Discrimination in Mortgage Lending Remains a Concern, Cityscape Colloquy Warns

Discrimination in Mortgage Lending Remains a Concern, Cityscape Colloquy Warns

Does racial discrimination make it more difficult for minority families to obtain home mortgages? A widely publicized 1992 study by the Boston Federal Reserve Bank said yes: it showed that African American applicants were 60 percent more likely to be denied mortgage credit than were white applicants, sparking a widespread debate on the causes and prevalence of racial discrimination in home mortgage lending. The following year, researchers from the Federal Reserve Board, Freddie Mac, and the University of Southern California presented a conference paper analyzing a hypothesized relationship between home mortgage defaults and potential lending discrimination. Some observers have interpreted the results of this study as a repudiation of claims of widespread mortgage market discrimination and as evidence that Federal policymakers should ease up on antidiscrimination efforts.

Researchers have long argued that if mortgage lenders were discriminating against qualified African Americans, their mortgage default rates would be lower than those of whites. However, in the Federal Reserve Board's conference paper, analysis of the performance of FHA-insured single-family mortgages from 1987 -- 89 failed to find such evidence, determining instead that default rates were actually slightly higher for African Americans.

The February 1996 issue of Cityscape, guest edited by John M. Goering of HUD's Office of Policy Development and Research, presents a colloquy on this controversy among experts in the areas of housing discrimination, mortgage market analysis, and FHA insurance. Cityscape's articles examine whether default rates are an appropriate measure of discrimination and speculate on the possible influence on default rates of unobservable credit variables that differentially affect minorities. In the lead article, James Berkovec, Glenn B. Canner, Stuart A. Gabriel, and Timothy H. Hannan present the findings of their study. Succeeding essays then address its methodological, conceptual, and policy soundness, and implications. For example:

John Yinger of Syracuse University argues that default rates are a deeply flawed method for examining lending discrimination, a method that will inevitably yield weak tests for discrimination that are inferior to traditional tests based on mortgage denial.
John M. Quigley of the University of California, Berkeley, questions the methodology of using mortgage default rates by race to make inferences about racial discrimination in mortgage credit. Quigley concludes that observed higher default rates for black households provide no evidence about discriminatory treatment in mortgage lending.
Anthony M. Yezer of George Washington University, in contrast, presents the case for using default rates as a measure of discrimination but says that to do so successfully would require better data on FHA borrowers than is currently available.
In a response to critiques, the Federal Reserve Board researchers acknowledge that their loan performance study may not provide complete and final answers and that it does not have implications for fair lending policy, but that this approach should be an integral part of the overall research program designed to understand discrimination and its effects.

Additional articles present other aspects of the debate, as well as additional analyses of FHA data. "The best available arguments and evidence," sums up Cityscape editor Michael A. Stegman, HUD's Assistant Secretary for Policy Development and Research, "warrant no other conclusion than that lending discrimination remains a serious problem in the home mortgage industry and a direct approach to the measurement of lending is far superior to an indirect, or default, approach." Stegman points to "a continuing need for financial regulatory agencies to join with HUD and the U.S. Department of Justice in aggressively enforcing fair lending laws."

Housing and banking trade and interest groups, housing researchers, and fair housing analysts and advocates will find that the latest issue of Cityscape clarifies and significantly advances the important debate on forms and persistence of racial discrimination in mortgage lending. Cityscape, published three times a year, is available from HUD USER for $5 per issue. Please contact HUD USER to obtain copies.