The Thin Red Line

Editor's Note: This feature originally appeared in the September issue of DS News.

Homeownership remains the primary way that Americans build wealth and pass it on to the next generation. But predatory lending and abusive mortgage-servicing practices have led to a tremendous loss of wealth among low-income communities and communities of color. The pendulum has swung from one extreme to another, with redlining returning to neighborhoods that were recently subject to reverse redlining. In some parts of California, where mortgage lending is occurring in neighborhoods of color, it often is leading to the displacement of families and small businesses that have been in the community for generations. Single-family and multi-family mortgage origination and servicing trends have only exacerbated inequality.

A Look at Lending

Federal Housing Administration (FHA) loans have a complicated history. These loans have provided access to homeownership for many families of color and working families who otherwise might not have been able to get a home. Any lender that does not offer an FHA loan product (and a good Community Reinvestment Act or CRA portfolio loan product) is demonstrating a questionable commitment to serving
the community.

However, lenders have often relied on FHA loans to serve perceived “emerging and multicultural markets” and “inner city” neighborhoods, even where borrowers qualified for lower-cost conventional loans. Lenders should commit not only to offering FHA (and CRA portfolio product) loans but also to ensuring that all borrowers receive the best-priced product they qualify for, whether it is an FHA loan or conventional loan.

The largest banks continue to lag when it comes to lending to low- and moderate-income families and families of color, according to 2017 Home Mortgage Disclosure Act (HMDA) data analyzed by the National Community Reinvestment Coalition. Banks have retreated from FHA loans and are increasingly trying to meet their CRA obligations through the purchase of loans made by other lenders, which provides minimal added value to communities.

Concerns about the impacts of mortgage and servicing practices on seniors continue to rise. Seniors who are struggling with mortgage payments may be pressured to take out a reverse mortgage, which can make them vulnerable to losing their homes. Data the California Reinvestment Coalition (CRC) obtained from a Freedom of Information Act request of HUD revealed an astounding 646 percent increase in the number of home equity conversion mortgage (HECM) foreclosures, with an average of 3,664 foreclosures per month reported nationwide over a nine-month period in 2016.

Nonborrower spouses continue to lose their homes despite purported fixes to the HECM program promised in 2015; such policy fixes were to have permitted widows and widowers to live out their remaining years at home. Information obtained by CRC from a FOIA request to HUD shows that an alarming number of seniors have had their homes foreclosed upon after the death of the spouse, even though few nonborrower spouses know to apply for such assistance, while others are denied for questionable reasons. Industry and consumer groups must work together to improve the HECM program so that seniors do not lose their homes. Recent comments by the FHA Commissioner are encouraging. During a recent media event, FHA Commissioner Brian Montgomery said that reforming the reverse mortgage program was one of his initial priorities he is focusing on.

Eschewing FHA lending, banks are increasingly relying on jumbo loans (which are targeted towards higher-wealth customers). Government-sponsored enterprise (GSE) loans are also skewing towards higher-credit-score borrowers, and the high fees associated with these loans means less access to credit for working families.

The GSEs report an increasing share of loans meeting their affordable housing goals are made to upper-income borrowers who are moving into lower-income neighborhoods. This hastens displacement of working families and families of color who should be benefitting from public policy efforts to make real the American dream of homeownership.

Affordable housing goals are a critical component of our housing finance system, and they must be strengthened and targeted to ensure that working families can build wealth and communities can stabilize.

Driving Inequity

REO-to-rental has enabled Wall Street and other investors to profit off the misfortune of working families. Millions lost their homes due to problematic lending and servicing practices during the foreclosure crisis. Wall Street, institutional, and all-cash REO-to-rental investors then swept in, outmaneuvering first-time homebuyers and mission-driven nonprofits. These new landlords displaced former homeowners and
other tenants and ripped apart the fabric of communities. The GSEs and banks should not finance or securitize REO-to-rental deals and should instead focus on first-time homebuyers and other owner occupants who live in their homes and communities.

In Oakland, First Republic Bank originated several hundred loans to an REO investor who filed hundreds of tenant-eviction petitions with the local rent board. The bank’s lending records showed that it was making single-family loans in neighborhoods of color. Was this helping the community? Other banks may offer few mortgages at all, lend only as an accommodation to existing high-wealth customers, or lend to limited liability companies. Is this what the Community Reinvestment Act and the Fair Housing Act are really all about?

Data show lending disparities exist widely, enabled by problematic policies and practices. In 2016, CRC found that OneWest Bank failed to serve communities of color in Southern California with mortgages and branches; this institution was nine times as likely to foreclose on a home in communities of color in California as to originate a home purchase or refinance loan in these communities. Sixty-eight percent of California foreclosures by this financial institution occurred in such neighborhoods.

While working families are kept out of the mortgage market, Mark Zuckerberg reportedly received a 1.05 percent rate on his mortgage. How many working families could qualify for a mortgage if they were offered below-market rates?

At the CRC, we have grown concerned about the financing of displacement and its impact on communities. In Redwood City, California, 20 tenant households in two apartment buildings were greeted in November of 2017 with a letter informing them that a new owner had purchased their building and that rents would be raised by over $800 in the next two months. When the tenants formed an association, obtained legal counsel, and engaged the owner about the rent increase, they were told that the owner had to raise the rents due to the loan agreement with First Republic Bank. An almost identical situation occurred soon thereafter in eastern Menlo Park.

All told, it is expected that 40 families of color will be displaced in two building complexes by property owners obtaining their financing from First Republic Bank. In Oakland, First Republic Bank emerged as an outlier, financing many property owners identified by local nonprofits as displacement drivers and serial evictors. When lenders underwrite loans based on increased rents, they are underwriting to displacement and harming both families and communities. As gentrification pressures increase in many communities and lenders continue to finance displacement, local residents are evicted or become homeless faster than affordable housing can be built.

Troubling Regulatory Trends

It is a challenging time to be advocating for an equity agenda in this regulatory landscape.

The Office of the Comptroller of the Currency (OCC) has taken several problematic steps recently, emphasizing that evidence of bank discrimination will not necessarily impact a bank’s CRA rating. Nor will failing a CRA exam necessarily preclude a bank from merging or expanding. The OCC has also indicated that it wants to streamline the CRA process, making it easier for banks to receive higher scores, despite the fact that 96 percent of banks already receive passing CRA grades. The head of the OCC, Joseph Otting, recently testified that he has personally never observed discrimination. This has raised many eyebrows; Otting was formerly the CEO of OneWest Bank, against which the CRC filed a redlining complaint.

Bank financing of displacement should have consequences. CRC believes that banks that originate “displacement mortgages” have sought, and received, CRA credit from regulators when the loans are in LMI neighborhoods and/or when the loans are on housing that is “affordable” to LMI tenants residing in those properties. This is so even though the loan for which CRA credit is sought will directly (through eviction and removal of affordable units from the market) and indirectly (by hurting the ability to access credit and exacerbating local affordable housing needs) harm the very residents and communities CRA is designed to support. Regulators should hold banks accountable for the consequences of their lending by downgrading CRA ratings for discrimination or financing displacement. Yet regulators appear to be heading in the opposite direction.

As CRA is under threat, so too are fair housing and fair lending. HUD has suspended the Affirmatively Furthering Fair Housing (AFFH) rule and the tools available to communities to help further its goals. HUD and the Consumer Financial Protection Bureau have raised the specter of opening up for reconsideration critical disparate impact analysis. The CFPB has reorganized and seemingly demoted its fair lending enforcement. [Editor’s note: In March 2018, CFPB Acting Director Mick Mulvaney directed that the name of the CFPB be changed to the BCFP, the Bureau of Consumer Financial Protection.]

The HMDA is a critical tool to ensure that housing needs are being met, to help local officials allocate resources, and to ferret out discrimination. After a much-discussed Reveal investigation highlighting potential redlining conditions in 61 jurisdictions throughout the country, the American Bar Association dismissed the findings, saying it relied on HMDA data that did not include credit score, loan-to-value, and debt-to-income data that are critical to determining if discrimination is occurring. And yet, Congress recently determined that 85 percent of reporting institutions need not report this crucial data. Under the current BCFP administration, HMDA reporting and disclosure is unlikely to be a priority.

Is it All Bad?

Despite challenges, there are positive developments. Our recent analysis of CRA activity in California found that CRA is working, returning billions of dollars in reinvestment to California communities. Banks that have entered into CRA commitments appear to be doing a much better job than those that have not.

To address displacement financing, California community groups have developed an Anti-Displacement Code of Conduct to show banks what they can do to end the financing of displacement and to instead reinvest in the community through an anti-displacement lens that focuses on community and resident stability. Over 65 organizations have endorsed these principles, and a number of banks have begun conversations about whether they would change their policies and practices.

Nonprofit groups continue to innovate and build their own capacity to meet community credit needs. Groups are now working to acquire existing multifamily buildings through the use of innovative financial products, in order to enable working families to remain in those units and ensure that units will remain affordable to community members for years to come. Community land trusts are growing their capacity to build long-term resident and community ownership.

On the legislative front, bills are moving in Sacramento that would extend the critical yet reasonable foreclosure protections of the Homeowner Bill of Rights, as well as clarify existing obligations of jurisdictions to affirmatively further fair housing. Local governments are considering ways to better protect tenants vulnerable to displacement and eviction.

Equity in the mortgage market will not be attained until industry participants step up to support equal access to credit and community stability. The industry must be intentional about serving all communities, hiring diverse management and staff, providing adequate language access, ensuring equitable branch and retail locations, offering accessible products like FHA and CRA portfolio loans, and ensuring all customers receive the best-priced product for which they qualify. On policy and lobbying matters, the industry must stand up for equality, access, and consumer protection of vulnerable and underserved communities. Banks and other lenders must consider the consequences of their lending on communities, not just short-term bottom lines.