By Mary Kane
New mortgage industry policy could charge borrowers higher fees by zip code.
In the middle of the housing boom, when virtually anyone could get credit, redlining wasn't even in the picture. It was an almost forgotten remnant of the past - a piece of lending history that involved lengthy legal battles and community organizing work to change a dark banking industry practice of denying credit based on where people lived or because of their race. But now, in the aftermath of the mortgage market meltdown, the cost and availability of credit for some borrowers is again becoming a concern - raising questions about whether a new kind of redlining is on the horizon.
A recent policy by the mortgage industry that would charge higher fees for loans to borrowers in certain zip codes is behind the concerns. It has quickly led to charges of redlining and violations of fair housing laws. This has reignited old battles over access to credit - fights that housing advocates thought they had settled years earlier.
Those advocates - the veterans of many past housing wars - are responding swiftly, and aggressively, though no one predicted during the housing boom that the lending industry might even consider going down this road again. They've formed alliances with realtor's groups, and they're already challenging moves by lenders to make credit more costly or unavailable to certain groups of borrowers.
Redlining worries reappeared because Fannie Mae, Freddie Mac, private mortgage insurers and mortgage firms are assessing loan risks by using a "declining markets designation," meaning borrowers in certain geographic areas must pay more for loans because their communities show a higher rate of foreclosures, short sales and falling home values. The mortgage giants have been using the designation for a few months, as part of their automated underwriting systems. In some cases, a borrower won't know whether he resides in such a market until he applies for the loan.
If the notion of extending or pricing credit based on a borrower's neighborhood sounds suspiciously like the redlining practices of old, in which lenders refused to lend money in poor and minority communities, well, that's because it is another form of redlining, plain and simple,
"It's our position that loan underwriting based on zip codes is a modern form of redlining," said David Berenbaum, executive vice president of the National Community Reinvestment Coalition, which represents fair housing groups. "I don't have a problem with lenders looking closely at the economics of the marketplace to ensure they are able to do business and are able to lend. But they need to do it in a way that doesn't have a discriminatory impact on neighborhoods and on certain groups of borrowers. This is just sort of a knee-jerk reaction to a difficult marketplace."
Gregory Squires, a George Washington University sociology professor who has studied predatory lending and redlining practices warned, "This should have set off alarm bells."
Fannie Mae has met with fair housing groups and is considering making some changes to its methodology, said spokesperson Amy Bonitatibus. She declined further comment about the practice. Berenbaum said Fannie Mae has responded "positively" to his concerns, and he remains optimistic that the policy could be changed.
Regardless of what happens, the fight over the policy shows how contentious things may get over access to credit as the mortgage meltdown shakes out. In many ways, lending to low-income and minority borrowers has come full circle - from redlining practices that denied them access to loans in 1950s and 1960s, to the "democratization of credit" in the 1990s that led to a credit glut and predatory lending, or reverse redlining, as Squires has described it.
Mortgage brokers and lenders began aggressively marketing subprime loans in the same neighborhoods once written off by traditional lenders, selling high-rate mortgages with hidden costs and fees. In neighborhoods long cut off from credit, these transactions, involving readily available mortgage money, often took place door to door, or by word-of-mouth spread through local churches.
Black and Latino borrowers were far more likely to take out high-priced subprime loans than white borrowers, even when their credit scores were similar, research shows.
This kind of lending came well before the housing bubble that began in 2005. That was when the subprime practices and lax underwriting spread to the rest of the mortgage market - especially in California, Florida, Nevada and other areas with hot housing markets, that attracted investors, house-flippers and mostly prime borrowers.
With so many loans gone bad, the subprime market no longer exists. Wall Street investors, accused of turning a blind eye to subprime abuses in their pursuit of profits, are wary of providing capital for new loans. As lending standards tighten, first-time home-buyers and borrowers with modest incomes now sometimes find themselves priced out of the mortgage market, even with the falling values that make some homes more affordable.
Once the credit squeeze eases, however, it's still not clear that the problems with loan pricing will end. The declining markets designation is just one example of how the market may have changed for good as a result of the housing collapse.
Housing advocates fear that all the progress made in four decades of fair housing fights will be set back significantly. The zip code controversy, they say, shows that borrowers with modest incomes could wind up paying higher prices or find mortgages or refinancing out of reach, directly as a result of speculation and lax lending standards among lenders and prime borrowers at the top of the market.
"It's all quite disturbing," said Patrica McCoy, a University of Connecticut law professor who has studied subprime securitization. "We're on this precipice of another transformation in the mortgage market. Every single pillar of the market has to be rethought. We're back to the drawing board and we're not sure how all this is going to play out. It's a fairly precarious time for fair lending."
Adding to the
Some lenders and investors contend that the subprime mess stemmed from the financial industry being forced by government regulations, like the Community Reinvestment Act, to make bad loans in poor neighborhoods. At mortgage banking conferences, academic seminars and in the blogosphere, the notion has taken hold and grown in the same way as an urban myth does.
The CRA was created by Congress in 1977, as a way to combat redlining. It required banks to make sure credit was available in the communities in which they operated. In the 1990s, CRA ratings for banks took on increasing importance, with regulators citing them when institutions applied for mergers or expansions. Regulators could deny a bank acquisition of another financial institution based on a poor CRA rating.
According to the CRA theory, advocacy groups like ACORN complained about redlining and pushed regulators into pressuring banks and lenders to make the bad loans.
Stan Liebowitz, an economics professor at the University of Texas-Dallas, called CRA regulations "the real scandal" of subprime lending in a recent New York Post column:
From the current hand-wringing, you'd think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards - at the behest of community groups and "progressive" political forces.
In the New York Sun, economist Jerry Bowyer contended that "the fault lies with the small army of hard-left political hustlers who spent the early 1990s pushing risky mortgages on home lenders."
Housing advocates find the argument absurd. Some believe lenders are just using the CRA criticism to fend off future lending requirements and to avert blame for the subprime mess.
"This is the big lie," Berenbaum said. "There's been absolutely no pressure from advocacy organizations to expand home ownership by underwriting risky loans. That is just so far from the truth."
Contentious arguments over fair lending have a long history, going back to when the federal Fair Housing Act was passed outlawing discrimination in housing, one week after the assassination of Martin Luther King Jr. in 1968. But the law didn't end battles over the denial of credit.
In the late 1980s, The Atlanta Journal and Constitution published "The Color of Money," documenting racial discrimination in mortgage lending. In 1994, Chevy Chase Federal Savings Bank reached a settlement with the Justice Dept. over allegations that it failed to make loans in black neighborhoods in Washington and suburban Prince Georges County, Md.
As subprime loan brokers began flooding poor neighborhoods in the 1990s, consumer advocates and legal aid lawyers complained, but the lending continued. In the mid-1990s, Associates First Capital Corp. earned $19,000 in fees by flipping an initial $20 loan 10 times over four years, to an illiterate borrower who signed his loan papers with an X. Citigroup purchased the Associates in 2000 and continued to make subprime loans.
In the last few years, fair housing groups have brought suits over lenders refusing to make loans for less than $100,000, or for denying "rowhouse loans" in Baltimore.
As the market restructures, industry leaders Fannie Mae and Freddie Mac will be under great financial pressure to provide mortgage money and still cover their costs, McCoy said. Asking for higher down payments in declining markets and careful use of accurate appraisals can address those concerns adequately, she believes. No one wants lenders to go back to making risky loans, but they also don't have to add on fees out of fear. "I'm not crazy about targeting zip codes and jacking up interest rates," she said.
Lenders and housing advocates should work toward access to sustainable credit - loans that a borrower can handle. It means that credit shouldn't always be available for everyone. For some people, it won't be the rig
To Squires, changes in the market may also open the door to thinking about ways to support rental housing, or alternative forms of housing like cooperatives.
The one thing certain about where the mortgage market is heading is that fights over lending tactics will continue. "These are constantly contentious political issues," Squires said. "As Saul Alinsky used to say, there are no permanent victories."
Housing advocates, however, are in a different position than they were at the beginning of the credit fights in the late 1960s, Berenbaum said. They are far more organized, sophisticated and able to respond quickly. They now work hand in hand with some in the lending industry.
They don't have much choice. As the mortgage industry enters its next phase, so will the battles over who gets access to credit and mortgage loans - and how much it will cost them. To the players in this fight, zip code designations are a reminder of the past, and a sign of what is soon to come.