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Housing Policy Debate
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Making new mortgage markets: Case studies of
institutions, home buyers, and communities
David Listokin & Elvin K. Wyly
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Housing Policy Debate
·
Volume 11, Issue 3
575
575
©
Fannie Mae Foundation 2000. All Rights Reserved.
Making New Mortgage Markets: Case Studies of
Institutions, Home Buyers, and Communities
David Listokin and Elvin K. Wyly
Rutgers University
Abstract
America’s housing and mortgage markets are undergoing a dramatic transformation,
as urban reinvestment and attempts to tap underserved markets of new homeowners
alter historical processes of redlining and discrimination. This article synthesizes
findings from case studies of private lenders, lender consortia, and nonprofit commu-
nity organizations that are active in underserved markets and analyzes the strate-
gies these organizations use to attract and qualify mortgage applicants and retain
new homeowners.
The case studies reveal a diverse array of strategies designed to address market im-
perfections related to information, discrimination, and household financial character-
istics. Although these strategies expand homeownership opportunities, challenges
remain. They reflect inherent tensions between the industry trend toward standard-
ized, efficient business practices and the customized, often expensive programs need-
ed to address the multiple obstacles to homeownership and community development
faced by underserved households and communities. They also reflect the historically
unequal distribution of risks and rewards in America’s central socioeconomic institu-
tion—homeownership.
Keywords: Homeownership; Mortgages; Underserved
Introduction
America’s housing and mortgage markets are in the midst of a dramatic
transformation. After generations of discrimination and disinvestment,
low-income and minority borrowers and neighborhoods now represent
growth potential for homeownership and mortgage lending. In a move-
ment that seems to reconcile socioeconomic equity with the imperatives
of profitability in a competitive and turbulent industry, mortgage lend-
ing has emerged as the key to revitalizing the inner city, opening ac-
cess to suburban housing markets, and promoting the accumulation of
household wealth. Housing policy is now a race to tap new markets for
homeownership by reaching traditionally underserved populations of
racial and ethnic minorities, recent immigrants, American Indians, and
low- to moderate-income (LMI) households.
This article, building on a 1998 investigation funded by the U.S. Depart-
ment of Housing and Urban Development (Listokin et al. 1998), exam-
ines illustrative lending and other strategies used by a cross section of
leaders to foster homeownership among traditionally underserved

5
76
David Listokin and Elvin K. Wyly
populations. The case studies encompass diverse institutions, includ-
ing private banks and mortgage lenders, lending consortia, and non-
profit community organizations. Lending industry regulators and
other sources recognize those institutions as among the leaders in the
effort to expand homeownership opportunities.
We use a qualitative approach to synthesize the efforts of case study
participants. We thus refrain from terming these strategies best prac-
tices because our research provides too few cases and has other limita-
tions that inhibit the identification of “best” or “exemplary” actions ac-
cording to generally accepted social science methodologies. Instead, we
term the efforts illustrative strategies because they reflect the wide vari-
ety of interventions that have evolved in response to changes in Amer-
ica’s housing and mortgage markets and in response to the different
city, institution, client group, and other contextual factors faced by the
different case study institutions.
These illustrative strategies provide useful documentation of the scope
and diversity of efforts to expand homeownership opportunities at a
critical juncture in the development of the U.S. housing finance system.
Numerous, diverse strategies include activities to attract and qualify
applicants and to retain successful homeowners. At their core, howev-
er, the strategies encompass a broad central notion of how to reach
traditionally underserved markets by “developing an intimate knowl-
edge of the target clientele and their housing and lending needs and
finding a way to match their needs with services within the agency’s
1
resource and legal, financial, and institutional constraints.” Efforts to
meet the needs of traditionally underserved populations are challeng-
ing because they attempt to address a broad range of financial, dis-
criminatory, cultural, and other barriers historically confronting such
populations. Adding to that challenge is the tension between a con-
temporary lending industry that emphasizes efficient, standardized
procedures and the labor-intensive, customized interventions required
to reach the underserved.
The analysis and findings are presented in seven sections. We begin
with a brief history of the current movement to tap new markets for
homeownership, followed by a discussion of the theoretical framework
used to organize the results of the case studies. We then turn to the il-
lustrative strategies used by the case study institutions, with separate
sections on (1) institutional management, (2) attracting applicants,
(
3) qualifying applicants, and (4) retaining new homeowners. In the
concluding section, we discuss the accomplishments, potential, and
limitations of housing finance as a policy instrument for promoting
household opportunity and community development.
1
We are indebted to George McCarthy for his insightful depiction of this theme in an
unpublished letter.

Making New Mortgage Markets: Case Studies
577
Background: A generation of change in housing finance
2
From “redlining” to “reinvestment” to “underserved markets”
America’s housing finance system has undergone a sweeping transfor-
mation over the past generation. Economic restructuring, community
activism, and policy measures have intersected in complex but distinct
ways in each of the past three decades. In the 1970s, the dislocations
of deindustrialization and “stagflation” devastated housing market
activity, while discrimination against minority and low-income urban
neighborhoods remained widespread, severe, and often blatant. A di-
verse and vibrant community reinvestment movement with roots in the
civil rights and community-organizing movements responded with ag-
gressive efforts to document and challenge blockbusting, disinvestment,
and redlining (Squires 1992). Local and regional activism broadened to
a national movement, culminating in the passage of the Home Mortgage
Disclosure Act (HMDA) of 1975 and the Community Reinvestment Act
(CRA) of 1977.
By the 1980s, housing markets had experienced some revival, but sev-
3
eral problems as well. For instance, the overall homeownership rate
slipped from 64.6 percent in 1983 to 63.9 percent in 1985. Also, evidence
from HMDA and other sources continued to show lingering racial and
geographic disparities in mortgage lending. Research and community
activism surrounding Dedman’s (1988) Pulitzer Prize–winning “Color
of Money” study of redlining in Atlanta led to provisions strengthening
HMDA as part of the S&L legislation of 1989 (see Vartanian et al. 1995).
Those provisions generated new loan-level data on characteristics of
mortgage applicants and the disposition of their applications, which in
turn initiated a new wave of research.
The 1990s ushered in an era of growing complexity that has continued
into 2000. The nation is enjoying its longest-running expansion in the
context of extremely low inflation and low unemployment, and an ex-
panding secondary mortgage market has reduced borrowing costs while
allowing greater flexibility in underwriting. The nation has realized
significant gains in homeownership since the mid-1990s and recently
posted the highest homeownership rate ever recorded—66.8 percent in
1
999 (table 1). Further, a subtle but widespread shift has become appar-
ent among lenders, regulators, and scholars: In many quarters, talk of
fair lending requirements has given way to discussions of reaching un-
derserved markets of minorities, LMI borrowers, and formerly redlined
city neighborhoods.
2
We extend our apologies to Squires (1992) for paraphrasing his title.
3
As an example of this revival, the value of newly constructed housing units rose
from $57 billion in 1982 to almost $140 billion toward the end of the 1980s.

5
78
David Listokin and Elvin K. Wyly
Table 1. Homeownership Rates for the United States, 1994 and 1999
1
994–1999
1
994
1999
(%)
(
%)
Change in %
% Change
Nation overall
By group
White (non-Hispanic)
African American
64.0
66.8
+2.8
+4.4
70.0
42.5
73.2
46.7
+3.2
+4.2
+4.6
+9.9
(
non-Hispanic)
Hispanic
41.2
50.8
45.5
54.1
+4.3
+3.3
+10.4
+6.5
Other (non-Hispanic)*
Sources: U.S. Bureau of the Census 1994, 1999.
Includes Asian Americans, American Indians, and Pacific Islanders.
*
These shifts, as well as extremely favorable employment and interest
rate environments, have yielded dramatic progress in lending to bor-
rowers and neighborhoods that were traditionally excluded from home-
ownership. Between 1993 and 1997, the number of conventional home-
purchase loans to African-American and Hispanic borrowers increased
by 72 percent and 45 percent, respectively, compared with an increase
of only 22 percent for non-Hispanic whites. From 1994 to 1999, both
the absolute and relative percentage increases in minority households
achieving homeownership outstripped those of their majority counter-
parts, as is evident in table 1. Lending increases have also been appar-
ent when underserved markets are defined geographically: Between
1
993 and 1997, mortgage loan originations increased by 40 percent in
predominantly minority neighborhoods and by 31 percent in low-income
neighborhoods, compared with an overall increase of 20 percent across
4
the nation’s metropolitan areas (Can, Bogdon, and Tong 1999). Many
lenders have committed capital to lending initiatives explicitly target-
ed to underserved borrowers or neighborhoods. Schwartz (1998) cites
evidence that since the passage of the CRA in 1977, community-based
organizations have negotiated with lenders to secure more than 300
reinvestment agreements valued at more than $353 billion. Neverthe-
less, substantial challenges and barriers remain.
Persistent challenges and barriers
First, expanded lending to underserved markets is precariously balanced
on the long-running economic expansion of the 1990s. Fair lending ini-
tiatives have benefited greatly from the combination of low interest
4
These figures include both conventional and government-backed products. Minority
neighborhoods are defined as tracts in which racial minorities composed more than
8
0 percent of the total population in 1990; low-income neighborhoods are defined as
tracts with median household income at or below 80 percent of the metropolitan
median in 1990.

Making New Mortgage Markets: Case Studies
579
rates, sustained economic growth, and tight labor markets; but questions
about the sustainability of those efforts remain, particularly among
first-time low-income borrowers shouldering high debt ratios on prop-
erties that might not reap the appreciation windfall characterizing the
postwar period. Thus, the 1990s run-up in homeownership attainment
by the traditionally underserved may, like the stock market, be due for
a correction when the economic cycle turns.
Second, it is also important to recognize that alternative statistics tell
different stories about the nation’s booming housing market, and rapid
growth rates have not yet eliminated long-standing inequalities. Even
though African-American and Hispanic homeownership grew at six
times the net rate of increase for non-Hispanic whites between 1995
and 1999, minority ownership still stands at only about 63 percent of
the level for whites. The differences are stark: In 1999, 73.2 percent of
non-Hispanic whites owned their homes, compared with 46.7 percent
for non-Hispanic African Americans and 45.5 percent for Hispanics
(
table 1). There are also marked geographic disparities, such as a central-
city homeownership rate of just over 50 percent, compared with a rate
of almost 75 percent in suburban areas. Similarly, CRA lending during
the past 20 years appears striking at $353 billion until one considers
the total magnitude of mortgage credit flows: In the first half of the
1
$
990s alone, mortgage loans on one- to four-family homes exceeded
4.3 trillion (Simmons 1997).
National data indicating enhanced mortgage lending to, and homeown-
ership gains achieved by, the traditionally underserved also mask many
pockets of stark need. Through 1994, not a single conventional mortgage
had been closed on the Navajo Nation, an Indian reservation with a
land area larger than that of nine states (27,000 square miles, 17 mil-
lion acres). The Little Haiti neighborhood in Miami, with a population
of about 65,000, has only one bank, and its residents must often turn
to pawnshops for their credit needs.
Third, racial discrimination remains a problem that cannot be regard-
ed as only a historical legacy. The most comprehensive, rigorous study
of mortgage-lending discrimination ever undertaken revealed that
African Americans are 60 percent more likely to be denied a mortgage
loan than identically qualified whites (Munnell et al. 1992, 1996). This
finding has withstood repeated attempts to dismiss racial disparities
in terms of unmeasured applicant characteristics, econometric flaws,
and data coding errors (Browne and Tootell 1995). Discrimination in
mortgage lending persists and still demands scholarly attention, reg-
ulatory scrutiny, and legal action (Yinger 1998).
Fourth, racial disparities in mortgage markets cannot be divorced
from processes that take place before the underwriting stage. Because
of the widespread availability of HMDA data on mortgage-applicant

5
80
David Listokin and Elvin K. Wyly
race and ethnicity, most research has focused narrowly on the deci-
sion to approve or reject a loan. It is widely recognized, however, that
race permeates many aspects of housing markets in American cities
from the search process onward (Turner 1992, 1993; Turner and Mikel-
sons 1992; Turner and Wienk 1993) and that discrimination in one
market may reinforce and multiply discriminatory effects in others
(
Yinger 1995). These effects are by no means trivial. Yinger (1997)
estimates that racial inequalities in housing search processes impose a
discrimination “tax” of nearly $4,000 on African-American and His-
panic households every time they search for a home to purchase. And
the search process is just the beginning of a racial gauntlet. A 1993
Cleveland (Ohio) Residential Housing and Mortgage Credit Project
identified many areas of the home-buying process in which discrimina-
tory acts were most likely to occur (see table 2).
Table 2. Discriminatory Acts in the Home-Buying Process
Potential Trouble Area
Examples of Discriminatory Barriers
Home purchaser’s contact
with the real estate agent
Steering; disparate treatment, as in provision of
information (e.g., a real estate agent informing only
certain home seekers about a particular affordable
loan program)
Home purchaser’s contact
with the lender
Disparate treatment, as in provision of information;
redlining
Appraisal process
Inaccurate appraisals for LMI- or minority-
concentrated neighborhoods
Property insurance
Poor service to LMI and minority markets by
insurance companies and agents
Interaction with the credit
bureaus
Slow correction of errors on credit reports;
inappropriate use of credit scoring
Source: Federal Reserve Bank of Cleveland 1994.
Fifth, even without the “American dilemma” of racial divide and discrim-
ination, the limited assets of minorities would severely limit their abil-
ity to secure homeownership. According to the 1995 Survey of Income
and Program Participation, white (non-Hispanic) renters had an aver-
age household income of $30,196 and an average of $11,368 in assets.
By contrast, African-American and Hispanic renters had average house-
hold incomes of $20,917 and $23,026, respectively; their average assets
were a paltry $1,601 and $2,000, respectively. Such constrained re-
sources severely limit minority renters’ economic capacity to realize
the American dream.
Finally, discriminatory and economic barriers confronting the under-
served are sometimes worsened by language and cultural differences.

Making New Mortgage Markets: Case Studies
581
This problem is exemplified by the hurdles to homeownership confront-
ed by immigrants, most of whom are members of racial or ethnic mi-
norities. In revealing ethnographic research, Ratner (1996) documented
that immigrants wishing to become homeowners were often challenged
because of their minority status, limited resources, communication
problems, and culturally based misinformation on how the homeown-
ership financing system operates in the United States.
Understanding underserved markets
All of these factors—the transformation of housing finance and the
many remaining barriers—demand increased attention to the complex-
ities of lending to traditionally underserved markets. While it is still
essential to document the existence and severity of discrimination
(
Yinger 1998), it is also crucial to understand how affordable lending
initiatives have evolved from the intricate interplay of macroeconomic
forces, regulatory intervention, community activism, and lending insti-
tution profitability. Indeed, some experts place less emphasis on the
need to document inequalities in access to mortgage credit and more
emphasis on the mortgage credit terms offered and the material bene-
fits actually delivered by homeownership. Unfortunately, with few ex-
ceptions (Rohe et al. 1998; Schwartz 1998), relatively little is known
about the role of mortgage lending in sustainable homeownership and
community development in traditionally underserved markets. Evidence
suggests that such initiatives have expanded dramatically in the past
decade, but we often have only a superficial knowledge of how they
evolved, what they comprise, and what they have accomplished. An-
swering those questions requires detailed case studies of current ef-
forts to expand mortgage credit and homeownership opportunities.
Research approach
This article describes the lending and other strategies used by a cross
section of organizations recognized as leaders in the effort to foster
homeownership among traditionally underserved populations. Our
focus is, therefore, in stark contrast to the literature documenting the
limitations on access to credit and homeownership; our purpose is to
document emerging efforts to reduce discrimination in, and more gen-
erally to open access to, underserved markets.
We adopt an inclusive definition of such markets. In light of wide vari-
ations in industry practices and local contextual factors, our definition
includes all attempts to increase lending to (1) LMI or minority borrow-
ers or (2) LMI or minority neighborhoods (minority is defined as all
racial and ethnic groups except non-Hispanic whites, but in practice
most efforts are directed toward African Americans and Hispanics).

5
82
David Listokin and Elvin K. Wyly
Clearly, this broad definition encompasses an exceedingly wide range
of lending industry efforts under the banner of “underserved markets.”
As we hope to show, however, the market for homeownership among
groups traditionally excluded from the mainstream mortgage market
has grown considerably in size and complexity in recent years, yielding
a dizzying array of alternative submarkets, guidelines, and practices.
Leaders in efforts to reach underserved markets were identified mainly
through reputation. Reputation is stressed because of limitations in
HMDA data and because we believe that financial industry and non-
profit groups have a good working knowledge of the leaders and inno-
vators in expanding markets to minority, LMI, immigrant, and similar
populations. To that end, in a prior investigation for HUD (Listokin et
al. 1998), we sought reputational nominations from financial institution
regulators (e.g., Federal Reserve Banks and the U. S. Comptroller of the
Currency); secondary market funders (Fannie Mae and Freddie Mac);
industry groups (e.g., the American Bankers Association and the Mort-
gage Bankers Association of America); and advocacy and community
groups and activists (e.g., Woodstock Institute and fair housing coun-
cils). In that investigation, we contacted a total of 25 such entities and
asked them to identify institutions with the foremost reputations in
expanding homeownership opportunities to traditionally underserved
populations.
As a supplement to the procedure just noted, we further identified can-
5
didate institutions by consulting the growing body of literature on ef-
forts to expand home mortgage opportunities. (That review also gave
us a better understanding of the so-called best practices.) In addition,
we used other means to identify candidates, such as personal knowl-
edge of lenders and nonprofits acting to further opportunities. While
we used various approaches to identify institutions for study, reputa-
tion was the most heavily weighted.
In considering candidates, we excluded from our analysis those entities
focusing on subprime lending. We did include several lenders specializ-
ing in Federal Housing Administration (FHA)–insured products, while
recognizing that debate persists on the program’s contributions and
drawbacks (e.g., Bradford 1998). Our central focus, however, was on
attempts to expand access to conventional credit.
5
Prominent contributions to the literature include America’s Community Bankers
997; Federal Deposit Insurance Corporation 1994; Federal Financial Institutions
1
Examination Council 1992; Federal Reserve Bank of Boston 1993; HUD 1996; Intera-
gency Regulatory Task Force 1994; Mortgage Bankers Association of America 1994;
National Community Reinvestment Coalition 1997; Neighborhood Reinvestment Cor-
poration 1997; Savings and Community Bankers of America 1993; Social Compact
between Financial Services Institutions and America’s Neighborhoods 1995; U.S.
Comptroller of the Currency 1997; and Vartanian et al. 1995.

Making New Mortgage Markets: Case Studies
583
We ultimately identified over 200 potential case study candidates. From
6
this pool, we selected 16 case studies, or roughly 8 percent. We winnowed
the field on the basis of available study resources, the willingness of
those nominated to cooperate with the research team, our desire to
study diverse organizations serving varying populations in different
areas of the country, and our prior contact with and knowledge of many
of the candidates in the HUD-funded study (Listokin et al. 1998).
The case studies are a cross section of highly regarded institutions
rather than a representative sample of those nominated. The cross
section comprises four national and regional lenders; four community
lenders, including two minority-owned banks; two metropolitanwide
lender consortia; and six nonprofit enterprises as follows:
For-Profit Institutions
National/Regional Lenders
Bank of America (BofA)
Countrywide Home Loans, Inc. (Countrywide)
Norwest Mortgage, Inc. (Norwest)
People’s Bank (People’s)
Community Lenders
Berean Federal Savings Bank (Berean)
First National Bank of Farmington (FNBF)
Industrial Bank (Industrial)
Trent Financial (Trent)
Lender Consortia
Atlanta Mortgage Consortium (AMC)
Delaware Valley Mortgage Plan (DVMP)
Nonprofit Institutions
Asian Americans for Equality (AAFE)
Chattanooga Neighborhood Enterprise, Inc. (CNE)
Little Haiti Housing Association (LHHA)
NAACP–NationsBank Community Development Resource Centers
(CDRCs)
Navajo Partnership for Housing (NPH)
Neighborhood Housing Services of Chicago (NHSC)
The case study institutions are geographically dispersed throughout
the United States; they range widely in age, with the oldest formed in
1
842 and the newest established in 1996. They are further described
in table 3, which also contains a synopsis of their accomplishments.
To place the case studies in a broader context, we also prepared a syn-
thesis of Federal Reserve studies that provided recommendations for
6
Nine of the case studies were originally examined in an analysis for HUD (Listokin
et al. 1998). These nine have been expanded and updated.

Table 3. Case Study Institutions: Profiles and Accomplishments
Case Study
Institution
Year
Founded Service Area
Description
Illustrative Accomplishments
For-profit lending institutions
National/regional lenders
a
BofA
1904
National
As of 1997 (before its merger with NationsBank),
the second-largest banking company in the United
Maintains a comprehensive program of lending to
underserved populations through its Neighborhood
States, holding about 40 percent of its assets (about Advantage affordable products program, launched
$50 billion) in residential mortgages
in 1990. Made a 10-year, $37 billion commitment
to LMI home lending as part of an overall lending
goal of $140 billion
Countrywide
1969
1906
1842
National
National
Regional
Principal subsidiary of Countrywide Credit Indus-
tries, Inc., which provides vertically integrated
financial services. One of the nation’s leading sin-
gle-family mortgage originators and servicers
About one-sixth of its mortgages made to African-
American, Hispanic, or American Indian borrowers.
Largest lender to the Hispanic market, according
to 1998 Home Mortgage Disclosure Act data
b
Norwest
As of 1998, the nation’s largest originator and sec-
ond-largest servicer of residential mortgages. Ver-
tically integrated mortgage subsidiary of Wells
Fargo & Company
The nation’s top mortgage originator to minorities
and LMI consumers. Offers integrated initiatives
to reach underserved populations and neighbor-
hoods
People’s
Large regional savings bank in New England and
the leading residential lender in Connecticut. Held
Integrated efforts to reach underserved markets
beginning in the early 1990s. Offers Building
Foundations—a $200 million initiative comprising
state, government-sponsored enterprise, and port-
folio affordable mortgages. In 1998, Building Foun-
dations extended approximately $96 million in
affordable mortgage loans and helped 941 people
buy homes
(New England)
$2.2 billion in residential mortgages in 1996

Table 3. Case Study Institutions: Profiles and Accomplishments (continued)
Case Study
Institution
Year
Founded Service Area
Description
Illustrative Accomplishments
For-profit lending institutions (continued)
Community lenders
Berean
1888
Philadelphia
The nation’s oldest minority-owned and -operated
thrift institution, specializing in single-family lend- borrowers and about 50 percent to LMI borrowers
ing in the largely minority West Philadelphia area
About 95 percent of mortgages granted to minority
c
FNBF
1902
San Juan
County, NM
Small commercial bank, located in a border commu- A leader in the development of mortgage markets
nity (Farmington, NM) next to the Navajo Nation,
providing mortgage and other banking services to
American Indians
and other financial services to the Navajo Nation.
Closed the first federally insured mortgage loan on
the Navajo Nation
Industrial
1934
Washington, DC,
area
Largest African American–owned commercial bank Customized, personalized efforts toward outreach,
in the United States, but with a small volume of
residential lending in Washington, DC, and Prince
George’s County, MD
underwriting, and postpurchase retention in minor-
ity markets of the Washington, DC area. Mortgage
volume is modest (e.g., 32 mortgages in 1997), but
mortgage lending is primarily to African-American
(81 percent in 1997) and LMI (56 percent in 1997)
borrowers.
d
Trent
1986
1988
Los Angeles
Small mortgage brokerage company specializing in Made about 90 percent of its loans to people of
FHA lending to LMI, minority, and immigrant bor-
rowers and neighborhoods in South Central Los
Angeles and surrounding areas
color with low or moderate incomes
Lender consortia
e
AMC
Fulton and
Nationally recognized consortium established in
response to “The Color of Money” redlining study
in 1988
Provided outreach and education along with flexible
loan products through nine member banks. Closed
a total of 1,815 loans with a value of $95 million.
Seventy percent of AMC loans went to minorities
with incomes at or below 80 percent of the area
median.
DeKalb Coun-
ties, GA (includ-
ing Atlanta)

Table 3. Case Study Institutions: Profiles and Accomplishments (continued)
Case Study
Institution
Year
Founded Service Area
Description
Illustrative Accomplishments
Lender consortia (continued)
DVMP
1975
Originally Phila-
delphia; later ex-
panded to a six-
county area
One of the nation’s longest-running, collaborative
mortgage-loan programs; established in response
to local activism that predated the Community
Reinvestment Act
From 1975 through 1998, 27,952 mortgages with a
total value of $763 million granted under DVMP
auspices. In 1996, 73 percent of DVMP loans were
made in Philadelphia, 75 percent were made to
minorities, and 60 percent were made to very low
income households.
Nonprofit institutions
AAFE
1974
1986
1987
Asian neighbor-
hoods in New
York City
Community-based, nonprofit civil rights and hous-
ing organization dedicated to providing housing
development (both rental and owner occupied),
Aided its clients in obtaining a cumulative total of
$63 million in home mortgage loans, provides home-
ownership counseling to about 500 persons annually,
housing assistance (e.g., homeownership counseling raised almost $18 million in private and public cap-
and tenant advocacy), citizenship courses, financial
counseling, and a variety of other social and eco-
nomic services to Asian Americans in the New York produce about 250 affordable rental and homeowner-
metropolitan area
ital to develop 185 affordable apartments, and is
currently involved in $26 million in projects that will
ship units as well as commercial improvements
CNE
City of
Chattanooga,
TN, and
Hamilton
County, TN
Nonprofit organization that facilitates financing,
development, and renovation of affordable housing
and prepares home buyers through education and
counseling; an affiliate of the Neighborhood Rein-
vestment Corporation (NRC)
Financed, produced, or renovated more than 4,600
units ($140 million investment), including origina-
tion or facilitation of almost 2,000 home-purchase
loans ($92 million). In 10 years, purchase loan vol-
ume grew from 7 to more than 300 home mortgages
annually. Leverages private-sector investment, cap-
tures public investment, and provides extensive
services to borrowers.
LHHA
Little Haiti (and
Uses housing as a primary vehicle to improve the
As of February 1999, had provided extensive
nearby neighbor- shelter and socioeconomic conditions of Haitians in homeownership counseling to 180 families. Of the
hoods) in Miami
Miami’s Little Haiti neighborhood. Applies a com-
prehensive integrated housing strategy that pro-
duces rehabilitated and new affordable housing
and provides both rental and homeownership
assistance.
57 families that purchased houses, not one has
experienced a foreclosure; and the delinquency
rate is zero percent. LHHA is in the process of
rehabilitating about 70 multifamily units and
building a new 33-unit for-sale townhouse project.

Table 3. Case Study Institutions: Profiles and Accomplishments (continued)
Case Study
Institution
Year
Founded Service Area
Description
Illustrative Accomplishments
Nonprofit institutions (continued)
NAACP–
1991
Atlanta; Austin,
TX; Charlotte,
NC; Columbia,
SC; Ft. Lauder-
dale, FL; and
Partnership between a civil rights organization and Between 1993 and 1996, made 443 home mortgage
a
NationsBank
Community
Development
a leading national bank. Provides education, tech-
nical assistance, and counseling along with home
mortgage, consumer, small business, and commu-
nity-development lending.
loans with a total value of $32.3 million. About 98
percent of those loans were to minority borrowers,
mostly LMI households.
Resource Cen-
ters
Richmond, VA
NPH
1996
Navajo Nation
Nonprofit affiliate of the NRC devoted to home-
ownership on the Navajo Nation. (Through 1994,
Involved on many fronts in surmounting the many
legal and institutional barriers to collateralized
(
AZ, NM, UT)
not a single conventional mortgage had been closed mortgage lending on Indian lands. As of mid-1998,
on the Navajo Nation, an Indian reservation with
a land area larger than that of nine states.) Offers
home-buyer education and counseling, provides
intermediation for the buyer with tribal and gov-
ernmental authorities, and makes available other
services.
only one home purchase on the Navajo Nation, in-
volving two separate mortgages, had been facilitat-
ed, but 13 loans had been approved. NPH had pro-
vided individual counseling, group homeownership
training, or both to almost 150 people. Developed
homeownership education materials especially for
American Indians.
NHSC
1975
Chicago (All LMI Largest member of the NRC network. Nonprofit
areas, with a organization that administers loan programs to
focus on 20 target finance home improvement, purchase, and rehabil-
Has provided about 6,800 loans—including home
improvement, purchase-rehabilitation, and pur-
chase loans—to borrowers in LMI Chicago census
tracts. Sixty percent of the borrowers earned 80
percent or less of the area median income, and 90
percent were ethnic minorities, racial minorities,
or both. Other accomplishments include rehabilita-
tion or new construction of 21,000 housing units.
neighborhoods)
itation for LMI families; buys and redevelops sin-
gle-family and multifamily properties; builds new
affordable housing; and engages in community-
building activities through neighborhood-based
programs.
a
In September 1998, NationsBank and BankAmerica merged to form Bank of America.
In November 1998, Wells Fargo & Company merged with Norwest Corporation, the parent of Norwest Mortgage. In April 2000, Norwest Mortgage
changed its name to Wells Fargo Home Mortgage.
FNBF was acquired by Wells Fargo Bank New Mexico in March 2000.
Trent Financial ceased operations on December 31, 1999.
AMC disbanded in 1997 in response to greater industrywide attention to underserved markets and consortia instability.
b
c
d
e

5
88
David Listokin and Elvin K. Wyly
expanding homeownership and eliminating discrimination in the mort-
gage finance and support industries (e.g., real estate, appraisal, and in-
surance). These studies were conducted by the Federal Reserve Banks
of Boston, Cleveland, Chicago, New York, San Francisco, and St. Louis.
The case study analyses consisted of telephone and on-site interviews
with principals such as nonprofit executive directors and senior bank
staff responsible for affordable lending. In a few cases, we also contacted
beneficiaries of the efforts of the case study organizations, such as new
homeowners or individuals being counseled. Where relevant, census
housing and social data were analyzed to set the stage. Other infor-
mation sources included annual reports, employee training manuals,
advertising copy, market studies, and newspaper articles and other
7
literature.
We acknowledge the limitations of our approach. No precise way of
identifying “leaders” exists; furthermore, our case studies include only
a small share of the larger group of institutions so identified. In any
event, our case studies are limited in number and our investigation is
qualitative. We also do not have a control group of less highly regarded
institutions whose practices we could compare with those of our leaders.
But given how little is known about how institutions are expanding
homeownership opportunities to the traditionally underserved, an ex-
ploratory, qualitative case study investigation is appropriate and timely.
To better understand the challenges confronting our case study organiza-
tions in opening markets, and to appreciate what they accomplished,
we present a theoretical framework of the influences on the under-
served market, including contemporary trends in the finance industry.
Theoretical framework: Correcting mortgage
market imperfections
Standardization, routinization, and efficiency
The United States is characterized by a historically entrenched sys-
tem favoring homeownership through a complex array of supply- and
demand-side subsidies (Jackson 1985; Krueckeberg 1999). However, in
the absence of a highly efficient mortgage lending industry, subsidies
are not enough to support homeownership. Contemporary mortgage
lending achieves such efficiencies in two ways: (1) Standardization of
loan products and underwriting guidelines reduces the costs of match-
7
The interviewing and background research were conducted by the authors; Larry
Keating, a professor at the Georgia Institute of Technology; Kristopher Rengert, then
a doctoral student at Rutgers University; and Barbara Listokin, then a consultant to
the Rutgers University Center for Urban Policy Research. See Listokin et al. (2000)
for the full case studies and the synthesis of the Federal Reserve studies.

Making New Mortgage Markets: Case Studies
589
ing borrowers to appropriate loan instruments, and (2) Routinization of
application procedures and other business practices reduces the trans-
action costs of evaluating applicant creditworthiness. Standardization
and routinization have been the central pillars of housing finance since
the 1930s, but in recent years significant advances have further reduced
borrowing costs for conventional mortgage credit. Most underwriting
is now at least partially automated, and the current shift toward fully
automated underwriting, credit scoring, and various forms of risk-based
pricing are all believed to offer still further efficiencies.
Information-related market imperfections
Standardization and routinization allow efficiency gains and can poten-
tially make underwriting more color-blind by stressing objective risk
factors. (We will discuss this latter point shortly.) At the same time,
standardization and routinization may exclude borrowers from the
mainstream market. Information-related market imperfections take
numerous distinct but related forms (see table 4).
First, on the demand side, imperfect or incomplete information about
the home-buying or mortgage finance process may lead potential bor-
rowers to avoid entering the market. Language barriers may also play
a role. Over the long run, unfamiliarity with mortgage finance can
mean that households fail to develop a financial profile matching the
requirements of standardized (and increasingly automated) credit eval-
uation procedures.
Second, on the supply side, imperfect understanding of underserved
populations may lead lenders to ignore profitable markets that do not
conform to standard criteria. As on the demand side, language barriers,
in addition to cultural differences (for instance, many lenders’ unfamil-
iarity with the rotating credit associations common among some im-
migrant groups), may be important.
Incomplete or imperfect information may contribute to systemic mar-
ket imperfection in the long-run intersection of supply and demand. A
long history of lenders’ unfamiliarity with underserved markets, and
of certain groups’ unfamiliarity with conventional mortgage finance,
reproduces and reinforces information biases. Standardization and
automation simply institutionalize these market imperfections. Credit
record evaluation, for example, is based on a highly specific set of as-
sumptions and values that have evolved over decades in the American
consumer-lending sector; these values and criteria may not translate
verbatim to the underserved sector. Standardized credit scoring, which
is increasingly emphasized in a standardized and routinized lending
industry, may therefore work to exclude a wide range of potentially

Table 4. Informational Problems in the Traditionally Underserved Lending Markets
Theoretical Framework
Demand Side
Supply Side
Problem
Result
Problem
Result
Insufficient knowledge of the
Cash-based, unrecorded
transactions; little or no credit
history
Insufficient understanding of
the cultural aspects of money
management
Failure to approve mortgages for
creditworthy home buyers
a
of banking system
Insufficient knowledge of
the home-buying process
Creditworthy households
Insufficient knowledge of the
lending area
Inaccurate appraisals, overpriced
insurance, increased denials
desiring homes do not enter
b
d
the market
of profitable loans
Language barriers
Inability to engage the supply
Language barriers
Inability to reach large segments
of the demand side of the market
c
side of the market
Illustrations from Case Studies and Synthesis of Federal Reserve Studies (Listokin et al. 2000)
a
LHHA and AAFE case studies reveal the largely cash-based economies of Haitian and Asian-American communities.
b
BofA consumer research on LMI Hispanic renters reveals that many Hispanics do not enter the homeownership market because of mis-
conceptions (e.g., that a high down payment is required or that a higher documented income is necessary to qualify for a home mortgage).
BofA consumer studies found that many Hispanics believed that the first person to be consulted in purchasing a home is the real estate
agent, reflecting the Hispanic culture’s tendency for the “uninitiated” to rely on the “expert.” Yet the agent may not be the best source of
information on financing options.
LHHA and AAFE case studies show how cultural history can affect immigrants’ perceptions of the home-buying market. In Haiti, people
tend to build their own houses on family-owned habitations; new homes are constructed over time from savings rather than through a
mortgage. Haitians coming to the United States are therefore unacquainted with buying a fully built home with a mortgage. In Korea,
most homes are paid for in cash or with a very high down payment; Korean mortgages rarely exceed a 20 percent loan-to-value ratio. Hong
Kong home buyers typically put 30 percent down, and home loans may be based in part on personal collateral. Korean or Hong Kong immi-
grants to the United States are understandably unacquainted with low–down payment mortgages fully collateralized by real property.
The AAFE case study reveals that Asian-American home seekers, knowing little about the home-buying process and encountering lan-
guage barriers, often rely on cultural brokers. While cultural brokers can be helpful, they may have limited knowledge of financing
options and may perpetuate misconceptions, such as the requirement for a high down payment.

Table 4. Informational Problems in the Traditionally Underserved Lending Markets (continued)
Illustrations from Case Studies and Synthesis of Federal Reserve Studies (Listokin et al. 2000) (continued)
c
The AAFE case study shows the challenge of language in dealing with immigrant populations. AAFE’s clients speak many languages
(
e.g., Chinese, Korean, Hindi, and Urdu), and these languages often have nuances of dialect (e.g., different words for mortgage in Mandarin
and Cantonese). Language can be an enormous barrier to homeownership.
BofA’s consumer research revealed that language was a key issue restraining Hispanic renters from homeownership. Many of those
renters depended entirely on Spanish for communication, they wanted to speak Spanish with who was helping them purchase a home,
and they preferred to read mortgage and other documentation in Spanish.
d
The Federal Reserve synthesis summarizes a test by the Federal Reserve Bank of Cleveland of appraisal consistency: On one property
in Cleveland, four different appraisers gave valuations ranging from $36,000 to $84,000. A 1994 study in Massachusetts found that 57
percent of insurance agents in urban areas did not have contracts with any of the state’s top 20 insurers.
Source: The theoretical framework was developed by George McCarthy, and illustrations were assembled by the authors.

5
92
David Listokin and Elvin K. Wyly
creditworthy borrowers. That information imperfection can restrict
credit access and diminish a potentially profitable market for lenders.
The case studies illustrate many of the information-related market im-
perfections noted above. The lower portion of table 4 gives examples.
BofA consumer research found that many LMI Hispanic renters did
not enter the homeownership market because of misconceptions, such
as the requirement for a high down payment. Cultural experience can
also reinforce misconceptions. In Haiti, homes are often paid for entire-
ly from savings. Understandably, Haitian immigrants may believe that
the same is true in the United States. Misconceptions can be compound-
ed by language difficulties. One Chinese home buyer described in the
AAFE case study summed up his experience by noting, “I had a terri-
ble time.…I didn’t know how to communicate and I didn’t know the
process.”
Finance-related market imperfections
Even if perfect information were available, the financial characteristics
of traditionally underserved households and the homes they purchase
complicate both the demand and supply side of the underserved mar-
ket (table 5). Consider, for instance, the limited income and assets of
minority populations, especially minority renters. We previously noted
that African-American and Hispanic renters had average household
incomes in the low $20,000 range and average assets of about $2,000.
Such constrained resources severely limit home buying through tradi-
tionally structured loans, and minority renters may therefore opt out
of the home-buying and home mortgage market (i.e., their effective
demand will be weak). Thus, mortgage supply can be constrained be-
cause traditionally underserved populations will tend to need high
loan-to-value (LTV) loans, which the market has historically viewed
as riskier.
Credit problems can have similar effects. LMI minority households
may have credit blemishes that preclude them from meeting the credit
requirements of traditional mortgage products, thus lessening effec-
tive mortgage demand. On the supply side, the credit problems of the
traditionally underserved may lead risk-averse lenders to shun this
market.
The case studies illustrate and provide insight into such issues. Home
mortgage lending on Indian lands is a classic conundrum: Indian pover-
ty plus credit, legal, and many other problems have deterred lenders
from offering home mortgages on reservations. The absence of mort-
gage offerings curbs Indians’ demand for homeownership and related
financing, and lenders are therefore hesitant to mount the expensive
effort needed to create a home mortgage market on native lands.

Table 5. Financial Problems Associated with Traditionally Underserved Lending Markets
Theoretical Framework
Demand Side
Supply Side
Problem
Result
Problem
Result
Insufficient assets/asset
Inability to make required
down payment
Insufficient assets/asset
verification
Higher perceived risk because of
higher LTV loans
a
verification
Insufficient or unsteady flow
of income
Inability to afford payments
on traditional products
Insufficient or unsteady flow of
income
Higher perceived risk because
of uncertain repayment ability
b
Credit problems
Inability to meet credit
requirements
Credit problems
Higher perceived risk because of
uncertain repayment behavior
Income/asset/credit constraints
steer borrowers into lower-
Purchase of homes with higher
upkeep costs; increased
probability of value loss because priced neighborhoods
of declining neighborhoods
Income/asset/credit constraints
steer borrowers into lower-
Lower appraisal estimates—
d
higher declinations
c
priced neighborhoods
Higher perceived risk because
of uncertain prospects for house
price appreciation
Case Study Illustrations (Listokin et al. 2000)
a
LHHA and AAFE case studies reveal that informal savings accounts in sous-sous (Haitian) and kye (Korean) were traditionally not rec-
ognized as acceptable assets to close. LHHA counselors described the sous-sous as an informal savings circle of anywhere from 4 to 20
people who agree to set aside a given amount per week for a stipulated period of time, say $100 a week for 10 weeks. A responsible indi-
vidual, often called a “key person,” holds the weekly contributions. When the sous-sous is formed, participating members agree what the
payout schedule will be: That is, in week one, a certain individual could withdraw the amount that he or she ultimately would contribute
($1,000 in the above example), and in week two another individual could do the same, and so on. The key person sets the schedule of
withdrawals and actual payments. Many Korean immigrants turn to a kye, a rotating credit association involving monthly restaurant
dinners during which participants pledge a stipulated amount that they can ultimately withdraw (Ratner 1996). The kye, common for
staking business acquisitions or expansions, may be used for accumulating the capital needed to purchase a home. It is important to note
that government policy may dissuade LMI families from saving in formal accounts. LHHA found that Haitians were reluctant to use
banks because keeping more than $1,500 in a savings or checking account would disqualify them from receiving food stamps and Medic-
aid.

Table 5. Financial Problems Associated with Traditionally Underserved Lending Markets (continued)
Case Study Illustrations (Listokin et al. 2000) (continued)
b
The vast majority of the American Indians NPH counseled had blemished credit records. Of those without blemished credit records,
many could not be evaluated by looking at nontraditional credit histories because they lacked a traceable, regular cycle of payments (e.g.,
they resided with relatives and therefore paid no rent, or in a unit with no utilities and therefore paid no utility bills).
Most of the borrowers coming to Berean and Trent had credit issues.
Our case studies reveal how economic, historical, and cultural influences reinforce a propensity for credit problems among traditionally
underserved populations.
FNBF attributes the high rate of Indian credit blemishes to a number of forces. Little economic resilience exists on the reservations;
therefore, if a debtor is laid off or injured, finding another job is difficult. The Catch-22 is that, because credit has generally not been
freely available to American Indians, the awareness that abusing credit is detrimental to one’s future is not as strongly imbued in Ameri-
can Indian culture as in others. FNBF also notes instances of excessive consumer debt, such as for car loans. Ironically, that high person-
al debt level, according to FNBF, has in part been fostered by historically low Indian housing costs relative to income. Indians have tend-
ed to live with their families or in inexpensive public housing—often precluded from the opportunity of conventional homeownership
afforded to other Americans. Personal debt for automobile and other purchases has often been marketed aggressively by vendors target-
ing the Indian market.
c
Constraints contribute to spatial concentrations, which are illustrated in the LHHA and AAFE case studies: Haitians in Little Haiti
and Asian Americans in New York’s Chinatown and similar neighborhoods.
d
NHSC encountered an appraisal gap in many Chicago neighborhoods, whereby the appraised value of rehabilitated properties was often
less than their combined property-purchase and construction costs.
Source: The theoretical framework was developed by George McCarthy, and case study illustrations were assembled by the authors.

Making New Mortgage Markets: Case Studies
595
The case studies also reveal how some cultural influences can aggravate
finance-related lending problems among traditionally underserved
populations. Haitians and Asian Americans are inclined to assist an ex-
tended circle of family and friends; however, when this assistance in-
volves cosigning on a loan that is ultimately not repaid, the result is
tarnished credit. Our case investigations also show how financial prob-
lems dissuaded lenders from supplying credit to certain markets. In
Chicago’s traditionally underserved neighborhoods, much of the housing
suitable for homeownership needs purchase-rehabilitation financing.
Overseeing such loans is very labor intensive for lenders, and in low
volumes those loans were costing Chicago banks as much as $5,000
to $10,000 per loan in overhead, an expenditure that made such lend-
ing uneconomical.
Discrimination-related market imperfections
Even with perfect information and no resource disparities, a market
could still fail if potential consumers were discriminated against be-
cause of their race, ethnic origin, gender, or other protected character-
istics. While much progress has been made in countering the blatant
abuses of the past, discrimination still lingers (Federal Reserve Bank
of Cleveland 1994; Turner 1992, 1993; Yinger 1995).
The case studies reveal some instances of discriminatory behavior. The
AAFE analysis notes that a group of residents of the SoHo area of Man-
hattan launched a campaign against property sales to Asians in their
neighborhood, alleging that the character of the neighborhood would
change and property values would fall (AAFE 1997). Some real estate
agents shunned Haitians in Miami, while others took advantage of
Haitians’ unfamiliarity with the home-buying process by tacking on
dubious charges.
To a certain extent, the trend toward standardization of the mortgage
market can help reduce discrimination by lenders. By stressing objec-
tive factors in “black box” underwriting, automation should obviate dis-
crimination on the basis of race, ethnicity, and gender. But even with
this progress, a discriminatory patina may linger. The choice of which
black box to use (conventional, FHA, or subprime) may have a racial
undertone (i.e., minorities who could potentially qualify for lower-cost
prime lending are steered to subprime markets). Also, the data that
inform the black box, such as credit bureau reports that are the basis
for credit scores, may have a discriminatory tarnish. To illustrate, LHHA
found that its Haitian immigrant clientele often had blemished credit
resulting from many factors, including abuse of credit, a culturally in-
duced readiness to aid an extended circle of family and friends, and
possibly discrimination. LHHA found that in many cases accounts that
were listed on the Haitians’ credit reports as collections were in fact

5
96
David Listokin and Elvin K. Wyly
paid before the collection process was initiated, but the creditors had
failed to acknowledge the payment in a timely fashion (St. Louis and
Fran c¸ ois 1998). LHHA attributed these failures to processing errors as
well as an undercurrent of discrimination against Haitians.
Illustrative strategies for addressing market imperfections
Current efforts to expand conventional lending to traditionally under-
served borrowers attempt to address the market imperfections de-
scribed above. They expand markets by providing essential information
and expertise on the supply side, the demand side, or both. Examples
are LHHA informing Haitians of low–down payment mortgages and
Norwest’s conducting research on minority LMI communities to better
serve them and thereby “make” those markets. In a similar vein, cur-
rent efforts reach the traditionally underserved by addressing finance-
related limitations on either the supply or demand side, or both. Case
study illustrations include People’s offering very high LTV mortgages,
NPH counseling Navajos, and NHSC assuming much of the adminis-
trative burden of overseeing purchase-rehabilitation financing for Chi-
cago lenders. Finally, a market for the underserved is made by con-
fronting discriminatory barriers. Case study examples include BofA
requiring everybody at its mortgage company to take and be tested on
an instructional program titled the “Fair Lending Challenge” (described
later) and AAFE combating bias against Asian Americans. Examples
such as these are the essence of this study.
In attempting to change multiple, long-ingrained market imperfections
that have kept the underserved from the American dream, case study
organizations face a Herculean task. Further adding to that challenge
are the contemporary demands of the mortgage industry. Those who
wish to reach traditionally underserved populations confront a choice
between the efficiencies of standardization or routinization and the
market-making benefits of custom, specialized, and narrowly targeted
interventions. Severe and entrenched market imperfections require
customized programs tailored to the specific perceptions, idiosyncrasies,
or needs of various borrowers (or, on the supply side, underwriters, real
estate professionals, or others). The high costs of specialized and cus-
tomized interventions, however, demand deep subsidies and limit such
efforts to small volumes. Our study captures targeted LMI and minor-
ity lending initiatives in an important transitional period in which a
proliferation of customized programs is beginning to allow partial, selec-
tive standardization to achieve efficiencies and support larger volumes.
As we shall see later from the case studies, this synthesis is often
achieved by nonprofits that do the necessary custom-crafted prepara-
tion of borrowers as part of broader housing and neighborhood devel-
opment efforts. With traditionally underserved populations and areas

Making New Mortgage Markets: Case Studies
597
made more bankable by such efforts, lenders can bring to bear the ef-
ficiency of the standardized financing market.
Organizational framework
Efforts to expand homeownership opportunities for the underserved
take place in the context of broader housing, capital, and industry forces.
Figure 1 shows these broader forces, each of which encompasses numer-
ous elements. For instance, the housing market is influenced by metro-
politan restructuring and demographic trends. Lending industry struc-
ture is affected by the market specialization of banks and other lenders
and by the networks and interdependencies among lenders and other
real estate professions (e.g., real estate agents and appraisers). The
capital market is affected by macroeconomic capital flows, changing
regulations, and other larger forces. The illustrative strategies described
in our investigation for the most part comprise microlevel mortgage
market processes as shown in the center of figure 1.
We organize strategies using a process model of the prerequisites for
creating a mortgage loan: establishing and operating an entity to do
the financing (referred to here as “institutional management”), “attract-
ing” mortgage applicants, “qualifying” these applicants, and then “retain-
ing” the resultant borrowers. Institutional management includes an
organization’s motivation for expanding activity in the underserved
market as well as the management structure it uses to do so. Efforts
to attract applicants include outreach, advertising, and strategic part-
nerships. Qualifying applicants includes the core activity of under-
writing, but also encompasses related activities such as counseling,
product development, and multiple review policies. Retaining homeown-
ers involves postpurchase servicing, counseling, monitoring, and loss-
mitigation procedures. We use this framework to organize the analy-
sis presented below and to examine the tensions between customized,
specialized interventions and efficient, standardized programs.
Institutional management
Nonprofits and some lenders, such as minority-owned, neighborhood-
based institutions, have long tended to the credit and housing needs
of minority, LMI, and immigrant populations. For others, such as many
mainstream lenders, reaching the underserved is a marked change be-
yond their traditional role of serving mainly middle-class white families
with financial profiles that match the templates of established mort-
gage screening mechanisms. It is instructive to understand why bank
management opted for that difficult reorientation. There is no question
that statutory, regulatory, and public pressure (“sticks” of different

Figure 1. Conceptual Framework of Lending to Underserved Markets
Metropolitan
restructuring
and
neighborhood
change
Lending Industry Structure
Lender specialization and interdependencies among lenders,
(
Demographic
and
other real estate professionals, and nonprofit enterprises)
immigration
trends
Lending
industry
regulation and
consolidation
Institutional Management
Housing supply
(
construction,
demolition,
conversion)
Loss-
mitigation
procedures
Macroeconomic
factors
influencing
capital flows to
housing and
mortgage-
backed
Outreach and
partnership
Product
Testing
Housing search
and real estate
practices
development
Underwriting
procedures
Community
activism and
nonprofit-sector
organization
securities
Advertising
and
promotion
Counseling
and
education
Multiple
review
procedures
Postpurchase
intervention
Secondary-
market
acquisition
criteria
State and local
housing and
development
policy
Attracting
Applicants
Qualifying Applicants
Retaining
Applicants
Mortgage market processes: Illustrative strategies
Housing
market
Capital
market
processes
processes

Making New Mortgage Markets: Case Studies
599
types) all compelled lenders to become more proactive. These sticks in-
clude the requirements of the CRA, the Fair Housing Act, the Equal
Credit Opportunity Act (ECOA), and other statutes; an invigoration of
regulators’ enforcement of those statutes; the release of loan-level HMDA
data; the growth of community activist organizations, which have be-
come quite proficient in analyzing and presenting HMDA information;
and an industrywide trend toward mergers, accompanied by a very
public look at the fulfillment of CRA obligations.
The case studies illustrate those pressures. Atlanta lenders became
more receptive to increasing lending to minority and LMI populations
when the Atlanta Community Reinvestment Alliance brought HMDA-
based loan information on minority lending disparities to the fore. A
group of lenders formed the AMC two weeks after those disparities
became front-page news in the Atlanta Journal-Constitution’s much
publicized “Color of Money” series. Merger-related CRA scrutiny also
prompted case study institutions to increase affordable lending. PNC
Bank became a much more active DVMP participant at the time of
its merger with the Bank of Delaware and attendant protests by the
activist group ACORN (Association of Community Organizations for
Reform Now); NationsBank’s partnership with the National Associa-
tion for the Advancement of Colored People (NAACP) coincided with
its national expansion; and BofA expanded its American Indian and
Hispanic mortgage outreach efforts with its acquisition of First Inter-
state of Arizona.
Although statutory, regulatory, and public pressures may have prompted
the initial expansion of minority and LMI lending, the potential prof-
itability of serving previously untapped markets has sustained it. The
growth of minority, ethnic, immigrant, and nontraditional households
in the United States forced a widespread reevaluation of core markets
and potential for growth. Echoing that demographic shift, Thomas Hy-
linski, a People’s vice president, stated, “If we are not in this market,
[
composed] of minorities and immigrants, lenders will be chasing an
ever-shrinking pool of white, middle-income households” (1997). The
lure of a huge nontraditional market was also echoed in our discus-
sions with Norwest. The underserved market was viewed not only as
vast, but also as profitable in its own right because of numerous factors
such as more flexible secondary-market criteria, lower prepayment
8
risk on affordable loans, and the lure of additional business from new
8
Most public discussion of affordable lending has focused on delinquency and foreclo-
sure—not surprising in light of experiences with products such as FHA loans (the 90-
day delinquency rate for FHA-insured loans is commonly three or four times the con-
ventional delinquency rate). Yet profitability also hinges on prepayment risk, and on
this measure, affordable loans can be more lucrative than mortgages made to higher-
income families. For instance, borrowers who secure loans through multilayered pub-
lic subsidies or grants will be unable to respond quickly to interest rate fluctuations
by refinancing.

6
00
David Listokin and Elvin K. Wyly
customers. Countrywide, for example, notes that even if it loses money
on its affordable home-purchase mortgages, it will likely make money
later on home equity loans and other ensuing business with the hereto-
fore underserved borrowers (Van Dellen 1997). One of the reasons that
FNBF became involved in mortgage lending to Navajos and continues
to pursue the business even though the bank continues to lose money
in these transactions is that American Indians are an essential FNBF
customer base, contributing in recent years to about one-third of FNBF’s
consumer growth (Coleman 1997).
Ultimately, judging the profitability of lending to the underserved
market depends on a wide range of factors—who holds the note, who
does the servicing, who bears the delinquency and prepayment risk,
what time horizon yields are measured on, and whether ancillary busi-
ness is considered. To our knowledge, there has been no definitive re-
search to suggest that efforts to reach underserved markets are, on
balance, riskier or less profitable than lending to higher-income borrow-
ers. What we can say unequivocally is that our interviews with lending
industry professionals—in this and previous studies—reveal a broad
and growing consensus on the profitability of prudent efforts to reach
underserved markets.
The case studies illustrate the broad management strategies that have
been adopted to tap the affordable lending market. We organize these
strategies in the following categories: management commitment, man-
agement structure, lending goals, compensation formulas, workforce
development policies, and market research. Examples of these strategies
are shown in table 6 and discussed below.
Management commitment
While it may appear obvious, an important management practice for
reaching the underserved is a clear, high-profile management com-
mitment to that goal. Norwest, for example, has a corporate objective
of being the largest lender to LMI and minority consumers. Country-
wide has adopted a similar philosophy, as evidenced by its “We House
America” campaign, and BofA has staked a similar position. Nations-
Bank’s partnership with the NAACP sends a similar message. Reiter-
ating the commitment to affordable and fair lending in bank mission
statements, lending policy statements, and similar defining documents
is important.
A corporate commitment to expanding mortgage opportunities is fur-
ther reaffirmed by the involvement of senior management. CRA over-
sight should be the line responsibility of, or supervised by, senior bank
personnel. Such was the case at Countrywide (its fair lending commit-
tee includes the company’s highest executives) and at several of the

Making New Mortgage Markets: Case Studies
601
Table 6. Illustrative Strategies for Managing Enhanced Mortgage Lending
to Traditionally Underserved Communities:
Case Study Examples
Management Strategies
Case Study Examples
Management Commitment
Ensure an overall corporate commit-
ment to the underserved market.
Norwest’s corporate goal is to be the largest
and most profitable mortgage originator and
servicer to LMI and minority consumers.
Stipulate the corporate commitment in
defining documents.
DVMP bank participants (e.g., PNC and
CoreStates) have vision statements reiterat-
ing their commitment to affordable lending.
Involve senior-level management.
Countrywide’s fair lending committee is com-
posed of the president, the heads of major pro-
duction divisions, and other senior officials.
Norwest established the position of execu-
tive vice president of affordable housing; the
officer in that position sits on the parent
company’s executive board. FNBF’s CRA offi-
cer reports to an executive vice president, with
oversight provided by the board of directors.
Management Structure
Allow for a creative mix of specialized
and companywide units involved in
affordable lending.
BofA has community-lending underwriters
and two special processing units expressly
designated to handle low-volume community
lending products; however, affordable lending
is done throughout the company. Norwest
has staff members who focus on affordable
lending (e.g., community development sales
representatives [CDSRs]) and has an afford-
able housing underwriting group, although
the company in general engages in affordable
lending and underwriting. Countrywide has
about 20 retail branches in inner-city locations;
however, the company’s 440 retail offices make
affordable loans.
Lending Goals
Set concrete goals for affordable lending. BofA sets three lending goals (for LMI cen-
sus tracts, LMI borrowers, and minority bor-
rowers) for every operating level. Norwest’s
performance objectives for division, area, and
regional managers include specific numeric
goals for LMI and minority lending. People’s
incorporates CRA objectives into annual
goals for each of its business areas.

6
02
David Listokin and Elvin K. Wyly
Table 6. Illustrative Strategies for Managing Enhanced Mortgage Lending
to Traditionally Underserved Communities:
Case Study Examples (continued)
Management Strategies
Case Study Examples
Compensation Formulas
Set compensation that encourages
working on affordable lending.
BofA ties compensation and bonuses to
affordable loan performance and offers other
incentives for such lending (e.g., peer recogni-
tion). Norwest links manager compensation
to LMI and minority mortgage production and
provides its CDSRs with a base salary plus
commission. (This system allows CDSRs to
perform functions that do not immediately
generate loan applications; however, in time,
all CDSRs revert to full commission.) Compen-
sation of Countrywide retail loan officers is
based on the number (not the value) of the
mortgages granted. People’s account officers
working in central cities have a special com-
pensation system. Industrial loan officers
receive a higher-percentage commission on
smaller loans.
Workforce Development
Educate the workforce on affordable
and fair lending and promote workforce active CD-ROM program) as well as other
BofA offers a Fair Lending Challenge (inter-
diversity and cultural sensitivity.
fair housing–CRA training, and it aggressive-
ly recruits minority and bilingual personnel.
People’s branch account officers and others
involved in the lending process (e.g., apprais-
ers) receive in-house training on fair lending.
FNBF provides staff training on the Navajo
culture.
Market Research
Analyze the potential and performance
of affordable lending.
BofA market research identifies the needs
and perceptions of the underserved communi-
ty and guides the development and promo-
tion of its Neighborhood Advantage Mort-
gages. Norwest’s Market Intelligence Group
identifies market opportunities and helps
develop marketing strategies.
other case study organizations (see table 6). Senior management’s in-
volvement is also manifest through participation in civil rights, afford-
able housing, and other organizations important to minority and LMI
populations. People’s CEO is active in the Bridgeport, CT, NAACP; a
BofA executive staff member served on the National Committee for Af-
fordable Lending; and FNBF’s CRA officer is on the board of the NPH.

Making New Mortgage Markets: Case Studies
603
Senior management involvement also means allaying staff concerns
about working in affordable lending (i.e., that it is “low profile” com-
pared with other higher-profile tracks) and supporting affordable lend-
9
ing staff in sometimes controversial situations.
Management structure
Among the most critical management decisions is how to structure
targeted lending initiatives in the context of the entire institution. For
small, neighborhood-oriented lenders, this decision is normally made
by history and by the local setting: Witnessing decades of neighborhood
change, in-migration, and out-migration, these lenders survive by de-
signing all aspects of their business to carve out a profit from under-
10
served markets. That mission was personified at Berean and Indus-
trial. Regional and national lenders, by contrast, must balance a wide
set of considerations when attempting to change a large organization
geared toward traditional banking practices. Creating a specialized di-
vision for community lending or CRA mortgages can enhance unit ef-
ficiency and innovation but risks marginalizing staff and operations
from the rest of the institution—thereby retarding genuine, across-the-
board transformation of business practices. However, it is difficult to
implement affirmative lending across the entire organizational chart
at once. In practice, the most successful models involve a well-funded,
high-profile unit specializing in affordable lending, in combination with
more fundamental changes throughout the fabric of the institution,
often with specific timelines for integration of various practices.
9
An event at People’s is illustrative. The senior vice president in charge of residential
lending became aware of a Wall Street Journal investigation of major lenders (includ-
ing People’s) that was to focus on the high percentage of minority mortgage rejections
compared with white rejections. The investigation coincided with People’s expansion
into the minority community and a rising number of minority loan applications, many
from less qualified borrowers who had never applied for a mortgage before. In short
order, People’s experienced a rising number of minority rejections. It was faced with
the choice of either backpedaling its marketing efforts to “show better statistics” or
pursuing its initiative, a course likely to draw adverse notice in the pending Wall
Street Journal article. The senior vice present approached People’s CEO and explained
the situation. The CEO told him, “Don’t back off, we will support you.” The CEO was
willing to support the minority lending initiative—and the staffers associated with
the initiative—despite what could have been adverse publicity.
10
For many years, these institutions survived by charging higher fees or interest rates,
which was made possible by credit rationing on the part of mainstream lenders. Recent
liberalization in the secondary market and among mainstream conventional lenders
has almost certainly threatened these neighborhood lenders by inducing adverse selec-
tion. In our interviews, many small lenders emphasized the challenges associated with
these trends, as they face new competitors from “above” (large conventional lenders
discovering new markets) and from “below” (the expansion of subprime lending). Sur-
vival will require increased efficiency or the development of portfolios that cross-
subsidize inner-city loans with business in high-growth suburban markets.