The Future of Fair Housing
- Table of Contents
- About the Commission
- Executive Summary
- I. Housing Discrimination and Segregation Continue
- II. Fair Housing Enforcement at HUD is Failing
- III. Fair Housing Enforcement at the Justice Department is Weak
- IV. The Need for Strong Fair Housing Programs
- V. Fair Housing and the Foreclosure Crisis
- VI. Federal Housing Programs
- VII. Fair Housing Obligations of Federal Grantees
- VIII. Regionalism and Fair Housing Enforcement
- IX. The President's Fair Housing Council
- X. Fair Housing Education: A Missing Piece
- XI. The Necessity of Fair Housing Research
- XII. Conclusion
- Appendix A: Emerging Fair Housing Issues
- Appendix B: International Disapproval of U.S. Fair Housing Policy
- Appendix C:
- Appendix D: Commission Witnesses and Staff
Fair Housing and the Foreclosure Crisis
When this Commission was created in the spring of 2008, the foreclosure crisis and its impact on the nation’s economic well-being was the country’s most pressing domestic issue. As the Commission has gone forward with its hearings and as this report is being released, the crisis has grown even worse and the nation now faces its greatest economic downturn since the Great Depression.
What has been greatly overlooked in the federal government’s response to this crisis and in media reports is that the roots of this crisis are not simply a result of the rapid growth of collateralized mortgage obligations (the purchase and bundling of mortgages into securities), the exotic loan products that were created for this booming secondary market, and the deregulation of the financial services industry. They also can be traced to historic discrimination and to more recent racial discrimination in housing and mortgage lending. Indeed, in describing the similarity of the causes of the present foreclosure crisis to past discrimination, one Commission witness described it as "déjà vu all over again." Similarly, the disproportionate impact of foreclosures on minority homeowners and renters has been underreported by the media. The impact of this crisis is causing one of the greatest losses of wealth in the American minority community in its history.
Discriminatory Causes of the Current Foreclosure Crisis
As noted earlier in this report, a central historical cause of racial inequality in housing has been government and private redlining of neighborhoods that left individuals living in minority neighborhoods without access to mainstream mortgage lending.
Redlining and exclusive lending practices have continued in more recent times. In the 1960s and 1970s, community groups and local government agencies in several cities, including Chicago, Baltimore, and Philadelphia, documented the residential isolation that contributed to the nation’s bifurcated lending structure. This research demonstrated that the lack of lending by mainstream financial institutions in under served communities opened the door for finance and high cost lenders to set up shop in these neighborhoods. Financial institutions exploited the lack of mainstream lenders in minority markets through the perpetuation of high cost loans, the use of tenuous housing schemes, and other vehicles that one housing researcher termed "the underworld of real estate finance."
In an attempt to address this longstanding discrimination, HUD reversed its own historical redlining maps and fostered the massive influx of Federal Housing Administration loans into minority and racially changing neighborhoods. But, in doing this, HUD virtually eliminated sound underwriting and oversight. With the mortgages fully insured to protect the investors, and with no effective monitoring from HUD, abuse was practically assured. Unscrupulous real estate and mortgage companies teamed up to exploit the new minority market through "blockbusting" practices. Whites were persuaded to leave the community for fear of an influx of racial minorities, while minorities were then sold the houses vacated by white homeowners, spurring rapid racial transition. In addition, early enforcement of the Fair Housing Act and Equal Credit Opportunity Act was neither vigorous nor especially effective.
In the 1970s, coalitions of community organizations played an important role in the passage of powerful financial reform legislation, including the Home Mortgage Disclosure Act of 1975 ("HMDA") and the Community Reinvestment Act of 1977 ("CRA"), legislation that helped local community organizations begin rebuilding neighborhoods devastated by discriminatory disinvestment, redlining and blockbusting.  Through HMDA data, academics, regulators and advocacy groups developed a large body of research, most of which showed significant lending disparities when comparing Whites with African Americans and Latinos.
Particularly important was the very influential Pulitzer Prize-winning series of articles called "The Color of Money," published in 1988 by The Atlanta Journal / The Atlanta Constitution, which demonstrated racial disparities in home mortgage lending in Atlanta, Georgia. Prompted by the public attention to this series, and the 1988 Fair Housing Act Amendments, which significantly strengthened the federal government’s enforcement authority, the Department of Justice commenced inquiries into the lending practices of 64 institutions. Ultimately, in 1992, DOJ filed U.S v. Decatur Federal Savings and Loan Association, the first in which DOJ charged a pattern of racial discrimination in lending through marketing and underwriting practices as well as through the failure to market products to minority neighborhoods. This case ushered in a period of vigorous fair lending enforcement by the DOJ through 1999, which contributed to a significant reduction in redlining practices and increases in mortgages available to minority home seekers.
At the same time, the seeds of the present foreclosure crisis were being planted. Substantial lending deregulation in the 1980s greased the wheels for lending in minority communities desperate for credit because of historic redlining. The Depository Institutions Deregulatory and Monetary Control Act (1980) removed usury restrictions on first lien mortgage rates; the Alternative Mortgage Transaction Parity Act (1982) permitted variable interest rates and balloon payments while preempting local government controls; and the Tax Reform Act (1986) eliminated interest deductions for consumer credit, encouraging homeowners to replace consumer debt with mortgages.Not surprisingly, the highly unregulated subprime market exploded and grew at exponential rates.The increased availability of mortgages to minority communities came primarily through a newly created subprime mortgage market that made mortgages available to higher risk and non-traditional borrowers, albeit at higher interest rates. Many of these borrowers were not truly high risk – they were just underserved by conventional lending institutions.
These unregulated conditions allowed predatory lending to thrive in the subprime market. Predatory loans were often marked with deceptive or unfair practices such as pre-paid single premium credit insurance, non-disclosure of fees, and promises to refinance into a better loan at a later date.By the 2000s, these predatory subprime loans had evolved to include "exotic" features such as artificially low introductory rates, interest-only mortgages, exploding adjustable rates, [and] pre-payment penalties to preclude refinancing."The securitization of these subprime loans created a seemingly limitless well of funds for these exotic products. 
These loans were often marketed in a discriminatory way. Brokers targeted these often unsuitable and unsustainable loans primarily to African-American, minority, and elderly homeowners, through a new discriminatory practice called "reverse redlining."The results were predictable. HUD’s examination of the 1998 HMDA data demonstrated that subprime loans were five times more likely to be made in African-American neighborhoods than in White neighborhoods. Analysis of 2006 HMDA data indicates that roughly 54 percent of African Americans and 47 percent of Latinos received subprime loans compared to approximately 17 percent of Whites.
Discrimination was exacerbated because of the profit incentives for predatory lenders, which resulted in many minority individuals being steered to risky subprime loans even when their income and credit scores would have qualified them for prime loans. Homeowners in high-income African-American neighborhoods have been found to be three times as likely to receive subprime loans as residents in low-income White neighborhoods. The Wall Street Journal’s analysis of subprime loans made since 2000 showed that in 2005, 55 percent of borrowers who received subprime loans had credit scores that would have qualified them for a conventional mortgage, indicating that credit was not a factor in the subprime loan disparities based on race and national origin. The study also revealed that by 2006, that percentage had increased to 61 percent.
Contributing prominently to this ballooning of the discriminatory subprime mortgage market was the opportunity for lenders to provide financial services in a highly unregulated atmosphere. Many lenders peddling subprime loans were non-depository financial institutions that were not regulated at the federal level and not covered by the Community Reinvestment Act (CRA). Furthermore, bank regulatory agencies failed to rein in abusive practices at the lending institutions that were subject to federal regulatory oversight. Even worse, agencies like the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) passed regulations exempting their member institutions from state anti-predatory lending laws, thereby preventing states from effectively challenging discriminatory and predatory lending activities.
Another contributing factor to the rise of discriminatory subprime and predatory lending practices is the halt to vigorous fair lending enforcement by the Department of Justice since 2000. Because of this lack of enforcement at the federal level, the responsibility to combat discriminatory practices at the root of the foreclosure crisis has fallen to private attorneys, states, and municipal governments. While they have few resources to combat the onslaught of abusive lending practices, private attorneys have been initiating innovative litigation strategies. Municipalities are also bringing innovative fair lending cases against lenders alleging that the severe damage to their neighborhoods from foreclosures is a result of the discriminatory reverse redlining practices of these companies. However, without the involvement of DOJ, prospects for meaningful redress are dim. Only the federal government has the enforcement resources necessary to fulfill the litigation needs of such cases.
In recent months, there has been a misleading campaign by some to blame the foreclosure crisis on the CRA, claiming that it forced lenders to make risky loans to uncreditworthy minorities. As one researcher has explained, this is akin to "blaming the canaries in the mine for the explosion." Such an attack is without rational support, and by now has been thoroughly refuted.Indeed, on November 20, 2008, the Comptroller of the Currency, John C. Dugan, said he categorically disagrees with suggestions that the CRA is responsible for the current financial crisis.
The Foreclosure Crisis Has Had a Devastating Impact on Minority Communities
As a result of past and present lending discrimination "both condoned and created by the explicit government policy" African Americans own less property today than they did more than 80 years ago. African Americans owned about 15 million acres of land in 1920. Today, they hold just over 1.1 million acres. African Americans still suffer from the fact that their parents and grandparents grew up in a rigidly segregated America and were exposed to public and private policies that inhibited their ability to accumulate financial capital and assets. Because Whites were helped by the homeownership development policies of the 1930s-1950s and African Americans, Latinos, and other minorities were not, Whites have had a longer time to build and sustain wealth. The wealth that Whites have been able to accumulate and sustain has compounded so that White wealth is held in very diverse portfolios. Conversely, for African Americans and Latinos in particular, housing wealth is a disproportionate share of their total wealth.
We are now in the midst of a mortgage catastrophe that has significantly added to this wealth gap. The Mortgage Bankers Association recently reported that of the 44 million active mortgages throughout the country, approximately 342,000 entered into foreclosure during the third quarter of 2007, the highest rate of foreclosures in more than 35 years. According to RealtyTrac, there were 765,558 foreclosure filings in the third quarter of 2008. Entire communities have been decimated by rampant foreclosures, essentially destroying neighborhood stability and wiping out individual wealth accrual.
The spillover effects of foreclosures harm the entire community, leading to a decrease in property values near the foreclosed home as well as "abandoned homes; increased risks of fire, crime, and drugs; increases in homelessness and job loss; deterioration of schools; and a crippling shortage of city funds for existing social programs."
The recent collapse of subprime loans and the resulting economic downturn has affected the entire United States, not to mention the global financial markets. But its effects have been felt first, and most prominently, in minority communities.  In his testimony before the Commission, Professor Melvin Oliver focused on the powerful effects of the subprime mortgage meltdown on the wealth of minority households, particularly African Americans:
No other recent economic crisis illustrates better the saying "when America catches a cold, African Americans and Latinos get pneumonia" than the subprime mortgage meltdown. African Americans, along with other minorities and low-income populations, have been the targets of the subprime mortgage system. Blacks received a disproportionate share of these loans, leading to a "stripping" of their hard won home equity gains of the recent past and the near future. To understand better how this has happened we need to place this in the context of the continuing racial wealth gap and its intersection with the new financial markets of which subprime is but one manifestation.
Family financial assets play a key role in poverty reduction, social mobility, and securing middle class status. Income helps families get along, but assets help them get and stay ahead. Those without the head start of family assets have a much steeper climb out of poverty. This generation of African Americans is the first one afforded the legal, educational, and job opportunities to accumulate financial assets essential to launch social mobility and sustain well-being throughout the life course.
Professor Oliver’s testimony is even more poignant when one considers that the subprime market was not a home purchase market until more recently. For more than a decade, the majority of loans originated in the subprime market were refinance loans with first-time home buyers representing only 10 percent of the subprime market. Thus, the loans were not contributing appreciably to increases in homeownership. This led the Center for Responsible Lending to accurately project that foreclosures resulting from onerous subprime loans would result in a net drain on homeownership, particularly for African Americans and Latinos. Accordingly, another very unfortunate result of this crisis has been the loss of homeownership for thousands of minority seniors who had worked so hard to build equity and financial security, only to see it stripped away.
 Testimony of Calvin Bradford (Atlanta), at 1.
 Testimony of Calvin Bradford (Atlanta), at 1; Testimony of Ira Goldstein (Atlanta), at 2.
 Testimony of Calvin Bradford (Atlanta), at 1; Testimony of Ira Goldstein (Atlanta), at 2.
 Testimony of Calvin Bradford (Atlanta), at 1-2.
 Testimony of Calvin Bradford (Atlanta), at 2-3. The Community Reinvestment Act requires banking institutions to help meet the "convenience and needs" of their entire communities, including those in low- and moderate-income neighborhoods. Id. at 5.
 Id.HMDA provides for the collection of data, including location and type, of all mortgage loans. "It has become an indispensable resource not only for community organizations, but for both regulators and enforcement agencies in identifying underserved markets and patterns of possible discrimination and exploitation." Id.
 Testimony of Calvin Bradford (Atlanta), at 1.
 United States v. Decatur Fed. Savings & Loan Ass’n, 92-CV-2198-CAM (N.D. Ga.) (complaint filed Sept. 17, 1992).
 Testimony of Calvin Bradford (Atlanta), at 9; see also Testimony of Ira Goldstein (Atlanta), at 2. During that period, the DOJ filed a number of cases successfully attacking redlining and the discriminatory application of stricter underwriting standards on the basis of race. Summaries of fair lending cases brought by the DOJ during the period of vigorous enforcement in the 1990s may be found at http://www.usdoj.gov/crt/housing/fairhousing/caseslist.htm.
 Testimony of Jesus Hernandez (Los Angeles), at 12.
 A Federal Reserve Bank of St. Louis study noted that the B&C lending market grew from $65 billion in originations in 1995 to $332 billion in originations in 2003. Souphala Chomsisengphet and Anthony Pennington-Cross, The Evolution of the Subprime Mortgage Market, Fed. Reserve Bank of St. Louis Rev (Jan. /Feb. 2006).
 Testimony of John Relman (Los Angeles), at 635; Testimony of Calvin Bradford (Atlanta), at 6-7.
 Testimony of Melvin Oliver (Los Angeles), at 3-4; see also Testimony of Calvin Bradford (Atlanta), at 3.
 HUD reported that subprime lending, which totaled $20 billion nationwide in 1993, increased to $150 billion in 1998. Subprime volume reportedly increased to $625 billion in 2005 and to between $600 billion and $634 billion by 2006. Alt-A lending volume increased from $60 billion in 2001 to $400 billion in 2006.
 Testimony of John Relman (Los Angeles), at 2, 8. The first reverse redlining case was brought by the FTC and a private firm headed by Relman, in which a court for the first time held that lenders who target minority communities to originate unsustainable mortgages violate the Fair Housing Act. Hargraves v. Capital City Mortgage Corp., 140 F. Supp. 2d 7 (D.D.C. 2000)
 Testimony of Ira Goldstein (Atlanta). See Goldstein Exhibit, Subprime Lending, Mortgage Foreclosures and Race: How far have we come and how far have we to go? p.5.
 Testimony of Cathy Cloud (Houston), at 13; Testimony of Lisa Rice (Chicago), at 6.
 Testimony of Melvin Oliver (Los Angeles), at 3-4.
 Testimony of Cathy Cloud (Houston), at 13; Testimony of Lisa Rice (Chicago), at 7.
 Rick Brooks & Ruth Simon, Subprime Debacle Traps even very Credit-Worthy: As Housing Boomed, Industry Pushed Loans to a Broader Market, Wall Street J., Dec. 3, 2007.
 Testimony of Cathy Cloud (Houston), at 11-12. The OCC went so far as to successfully seek to enjoin the New York state attorney general from investigating prominent national banks for lending discrimination. Cuomo v. Clearinghouse Association, 510 F.3d 105 (2nd Cir. 2007), petition for writ of certiorari pending, No. 08-453.
 In the last few years, private efforts to attack the discriminatory practices at the root of the foreclosure crisis have increased. Stuart Rossman, Litigation Director for the National Consumer Law Center, testified that in just over a year, starting in September, 2007, 23 fair lending cases have been brought attacking the discretionary pricing policies of banks, including the practice of providing yield spread premiums to brokers thereby incentivizing the discriminatory marketing and pricing of expensive subprime loans to minorities. Testimony of Stuart Rossman (Boston), at 2-3. Disparate impact analysis is crucial to these suits and has been consistently attacked by the financial industry in many of these cases, thus far with no success. Because of its stance on disparate impact, DOJ has been predictably absent from any defense of this important legal standard in these cases, not to mention its failure to bring any disparate impact cases of its own.
 Testimony of John Relman (Los Angeles).
 Testimony of Calvin Bradford (Atlanta), at 4.
 Indeed, to place blame for the foreclosure crisis on the CRA is absurd for many reasons: 1)
the CRA applies only to depository institutions regulated by the Office of the Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance Corporation, and the Office of Thrift Supervision with assets of $1.033 billion or more. Most subprime lenders were not subject to the legislation because they were not depository institutions. Researchers have noted that at the most, CRA covered entities only originated 1 in 4 subprime loans (Prepared Testimony of Michael S. Barr before the United States House Committee on Financial Services, Feb. 13, 2008). and when they did, they were typically at lower rates than loans made by non-regulated entities and they were less likely to be sold. (Traiger & Hinckley LLP, The Community Reinvestment Act: A Welcome Anomaly in the Foreclosure Crisis (Jan. 7, 2008), available at http://www.traigerlaw.com/publications/traiger_hinckley_llp_cra_foreclosure_study_1-7-08.pdf); 2) the CRA requires covered financial institutions to meet the credit needs of their entire delineated communities in a manner that is consistent with safe and sound lending practices; 3) the CRA was passed in 1977. The last legislative change to the Act occurred in 1999, long before the financial crisis hit. Indeed, the most problematic subprime loans were the 2006 and 2007 vintages. The timeline does not fit to lay even partial blame for the financial crisis at the feet of the CRA; 4) the argument that CRA forced lenders to provide mortgages to unworthy borrowers does not hold water since multiple studies have revealed that many subprime borrowers actually qualified for prime mortgages; 5) the argument that CRA forced lenders to provide mortgages to unworthy borrowers is further undercut by the lack of a private right of action to enforce the CRA. It is a "soft" law used by community groups and regulators, when used effectively, to encourage covered institutions to provide loans to borrowers in under-served communities. Most of the loans originated in under-served communities – even up until 2007 – were originated by non-covered, unregulated financial institutions, highlighting the "softness" of the law; 6) the CRA does not and never has required lenders to provide subprime loans, or any type of loans, to unworthy borrowers, nor does it impose harsh penalties on lenders for not doing so. In fact, the CRA requires lenders to make loans in a safe and sound manner.
 OCC News Release, NR 2008-136 (November 19, 2008).
 Testimony of Melvin Oliver (Los Angeles), at 1-2.
 Testimony of Stuart Rossman (Boston), at 1.
 Testimony of John Relman (Los Angeles), at 650-51.
 Testimony of Melvin Oliver (Los Angeles), at 1.
 Ctr. for Responsible Lending, CRL Issue Paper No. 14, Subprime Lending: A Net Drain on Homeownership (Mar. 27, 2007).