bank. Federal data show that in 1993, State Savings received only about 5 percent of its mortgage applications from minorities.

Unlike Prudential and Mellon, State approved minority applications at about the same rate as those from whites. The study took the bank to task for failing to adequately market to minority groups in Phoenix, as shown by the low numbers of applications State Savings received from minorities.

Marc Trimmer, State Savings' CRA officer, says the low application numbers are anomalies. The bulk of the business the bank did in 1992 (its first year of existence) and 1993 involved the refinancing of loans originally made by the Federal Housing Administration and the Veterans Administration. He says that in the last 18 months, State has added seven bilingual loan officers to help with its low-income-lending efforts. Those loan officers are paid salaries, and not by commission, so the temptation to ignore small, low-income loan-seekers is eliminated.

State Savings Bank would seem to be making an honest effort to adhere to fair-lending practices. But there are 20 other lenders in Phoenix with fair-lending problems of their own. Among the larger ones are Banc One Mortgage Corporation, Venture Financial Services and Countrywide Funding Corporation, one of the companies that first turned down Greg and Bernadette Johnson.

With so many lenders unwilling to help lower-income people get mortgages, finding one that will work with borrowers can be a difficult task. Ultimately, Thunderbird Bank's Smith says, the most important choice a lower-income house hunter makes may be the first--the realtor.

"They need to make sure they get with someone who will help them through the whole process," she says, "including which lender will be best for them.


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