The Continued Importance of Fair Lending in the Age of Obama

Housing discrimination continues to plague the market, as does the myth that the housing crisis resulted from extending homeownership and home mortgage credit to historically underserved groups: minority families. Even with the Obama administration's Homeowner Affordability and Stability Plan and, within that, the Making Home Affordable program, minority groups continue to suffer ongoing discrimination and fair housing violations.

A Spike in Lending Discrimination

There is reason to be concerned that the growing foreclosure crisis will lead to a return to the old days of outright credit denial to minority families and minority neighborhoods. Equally qualified minority applicants are now more likely than white applicants to find their loan applications turned down because of a popular perception that they are risky borrowers.

Recently, even since President Obama’s election, you still hear that we shouldn’t force banks to make loans that they are not comfortable making — language echoed in March by then-Treasury Assistant Secretary Neel Kashkari in his testimony on Capitol Hill. There, Kashkari said that the government “must not attempt to force banks to make loans they are not comfortable with, nor should we try to direct the lending from Washington.” He added that bad lending practices were the root causes of the crisis and that “returning to those practices will not help end the turmoil.” Kashkari, a Bush administration holdover upon request of Treasury Secretary Timothy Geithner, ran the $700 billion Troubled Asset Relief Program up until April, when Fannie Mae Chief Executive Herb Allison was tapped by the Obama administration to take over.

Moreover, the Washington correspondent for Forbes magazine, Josh Zumbrun, said on C-SPAN’s “Washington Journal” recently that “we don’t want to do too much to force the banks to make loans they are not comfortable making — they are already losing tons of money . . . so you don’t want to force them into taking out loans that could potentially make their situation worse.”

Although these speakers did not mention lending to minorities (Mr. Zumbrun had earlier referred to people with low credit scores and low incomes), it is worth asking the question: “What groups, historically, have banks been uncomfortable making loans to?” Whether one wants to go back 75 years or 25 years, we know that banks have been uncomfortable making loans to minority neighborhoods, to minority households, and to lower income households in general.

We’re seeing a climate where the enforcement of fair lending laws may be viewed as “forcing” banks to do something they don’t want to do, and thus a risky maneuver in the midst of a banking crisis. Fair lending is the law; it’s not optional, or practiced only when it’s convenient or when banks are financially healthy and profitable. We are where we are because of decades of housing and lending discrimination.

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Dr. Nandinee K. Kutty is an economist and a policy consultant. She is an editor and contributor for the book Segregation: The Rising Costs for America (Routledge 2008). She is the author of numerous research papers published in peer-reviewed journals of economics and public policy. Dr. Kutty was formerly a professor at Cornell University. Her published research papers and op-eds are currently on the reading lists for courses taught at various universities in the U.S. Her e-mail address is nndkutty@aol.com.

3 COMMENTS

  1. Nandinee—Tiny point, in an overall very important article, but wouldn’t revaluing overvalued homes downward increase the debt to value ratio and make fewer owners eligible for refinancing under the 105% rule? Or am I misunderstanding your suggestion somehow?

  2. @Miriam Axel-Lute: Thanks for the comment Miriam. My suggestion is to use the loan value that would have occurred if the home had been appraised correctly (rather than over-appraised) at the time of the home purchase, and then to apply the 105% rule—which is now the 125% rule—to determine eligibility for refinancing. This adjustment would be made solely for the purpose of determining eligibility for refinancing. The debt to value ratio and any other parameters for determining the terms of the refinancing would be unaffected.

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