May 13, 1998
Racial Bias Seen in U.S. Housing Loan Program
By BILL DEDMAN
HICAGO -- While the federal Department of Housing and Urban Development is responsible for fighting racial discrimination in housing, it is also contributing to discrimination through its major mortgage program, according to an in-depth study of the Chicago area.
The study's authors contend that the department's Federal Housing Administration loan program, combined with the racial "steering" of home buyers by real estate agents and lenders, adds to blight in minority neighborhoods. The study is being released Wednesday.
Because FHA loans are especially profitable for lenders, and those lenders and real estate agents direct a disproportionate number of minorities into the FHA program, minority neighborhoods are pockmarked with the foreclosed homes of buyers who should never have been approved for the mortgage, the study concluded.
"Were any private mortgage lending or mortgage insurance institutions engaged in activities with such clearly differential impacts for white and minority communities, HUD and the Department of Justice would surely file suit for discrimination under the Fair Housing Act," said Calvin Bradford, a fair-housing researcher who wrote the study for the Chicago Fair Housing Alliance. The study was financed by the MacArthur Foundation.
HUD, which enforces fair housing laws, said the study's portrayal of FHA was "rather extreme," but agreed that elements of the FHA "require additional improvement and reform."
The FHA program was created during the Great Depression to assist homebuyers who could not qualify. While FHA loans allow buyers with less money for a down-payment to buy a home, the interest rates are usually higher than those for conventional loans. Nationally, African-American and Hispanic homebuyers received FHA loans more than twice as often as white homebuyers, which might be expected because minority home buyers have, on average, lower incomes and worse credit ratings.
But the researchers found a surprising pattern: As they looked at middle-income and upper-income minority neighborhoods, the percentage of FHA loans did not decline, as it did for whites, but increased. Even high-income minority neighborhoods had higher rates of FHA lending than low-income white neighborhoods.
Steering by real estate agents explains part of this pattern. In tests of more than 50 real estate firms, agents steered minority buyers to minority neighborhoods, when the buyers had expressed no preference. Many agents also steered minority buyers to lenders that specialized in FHA loans.
This occurred although, in every case, the minority "testers" had incomes and were more credit-worthy than the white testers.
The study found that Housing Department policies discouraged lenders from caring whether they were making sound loans. The fees that FHA pays to lenders are twice as high as those for conventional loans. And by guaranteeing full repayment of mortgages, FHA reduces a lender's incentive to make sound loans, the fair housing group contends.
"You have people being steered to FHA who don't need it," Bradford said, "and at the low end of that market, people are being given FHA loans who don't qualify, who shouldn't really have gotten any loan. We all want more minorities to receive loans. But HUD has never faced the side effects of its programs."
HUD spokeswoman Karen Hinton said Housing Secretary Andrew Cuomo has toughened enforcement since he took office in January 1997.
Ms. Hinton also said that the high fees for lenders and the loan guarantees are necessary to induce lenders to make the loans. But she denied that they induced lenders to overuse FHA.
She agreed with one contention of the Chicago group: that the department could do more to push conventional lenders to lend to minorities.
In general, Ms. Hinton agreed that steering is a problem.
"But it's not a problem with FHA's policy," she said. "That's lenders breaking the law. They see a minority person walk in the door and say, 'I'm not going to make a conventional loan to them.' We're doing everything possible to send a message to the lending committee that they're not going to get away with it."
Other Places of Interest on The Web
Department of Housing and Urban Development. Department of Housing and Urban Development, Housing Discrimination.