Tag Archives: FHA

Racial Discrimination in the Secondary Mortgage Market

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Judge Baer issued an opinion in Adkins et al. v. Morgan Stanley et al., No 1:12-cv-07667 (July 25, 2013), denying Morgan Stanley’s motion to dismiss the plaintiff-homeowners’ Fair Housing Act claims. The homeowners claimed “that Morgan Stanley’s policies and practices caused New Century Mortgage Company to target borrowers in the Detroit, Michigan region for loans that had a disparate impact upon African-Americans” in violation of the FHA. (1)

The Court found that the plaintiffs met their pleading burden sufficient to survive a motion to dismiss:

First, they have identified the policy that they allege has a disproportionate impact on minorities.  That policy consisted of Morgan Stanley

(1) routinely purchasing both stated income loans and loans with unreasonably high debt-to-income ratios,

(2) routinely purchasing loans with unreasonably high loan-to-value ratios,

(3) requiring that New Century’s loans include adjustable rates and prepayment penalties as well as purchasing loans with other high-risk features,

(4) providing necessary funding to New Century, and

(5) purchasing loans that deviated from basic underwriting standards.

Plaintiffs go on to state that these policies resulted in “New Century aggressively target[ing] African-American borrowers and communities . . . for the Combined-Risk Loans.”  (Compl. ¶ 81.) Indeed, Plaintiffs allege in detail the effect that New Century’s lending had upon the African-American community in the Detroit area. (Compl. ¶¶ 115–122).  That lending, according to Plaintiffs, was a direct result of Morgan Stanley’s policies.  And while Plaintiffs do not allege that they qualified for better loans, they allege discrimination based only upon the receipt of these predatory, toxic loans that placed them at high financial risk.  These risks exist regardless of Plaintiffs’ qualifications.  On a motion to dismiss, these allegations are sufficient to demonstrate a disparate impact. (11)

The opinion goes farther afield than the questions presented at points. For instance, Judge Baer writes,

Detroit’s recent bankruptcy filing only emphasizes the broader consequences of predatory lending and the foreclosures that inevitably result.  Indeed, “[b]y 2012, banks had foreclosed on 100,000 homes [in Detroit], which drove down the city’s total real estate value by 30 percent and spurred a mass exodus of nearly a quarter million people.”  Laura Gottesdiener, Detroit’s Debt Crisis:  Everything Must Go, Rolling Stone, June 20, 2013.  The resulting blight stemming from “60,000 parcels of vacant land” and “78,000 vacant structures, of which 38,000 are estimated to be in potentially dangerous condition” has further strained Detroit’s already taxed resources.  Kevyn D. Orr, Financial and Operating Plan 9 (2013).  And as residents flee the city, Detroit’s shrinking ratepayer base renders its financial outlook even bleaker.  Id.  Given these conditions, it is not difficult to conclude that Detroit’s current predicament, at least in part, is an outgrowth of the predatory lending at issue here.  See Monica Davey & Mary Williams Walsh, Billions in Debt, Detroit Tumbles Into Insolvency, N.Y. Times, July 18, 2013, at A1 (listing Detroit’s “shrunken tax base but still a huge, 139-square-mile city to maintain” as one factor contributing to the city’s financial woes). (3-4)

This kind of judicial history does not seem to speak to the legal issue at hand and may negatively impact its reception on appeal. Furthermore, all Fair Housing Act cases will be impacted by the Supreme Court’s decision in Mount Holly v. Mount Holly Gardens Citizens in Action, Inc. for which it has recently granted cert. In that case, the Supreme Court will decide whether disparate impact is a cognizable claim under the Fair Housing Act.

But, whatever happens in the future, Adkins proceeds apace for now.

FHA Whitewash, Redux

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Richard Brooks and Carol Rose have recently published their book Saving the Neighborhood:  Racially Restrictive Covenants, Law, and Social Norms.  This well-written book brings to mind my recent post on the FHA Whitewash which reviewed a recent paper by HUD-affiliated researchers.  The paper minimized the role that the FHA played in furthering housing discrimination.  I mentioned that Kenneth Jackson’s classic book, Crabgrass Frontier, documented this sorry chapter of the FHA’s history.  Saving The Neighborhood covers some of the same ground, but from a legal and legal history perspective.  By doing so, it adds depth and texture to the historic record.

The book makes clear just how much of a role the FHA played.  The FHA’s

Underwriting Manual reflected private developers’ and brokers’ views of the kinds of features that made housing values stable and secure. Those features clearly included racial segregation.  In a section on “Protection from Adverse influences,” the Manual stated bluntly that “[a] change in social or racial occupancy generally leads to instability and a reduction in values” (par. 233). Thus property evaluators were to investigate the surrounding areas for the presence of “incompatible racial and social groups” and to assess whether the location might be “invaded” (par. 233). The Manual specifically noted that deed restrictions on “racial occupancy” could create a “favorable condition” (par. 228). in the section on subdivisions that were still in the development stage, the Manual recommended deed restrictions that included, among other matters, “. . . (g) Prohibition of the occupancy of properties except by the race for which they are intended” (par. 284(3)). (109)

The authors argue that these preferences gave developers, even those who did not favor segregation, an incentive to employ racially restrictive covenants in their projects. (110)

The FHA’s record of racial discrimination during the first few decades of its existence is clear, for all to see.

FHA Whitewash

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While preparing for my talk tomorrow on The FHA and Housing Affordability, I was reviewing some of the recent literature on the FHA. I came across a recent HUD working paper with some interesting data about recent FHA crises but also with a disturbing spin on the FHA’s history. The FHA Single-Family Insurance Program: Performing a Needed Role in the Housing Finance Market states that in its early years “race was not explicitly regarded as a factor in FHA’s mortgage insurance operations.” (9) This is flat out wrong and has been known to be flat out wrong at least since Kenneth Jackson published Crabgrass Frontier in 1987. Jackson clearly demonstrated that race was “explicitly regarded as a factor in FHA’s mortgage insurance operations.”

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Jackson writes that the FHA’s Underwriting Manual from those early years stated that “[i]f a neighborhood is to retain stability, it is necessary that properties shall be continued to be occupied by the same social and racial classes” and recommended that owners employ restrictive covenants to exclude African Americans (and some other groups). (208) The working paper has other extraordinary statements that minimize the FHA’s central role in promoting segregation during the mid-20th Century. For instance, it states that the FHA’s “early policy may have inadvertently promoted redlining practices.” (18) There was nothing “inadvertent” about it.

I typically find that federal government reports make great efforts to be factually accurate, so this paper is a great exception.  One might think that the authors deserve some leeway in their interpretation, but Jackson’s history has only been confirmed by later research, such as last year’s Do Presidents Control Bureaucracy? The Federal Housing Administration During the Truman-Eisenhower Era which was published in Political Science Quarterly. It makes much the same point as Crabgrass Frontier. I would be curious to hear the authors’ response to my assessment, but I really can’t see how they can deny it.

“Those who cannot remember the past are condemned to repeat it.” (Santayana)

Reiss on Housing Affordability

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I will be speaking on the FHA and Housing Affordability on June 11th at the AALS Workshop on Poverty, Immigration and Property will be held June 10-12 in San Diego.

The workshop brings together three communities of scholars: poverty, immigration and property to address historical issues and recent developments in the intersection of these topics. The topics covered in this innovative workshop include plenary sessions on What Lies at the Intersection of Poverty, Property, and Immigration; After SB 1070: Exclusion, Inclusion, and Immigrants; Reconsidering State v. Shack; and Transnational Perspectives on Poverty, Immigration, and Property. A range of concurrent panels will be established based on proposed topics and a call for papers and presentations.

 I will be posting a version of my paper later this summer.

Levitin and Wachter’s New History of American Housing Finance

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Adam Levitin and Susan Wachter have released a very interesting paper on The Public Option in Housing Finance.  The paper provides a history of the development of the housing finance infrastructure in the United States.  It concludes that

[t]he experience of the U.S. housing finance market teaches us that public options can only succeed as a regulatory mode in certain circumstances. A public option that coexists with private parties in the market is only effective at shaping the market if all parties in the market have to compete based on the same rules and standards. Otherwise, the result is merely market segmentation. Moreover, without basic standards applicable to all parties, the result can quickly become a race-to-the-bottom that can damage not only private parties, but also public entities.(60)

Personally, I wish they struggled more with the trillion dollar issue that they highlight in the middle of the paper:  “It is not clear how deep of a housing market can be supported if credit risk is borne by private parties rather than by government.”  (30)  As the Obama Administration seeks to impose a new order on the housing finance market that will likely last for generations, we should seek a consensus (or as close to one as we can) among policymakers as to how much credit risk the private sector can take when it comes to mortgages secured by single and multifamily housing.  Personally, I believe it can handle a lot more than we give it credit for.

FHA 2012 Annual Report on MMIF Shows Great Stress on Agency

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The report‘s findings show that the academic critics (here and here) of the FHA’s risk analysis were on to something over the last couple of years.