[PEN-L:4777] RE: New work on discrimination in credit mkts

[Dana Wise <dwise@xxxxxxxxxxxxx>]

Patrick, you've set-up a "straw-person" in your musings about the
shortcomings of urban activists.  Through their redlining
studies, fights with landlords, and battles with state and local
governments, community-based organizations have built a method of
analysis and a practice that helps people relate their own
experiences to the urban process and the underlying logic of
capital.  That's a tough job, but there are thousands of
organizers who are busy with it every day.  You recognize that
organizing has to start where people are.  Admitedly, lots of
community organizations stop with the "American Dream," but
others have continued to connect their local struggles with
structural processes.  Intellectuals like yourself have to play a
role in helping us all improve our urban politics, not just
criticizing them for being short-sighted.

Here are some questions for you:  Name the second-largest
corporation ($270 billion in assets) in the U.S. and the fastest-
growing financial institution.  Name the two institutions that
have in one way or another financed over 50 percent of single-
family homes in the U.S.  Guess the percent in 1993 of their
mortgages were for African Americans: 2 percent.

Allen Fishbein from the Center for Community Change and I just
finished a brief article for Shelterforce Magazine about HUD s
proposed new performance goals [sic] for Fannie and Freddie.
(Some excerpts below) HUD s analysis of the past performance of
the GSEs contains some interesting statistics that directly
support your statement that:

>a rising financial-speculative circuit of
>capital accentuates uneven spatial development, because of the
>growing capacity of financiers to `annihilate space by time' as
>Marx put it.

(We welcome any guidance on ways to improve our analysis of these
institutions.)

It turns out Fannie and Freddie are extremely opportunistic in
their activities in the international capital markets.  They buy
mortgages aggressively when the  spread  between mortgages they
purchased and their cost of funds increases.  That spread
normally increases as the supply of mortgage debt hitting the
secondary market explodes.  But despite their criminally large profits
these institutions have had a dismal record in serving low-income
people and their communities.

The market dominance enjoyed by these two government supported
entities in large part dictates the underwriting terms and
conditions used by loan originators.  These underwriting
guidelines have been criticized, especially in the past, for
being biased against older urban neighborhoods, and thus
reinforcing patterns of redlining and disinvestment.

To develop the goals, HUD conducted considerable research into
the size of the potential market and the GSEs  past performance,
and we found the proposed rule to contain many useful references
to recent research on ongoing inequities in mortgage finance.  I
can e-mail the proposed rule to any one who wants it.  It's
available over the Net in the GPO Federal Register gopher sites.
The proposed rule was published on February 16th, 1995.

Despite their general success in lowering interest rates and
expanding mortgage credit availability for moderate income
households, most observers would agree that the GSEs have been
much less successful in serving the needs of modest income
families, minorities, and the residents of underserved areas.  In
an effort to redress this imbalance, in 1992 Congress enacted
legislation directing HUD, as the GSEs regulator, to establish
specific performance goals for affordable housing.
Organizations, such as the National Low Income Housing Coalition,
National Peoples' Action, ACORN, Center for Community Change,
LISC, and the Enterprise Foundation, strongly supported passage
of this legislation.

The interesting thing about HUD's analysis is how the GSEs have
failed to "lead the market" in the production of affordable
housing and housing in underserved areas (which is the basis of
their governmental charter).  HUD estimates that the
already underperforming private financial market is originating
half of its mortgages on housing affordable to  low and moderate
income families, yet the 1996 share of purchases for the GSEs is
only 40 percent.

In 1993, the GSEs purchased 70 percent of all single-family
mortgages, yet they have underperformed even the market in
serving minority households.  In that same year, just 2.9 percent
of all mortgages originated nationally went to African-Americans.
According to HUD Secretary Cisneros,  In 1993, mortgages to
African Americans accounted for only 2.3 percent of Fannie Mae s
purchases and 1.7 percent of Freddie Mac s.  Similarly, 3.4% of
all loans went to Hispanics in 1993, but Fannie Mae's purchases
amounted to 2.7% and Freddie Mac's 2.9%.   Based on 1993 mortgage
market data, the GSEs purchased 55 percent of the loans
originated by the primary market for borrowers with incomes above
120 percent of area median income, but only 41 percent of the
mortgages originated for borrowers with incomes less than 60
percent of area median income.

Central cities, rural areas, and other underserved areas housing
goal.
                    Actual Performance  Proposed Goal
          Est. Market    FNM      FHLMC      1995  1996
urban/ suburban          13.1%    13.6%
rural                    2.8%     0.8%
Total      21 - 23% 15.9% 14.4% 18.0%        21.0%

The proposed annual goal for the purchase of mortgages on housing
located in central cities, rural areas, and other underserved
areas is 18 percent in 1995 and 21 percent in 1996.  As in other
areas of the GSEs  performance, HUD found the GSE underperforming
the market in terms of reaching communities that are underserved
in terms of access to mortgage credit:   In 1993, GSE purchases
accounted for 44 percent of the conventional conforming market in
under-50-percent income tracts and 47 percent in 50-80 percent
income tracts; in above-median-income tracts, on the other hand,
they accounted for 59 percent of the market.   The GSEs have
regarded the "central cities" goal as the most diificult one for
them to meet.  Accordingly, Fannie Mae reported that it slightly
exceeded the 30 percent goals with 30.4 percent the third quarter
of 1994.  However, Freddie Mac reported that it again fell short
of this goal with only 24.8 percent (3rd quarter) of last year's
business meeting the central cities definition.

The rule improves on existing regulations by developing a more
rigorous definition of  underserved area. Using 1993 HMDA data
and 1990 Census data, the Department analyzed mortgage
application denial and  origination rates throughout the country,
as well as reports and other  research on the availability of
mortgage credit and mortgage flows. The  data showed that the
availability of mortgage credit to an area is related to its
minority concentration and income characteristics of its
residents:
           Census tracts with higher percentages of minority
           residents have higher mortgage denial and lower loan
           origination rates than all-white or predominately
           white census tracts; and
           Census tracts with lower incomes have higher denial
           rates and lower origination rates than higher income
           tracts.

The proposed rule defines underserved areas to include  rural
areas,  defined as any underserved area located outside of any
metropolitan statistical area (MSA) designated by OMB. The
proposed rule defines  underserved areas ' as census tracts or
non-metropolitan counties where: Minorities comprise 30 percent
or more of the residents and the median income of families does
not exceed 120 percent of the area median income; or where the
median income of families does not exceed 80 percent of the area
median income.  This refined definition of underserved areas
appropriately focuses the GSEs  goals in those areas that have
the least amount of access to housing finance.

Special Affordable Housing Goal
                    Actual Performance       Goal
           Est. Market    FNM   FHLMC        1995      1996
VLI rental          7.2%  3.7%  1.4%         5.5%      6.0%
owner-occupied:                              5.5%      6.0%
  L-I in L-I areas  1.8%  0.9%  0.9%
  V-L-I owner       11.0% 4.6%  4.4%
Total      17 - 20% 9.2%  6.7%  11.0%        12.0%
(1994 Estimates)          14.0% 9.0%

The proposed rule establishes the goal at 11 percent for 1995,
and at 12 percent for 1996.  This goal has two equal parts, each
to receive 5.5 percent (6 percent) of the GSEs  units financed
during 1995 (1996): homeownership for either low-income families
living in low-income areas or very low-income families; and,
rental housing for very-low-income families.

In this case as in the others, HUD s research showed that  the
market is originating many more loans for lower income homebuyers
than the GSEs are purchasing.  The GSEs, based on 1993 HMDA
data,, purchased a much smaller proportion of conforming
mortgages originated for very-low income homebuyers than of
mortgages originated for high income homebuyers (41 percent
versus 55 percent).  In 1993, low- and moderate-income
individuals received 16% of all mortgages, yet of all loans
purchased by Fannie Mae and Freddie Mac, only 14.4% were from
low- and moderate-income borrowers.


Dana Wise
National Low Income Housing Coalition/ Low Income Housing Information Service
1012 14th ST, NW, Suite 1200, Washington, D.C. 20010 (202)662-1530
fax:(202)393-1973, dwise@xxxxxxxxxxxxx, HN0396@xxxxxxxxxxxx