Lessons of LBJ and Civil Rights Movement for Possibilities of Change Today

Julian Zelizer’s recent book “The Fierce Urgency of Now: Lyndon Johnson, Congress, and the Battle for the Great Society,” masterfully explains how far reaching Civil Rights and Great Society legislation was made possible by a social movement, a determined President, large Congressional majorities, and moderate politicians in the minority party willing to negotiate. The book also indirectly illustrates why even after the financial crisis and the Great Recession, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was incomplete in its reform of the financial sector. A number of key ingredients present in the passage of the Civil Rights and Great Society laws were missing this time around.

The passage of the Civil Rights Act of 1964 reveals how grassroots pressure combined with a steadfast President to pass a landmark law. The odds were great. In the previous decade, the powerful Southern segregationist James Eastland was Chair of the Senate Judiciary Committee and had succeeded in blocking 119 civil rights measures from leaving his committee. But Senator Eastland lost ground in 1963 and 1964 as the civil rights law was being debated due to the strength of the civil rights movement and its allies. Sit-ins in segregated establishments and civil rights protests succeeded in turning the tide of public opinion. The pollster Louis Harris reported in April of 1964 that great majorities of Americans supported the civil rights bill.

Religious organizations were also vital in their moral suasion. Religious leaders held meetings with Senators, including prominent conservatives, who were persuaded to vote for cloture ending the filibuster of the civil rights law. Congressional staffers got used to letters arriving on Tuesday and Wednesday after congregants were urged to write during Sunday services. This activity prompted Senator Humphery to state, “The most important force at work today on behalf of civil rights is the churches – Catholic, Protestant, and Jewish.”

Even with the grassroots pressure and increasing public support, the Southern filibuster of the bill turned into the longest Senate filibuster in history lasting 60 days. President Johnson realized that he needed the support of moderate Republicans and asked Minority Leader Everett Dirksen to negotiate a bill with his administration. Senator Dirksen’s negotiation and support for the bill carried enough Republicans to end the filibuster and pass the bill. He called civil rights a “moral” issue that “must” be resolved. Can you imagine the current Republican majority leader of the Senate or House possessing this much vision and statesmanship?

The Civil Rights Act of 1964 ended segregation in public accommodations, established the Equal Employment Opportunity Commission, prohibited distribution of federal money to programs practicing segregation, and banned gender discrimination in employment.

After Johnson signed the bill into law on July 2nd, Bill Moyers, his aide, found the President forlorn in the White House. Johnson told Moyers, “I think we have just delivered the South to the Republican Party for a long time to come.” Lyndon Baines Johnson (LBJ) was a political and legislative genius who took big risks for what he thought was right, and took these risks despite the possibility of defeat in the future. This type of political leader is sorely missing today.

In the immediate aftermath of the Civil Rights Act of 1964, LBJ did not experience political costs. Instead, he defeated Barry Goldwater in a landslide and new Congressional Democratic majorities were the largest since 1936. LBJ used these majorities to pass 200 bills in perhaps the most productive legislative record of any president including FDR. Landmark bills included the Voting Rights Act of 1965, Medicare, Medicaid, and the first federal funding of education.

Eventually, LBJ’s gambling and risk taking took its toll. LBJ was committed to the Fair Housing Act (FHA) which was a much tougher sell than the Civil Rights Act or the Voting Rights Act. By prohibiting discrimination in the sale or rental of housing, many Americans, including Midwest and Northern lawmakers who sided with LBJ on earlier civil rights bills, viewed the FHA as an intrusion on their castle, that is, their home. Americans could support earlier civil rights bills as moral imperatives and as needed to stop the bitter oppression and violence experienced by African-Americans and the civil rights movement. But the FHA seemed different and a government mandate interfering with private property. Senator Dirksen came out against the FHA. Only after the assassination of Martin Luther King were lawmakers and the nation swayed to support the bill.

LBJ’s support for the FHA, his tragic mistakes in escalating the Vietnam War, and the unrest in the nation’s cities contributed to the defeat of the Democrats in 1968. But the Great Society has endured today with civil rights laws, Medicare, Medicaid, and a federal role in education, housing and community development largely intact despite attacks.

Today, monumental legislation faces greater odds. It was miraculous that the Affordable Care Act (ACA), popularly known as Obamacare, passed despite a less hospitable Congress and a lack of a visible evil (discrimination) and a social movement that graphically displayed that evil in the nightly news on Americans’ television sets. In addition, financial reform legislation was not as far reaching as the civil rights and Great Society reforms even though the lawless and irresponsible behavior of the financial industry caused the worst recession since the Great Depression.

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act that instituted important reforms. The law created the Consumer Financial Protection Bureau that is dedicated to protecting consumers from abusive lending and other financial products. It established new safeguards against predatory lending. It also required more transparency and data on loan terms and conditions in order to monitor lending trends and detect abusive practices earlier.

But Dodd-Frank missed one critical reform. In 1977, Congress passed the Community Reinvestment Act (CRA) which requires banks to serve all communities consistent with safety and soundness. Federal agencies conduct CRA exams and give banks ratings based on how many loans, investments, and services they offer to low- and moderate-income borrowers and communities. This law has boosted banks’ lending and investments in modest income communities by hundreds of billions of dollars. If Dodd-Frank had applied this law to all segments of the financial industry including mortgage companies, insurance companies, and Wall Street investment banks, lending and investments would have been multiplied many times over in lower income and minority communities. Lawmakers had proposals before them to expand CRA during Congressional consideration of Dodd-Frank.

Sadly, however, the Great Society ingredients were not there. The President did not invest as much political capital in financial reform as LBJ did in civil rights and Great Society laws. Support in Congress for CRA reform was tepid at best and had many prominent lawmakers hostile to CRA. Lastly, the social movement was not as strong as the Civil Rights movement. I proudly worked at the National Community Reinvestment Coalition for almost 20 years, ghost wrote CRA reform bills, and worked with 600 community organizations to support CRA reform and make community voices heard in Congress. But it is not a knock on our collective efforts to state honestly that we were not as successful as the Civil Rights movement. It is just hard, hard work. Perhaps we also lacked the visible evil of violent discrimination.

One can conclude that the possibilities for profound social change are rare. So many ingredients must gel at the right time. It is easy to give up and be cynical. But perhaps the response that LBJ, Martin Luther King, and other leaders would advocate is to never give up, defend current gains, push for incremental reforms, and support budding social movements when they occur. Just maybe, you might be involved in once in a lifetime moment of social change.

 

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna, Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter.

 

 

 

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Participate in Crowdfunding for Affordable Housing and Homeownership

As readers of this blog know, affordable housing in DC is becoming harder and harder to find each year. Manna is constantly searching for financing/funding and available properties/lots to produce affordable housing for those who need it. Manna is not a hand-out but a hand-up. Most subsidies received from the city in the form of second loans or low down payments are paid back over time. And Manna’s programs work because of diligence and effort on everyone’s part.

Recently, we have acquired a foreclosed property in the Hillcrest section of Washington, DC to renovate and sell to a lower income purchaser. Manna used funds provided by Neighborworks America to purchase this house, which is currently undergoing renovation. The house is a semi-detached, 2 bedroom, 2 bathroom town house with a full renovated basement, and very large backyard with deck overlooking a small stream. Before renovation was complete, Manna received an offer. Akua Danqua is a single mother with two little girls. This family has prepared themselves for a couple years and is very excited to be able to buy their own home. For more information about Akua, her family, and affordable housing in DC in general, please read this Street Sense article.

As a part of the M St. renovation, Manna will need to provide the home with a number of brand new appliances, which is why we are asking for your help with funding. In an effort to test out crowdfunding as a new source of fundraising, we have created a campaign on causevox.com to raise $13,290 for appliances in a new Manna property on M St. SE. Information about the property and the future owner, Akua Danqua, can be found on this page. We invite everyone to please send this link to any family or friends that they believe may be interested in helping Akua with funding for her household appliances before she and her two young daughters move in.

Not only do Manna’s programs work, they represent less risk than a traditional bank’s loan portfolio as buyers are prepared, educated, and supported. Before people become homeowners, they work with Manna’s counselors on saving for a down payment and cleaning up their credit for one or even two years! In the coming weeks, Manna will be producing a report showing that Manna’s low-to-moderate income families have a lower foreclosure rate than the rate in Washington DC, as a whole. And remember, DC was not ravaged by the foreclosure crisis like some other localities, and it is a city that has experienced considerable gentrification over the last couple of decades. What is special about Manna’s program is that we have provided sustainable and affordable homeownership for 1,000 families. The families who have purchased Manna homes have gained millions of dollars in equity, and a typical family has about $200,000 in homeowner wealth after starting with little or no wealth. We have participated in some cases in ending inter-generational poverty. Most of these homeowners will pass this wealth along to their kids, some will fund education, and some may fund small business start-ups.

Be a part of supporting affordable housing in DC and Akua Danqua’s family in particular!

 

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NY Agreement May Increase Lower Income Homeownership in DC

Last week, Eric Schneiderman, the New York Attorney General, reached agreement with the three large credit bureaus, Equifax, TransUnion, and Experian, which could result in more minority and lower income loan applicants nationwide and in the District of Columbia qualifying for home mortgage loans. By reducing the number of errors on credit reports, the chances that applicants are creditworthy and qualify for loans increase. This disproportionately helps populations that are traditionally underserved by the financial industry.

The three large credit reporting agencies (CRAs) collect information on the use of credit, the amount of debt, and delinquencies on some 200 million Americans. In a massive data collection undertaking, errors are inevitable. But care can be taken to reduce the amount of inaccuracies and resolve disputes and errors when they occur. Without adequate oversight, errors can multiple and unfairly penalize hard working Americans. The CRAs provide credit reports to FICO and other companies that calculate credit scores or numbers usually on a scale of 300 to 800 that indicate how creditworthy consumers are and how likely they are to repay their loans and debts on time. Faulty credit reports depress credit scores and may lead to loan denials. Other adverse consequences can follow as well. Employers and landlords consult credit scores in addition to lenders.

A Federal Trade Commission study in 2012 found that 26 percent of consumers’ credit reports contained inaccuracies that lowered credit scores. Thirteen percent of consumers boosted their credit scores after working with the credit bureaus to resolve errors on credit reports. Some simple math reveals profound implications of errors. An error rate of 26 percent means that 52 million of the total 200 million consumers have credit report errors. A 13 percent correction rate means that 26 million successfully improved their credit reports and scores. Assuming that the Attorney General’s agreement makes it possible for another 10 percent or so to improve their credit reports, another 20 to 26 million consumers may be able to boost their scores. Chances of loan approvals then increase significantly.

In particular, medical debt is an oppressive problem. Over half of the debt collections on credit reports are medical debts. Anyone familiar with medical bills can attest to how difficult they are to understand, how difficult it is to determine what the consumer must pay and what the insurance company will pay, and delays in working with medical care providers and insurance companies in sorting out medical bills. Not surprisingly, the likelihood of delinquent medical payments increase for the uninsured and for lower income borrowers.

A Center for Disease Control study finds that 26 percent of the lowest income borrowers had problems paying medical bills compared to just 6 percent of the richest borrowers.

Graph for NY AG Agreement post - 2015 Mar 17

Regarding medical debt and other issues, the Attorney General’s agreement with the three large bureaus requires the following:

  • Medical debt: CRAs must wait 180 days before reporting delinquent medical bills on credit reports. This will provide more time for consumers to work out their bill payments with medical care providers and insurance companies. Once paid, medical debt must be removed from credit reports, which is not the case now.
  • Disputes over Errors: CRAs will no longer automatically reject a consumer’s dispute about an accuracy of a debt report after a lender verifies that the lender reported the debt. Instead, an employee with discretion to fix errors must investigate the matter and review documentation from all parties.
  • Illegal Loans: CRAs are prohibited from reporting debt incurred on loans deemed to violate New York state law regarding predatory lending. These abusive loans must not be allowed to further penalize consumers through damage to credit reports. Other jurisdictions should follow the New York Attorney General and adopt this provision.
  • Bolster the Visibility of AnnualCreditReport.com: Most consumers do not know that they are entitled to one free credit report annually via this website. The CRAs are required to adopt increased marketing and outreach to make consumers aware of the availability of free credit reports so consumers can investigate and fix any errors.

Although the New York Attorney General negotiated this agreement, most of the provisions of the agreement are national. Thus, the consumer protection actions of the New York Attorney General will benefit consumers in the District of Columbia, particularly minority and lower income loan applicants. A few weeks ago, this column reported that the below percentages of different populations in DC during 2013 were denied conventional home purchase loans because of creditworthiness:

  • African Americans – 17 percent
  • Low-income – 15 percent
  • White – 8 percent

Suppose that the New York Attorney settlement benefits all applicants but disproportionately benefits low-income and minorities that probably have the highest frequencies of medical debt and errors on their credit reports. The agreement has the potential to narrow racial and income disparities in access to credit for residents of the nation’s capital.

Key to this, however, is consumer use of this new agreement. Manna’s homeownership counselors regularly assist consumers in addressing errors and cleaning up their credit. Let us hope that the New York Attorney General’s agreement facilitates this important work, increases loan approvals, and thus helps us build wealth in traditionally underserved communities.

 

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna, Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter.

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Police and Wealth Extraction vs. Lending and Wealth Creation in Ferguson, Missouri

The tragedy of Ferguson, Missouri has prompted national reflection. Will it prompt corrective action? It is too early to tell, but the Department of Justice report, Investigation of the Ferguson Police Department, is a sobering, sad, and maddening account of policing in our towns and cities.Let us hope it spurs us to a serious examination of our institutions and whether they empower all races and classes in America or whether they purposely keep some downtrodden in order to elevate others.

Ferguson is a small city of about 21,000 people that has undergone a tremendous racial transformation from about 90 percent white in 1970 to 67 percent African-American today. In this racial transformation, the power structure of local government remained largely in white hands with disastrous results. The police became an instrument of oppression and wealth extraction. Not only does the Department of Justice document arbitrary enforcement practices aimed at African-Americans, they record unspeakable racist emails from police officials that make one’s stomach turn and that I cannot bear to repeat in this column. As someone who has studied access to lending for several years, the Department of Justice report motivated me to compare the police to another major force in American life, financial institutions. While the police appear to target African-Americans, what are the lenders doing in terms of serving African-Americans?

The bar graph immediately below shows that African-Americans received 51 percent of the home purchase loans issued in Ferguson during 2013, Missouri while African-Americans are 67 percent of the population.

Ferguson share of loans police actions

 

While lending is disproportionately low, negative police actions are disproportionately high. About 93 percent of all arrests are of African-Americans, 88 percent of the cases of force involve African-Americans, and 95 percent of cases of citizens being in jail longer than two days are African-American. Oppression occurs at a higher rate than financial empowerment and access to credit for African-Americans.

Before we equate lenders with police, it must be added that the racial disparity in lending observed in Ferguson is less than the disparity observed in other municipalities including the District of Columbia as has been pointed out in previous columns. Lenders are not acting as poorly as the police. The reason, I believe, is that the Ferguson police have not been accountable to the community for decades whereas lenders have been required to abide to laws and regulations including the Community Reinvestment Act, the Fair Housing Act, and the Equal Credit Opportunity Act. We have much more ground to cover to make the lending marketplace fair but progress has been made whereas the Ferguson police were operating with complete impunity before the tragic death of Michael Brown and the Department of Justice investigation.

Ferguson as well as being an African-American city is a poor city, but lending institutions have not shied away from serving low- and moderate-income borrowers in Ferguson. Lenders issued 40 percent of their home mortgage loans to low-income borrowers and another 36 percent to moderate-income borrowers. Lenders made 5 loans to borrowers with less than $20,000 in annual income and 24 loans to borrowers with incomes between $20,000 to $30,000 during 2013. This is possible because a good number of homes appear to have values ranging from $40,000 to $70,000, judging by the loan amounts made to these low-income borrowers. Hopefully, this is the silver lining in the Ferguson fiasco. That is, the affordability of homeownership creates possibilities for wealth building through responsible home mortgage lending. If the City gets its act together and takes action to make it an attractive community for everybody, then perhaps the homes will experience healthy appreciation in future years.

Contrast, the wealth building prospects of homeownership with the wealth extraction of policing. The Department of Justice describes the case of an African-American woman that police charged $151 for a parking ticket. She tried to make partial payments but they were not accepted. Experiencing periodic bouts of homelessness, the woman was charged for missing court dates. She spent six days in jail. Despite paying the City $550 in fines, she still owes $541. Some abusive payday lenders would be jealous of how well the Ferguson police and courts have perfected extortion.

The bar graph below shows that fines and fees assessed by the City of Ferguson totaled $2.46 million while the total dollar of home loans were $7.1 million during 2013. In other words, police wealth extraction was about 34 percent of wealth building possibilities represented by home purchase loans. Loans to African-Americans in the city amounted to about $3.4 million. Fines were about 73 percent of the loans issued to African-Americans.

Either the police department will voluntarily settle with the Department of Justice and institute reforms or will be sued. Let’s hope that the voluntary route is taken and concludes with robust reforms. Progress still needs to be made on the lending front but at least a decent start has been made there. The key to all of this is whether the citizens have input, participation, and representation in the institutions that so mightily influence their life chances.

dollar amt fines vs loans

 

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna, Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter

 

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What is Behind the Lending Disparities: The Role of Bank Branches and Loan Offices?

orange_zip_ward_bank

This is the third in a series of columns about lending disparities in the District of Columbia. Like any movie sequel, the column risks not being as exciting as the first one of the series. But I think this is the best because it is the most revealing.

In the first column, glaring disparities by race and income in lending were described such as African-Americans receiving 8.8 percent of the home purchase loans during 2013 although they were 46.9 percent of the District of Columbia’s households. The second column examined reasons for loan denials and found that a higher percentage of African-Americans and Hispanics than whites were not mortgage ready. However, if one lowered the African-American denial rate to that of whites, the percentage of loans to African-Americans only increased slightly. The reason is that relatively few African-Americans were applying to banks or mortgage companies.

Why are so few African-Americans applying? If bank branches have been rare in a community for decades, isn’t that population less likely to apply because it is not as familiar with banking and applying for loans?

A picture can speak 1,000 words. The map below of branches per zip code and ward reveals far fewer branches east of the Anacostia River. Wards 7 and 8 east of the river have a population that is about 95 percent African-American, and these wards have only 14 bank branches compared to 235 in the rest of the city. On a per capita basis, the disparity is stark. There is one branch per 10,386 people East of the River compared to one branch per 2,561 people citywide. In other words, imagine more than 10,000 people cramming into a branch East of the River to get bank service versus 2,561 elsewhere in the city. Another way to picture this is that there is about one branch per 10,000 people East of the River and about 4 branches per 10,000 people elsewhere in the city.

branches per people

 

Banks are not the only scalawags in this story. Mortgage companies are not better when it comes to the location of their loan offices. After visiting the websites of the 5 largest mortgage companies as measured by numbers of home purchase loans, I found that only 1 of their 15 loan offices in the District of Columbia was located East of the River.

The relationship between bank branches, loan offices, and lending should seem intuitive; if there are fewer branches, then there will be fewer loans in a community. But some pundits are in love with mobile and telephone banking and seem to think we don’t need branches anymore for providing services and loans in a community. Well don’t believe it. The FDIC recently published a paper showing that branches per capita is the same today as it was in 1977, suggesting that people still need branches for the complicated transactions like applying for home purchase loans

Furthermore, research conducted by economists at the Federal Reserve Bank of Cleveland reveals that census tracts receive more loans when they have more branches.In addition, the loans in communities with more branches have lower default rates, meaning that loan officers at the branches are probably doing a better job finding suitable loans for applicants than when applicants apply virtually or over the phone.In the District of Columbia, the relationship between branches and loans holds up. In 2013, financial institutions made 56 loans per 1,000 homeowners citywide but just 28 loans per 1,000 homeowners East of the River. This is roughly half as much access to loans East of the River.

Loans per 1000

So what is to be done? Undoubtedly, differences in mortgage readiness explains a significant part of racial and income lending disparities. So increase the amount of counseling. However, location of banks and mortgage company loan offices explain as much or more of the disparities. The District of Columbia will be implementing its new responsible loan ordinance over the next year. This new law requires banks that seek municipal deposits to explain to city officials and the general public how they will better serve District of Columbia residents. We must insist on more branches East of the River and in other underserved communities in the city.

In meantime, let us think of some creative partnerships between banks, mortgage companies, and housing nonprofit organizations. Readers around my age of 50 may recall the commercial for Life cereal in which the older kids teasingly place the cereal in front of a young Mikey and say Mikey must like it because Mikey likes everything. Well, Mikey started eating the cereal ravenously. If we place some loan officers in the middle of underserved communities, I bet you that they will like it as much as Mikey liked Life cereal.

I bet the loan officers would tap into unmet demand. Why don’t we place some loan officers literally in the offices of housing nonprofit organizations in Wards 7 and 8? They could work out of these offices a couple of days a week on a trial basis. The nonprofits, most of whom engage in housing counseling, can funnel qualified applicants to these loan officers. After about a year of this, I bet the loan officers will be clamoring for their institutions to open more branches in underserved communities. Do we have any takers among the lending institutions out there? You have nothing to lose and more markets to gain!

 

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna, Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter

 

 

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Child Homelessness on the rise

One of the biggest deterrents to economic mobility, in addition to a lack of wealth or opportunity, is the lack of stability for children, a safe and consistent place to call home. Recent studies and surveys have shown that homelessness has increased tremendously for grade school age children, as well as college students. According to a recent study done by The National Center for Family Homelessness, one in thirty US children are homeless. The study shows that these adverse circumstances greatly affect communities of color, further increasing the vicious cycle of poverty. The study released back in November detailed an increase in child homelessness in 31 states and the District of Columbia. Nearly 2.5 million children were considered homeless in 2013, which was an 8% increase from 2012. And based on current projections 2014 won’t fare any better.

One of the main factors contributing to this increase in homelessness is the lack of affordable housing. In California, the state reported more than 500,000 homeless children, while only having 11,316 housing units for those homeless families; only Alabama and Mississippi ranked worse. Dr. Carmela Decandia, director of the center, states that “child homelessness has reached epidemic proportions in America,” and “living in shelters, neighbors’ basements, cars, campgrounds and worse – homeless children are the most invisible and neglected individuals in our society.”

The study showed that the largest population facing these circumstances was households headed by single Black or Hispanic women, a group that has suffered the worst from the recession, as well as other factors such as debt and institutional racism, which in turn has resulted in economic segregation.

As the District decides what it will do to continue combatting its homeless crisis, remembering the children who are suffering due to the lack of affordable housing is vital. Housing provides a sense of community, safety, and even pride. Housing is one of the cornerstones for strong communities and upward mobility, something every child deserves.

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What is Behind the Lending Disparities?

Last week’s blog revealed significant disparities by race and income in the District of Columbia but left the reader largely guessing about what caused the disparities. This week’s edition analyzes the reasons for denial of loan applications and concludes that while differences in mortgage readiness and creditworthiness explains some of the differences, these factors do not account for all of the disparities. Far from it.

In addition to loans and denials by race and income, the Home Mortgage Disclosure Act data has information on the reasons for denial. In the chart below, the reasons include debt-to-income ratio (DTI), credit history (credit), insufficient cash (which probably means not enough cash for down payment and closing costs), and unverifiable information and incomplete application (added together and called bad apps in the chart). The percentages in the chart do not equal 100 because a few reasons for denial such as employment history, “other,” and denial of mortgage insurance occurred infrequently and/or were not significantly different by race or income. DTI, credit, and insufficient cash were added together and called “not mortgage ready” in the chart because these are applicant attributes that result in loan denial and are distinct from collateral issues or defects in the property that result in loan denial.

reasons for denial conventional loans

 

The chart reveals that African-Americans and Hispanics have a higher percentage of applicant attributes disqualifying them from loan approvals than whites. For example, 17 percent, 11.8 percent, and 8.2 percent of African-Americans, Hispanics, and whites respectively, were denied loans because of credit history during 2013 in the District of Columbia. Likewise, DTI was a barrier for 30.9 percent of African-Americans compared to 18.7 percent of whites. When considering DTI, credit history, and insufficient cash together in the category called not mortgage ready, 55.3 percent, 41.2 percent, and 32 percent of African-Americans, Hispanics, and whites, respectively, were denied loans because they were not mortgage ready. Conversely, the percentage of denials due to collateral and bad applications were higher for whites than African-Americans and Hispanics.

By income, the most dramatic differences were between low-income applicants and their more affluent counterparts. About sixty two percent of low-income applicants were not mortgage ready compared with 37 percent, 34 percent, and 33 percent of moderate-income, middle-income, and upper-income applicants, respectively. Forty two percent of low-income applicants were denied because of DTI which was about twice as much in percentage terms as other income categories. Interestingly, the same portion (14 percent) of low-income and upper-income applicants were denied due to credit history.

For sake of comparison, the reasons for denial for FHA loans are displayed below. FHA lending exhibited narrower racial and income disparities. And sure enough, about the same percentage of white and African-American applicants were deemed not mortgage ready by lenders as shown in the chart below.

reasons for denial FHA loans

 

After this review, it might be tempting to conclude that differences in mortgage readiness explains lending disparities, particularly in conventional home mortgage lending. However, the following exercise assuming that mortgage readiness was about equal for whites and African-Americans reveals some other factors at play as well. Let us assume that instead of 17.3 percent of African-American applicants being denied for conventional loans, that just 5.7 percent were denied which is the same denial rate for whites. Instead of receiving 363 conventional home purchase loans, African-Americans would have received 433 conventional loans. While this is a considerable improvement, the percentage of conventional loans issued to African-Americans would have inched up only from 8.8 percent to 10.5 percent. And remember, African-Americans were about 47 percent of the households in the District of Columbia. The big gap that remains between the percentage of loans and the percentage of households can be accounted for by a considerable extent by the low percentage of applications submitted by African-Americans. Just 11 percent of the applications submitted for conventional loans were from African-Americans in the District of Columbia during 2013.

Why is there such a low percentage of applications submitted by African-Americans? We don’t know for sure. Was it because they were unfamiliar with lenders or intimidated to a greater extent than whites? While there are surveys of small business owners concerning “fear” or unfamiliarity for reasons of not applying for loans, I have not seen a comparable survey regarding applying for home loans. Another possibility is that lenders (banks and mortgage companies) are less accessible and are not located in as great an extent in African-American communities than predominantly white communities.

Surely, credit and homebuyer counseling can reduce the reasons for denial for home loans and get more minorities and low-income applicants approved for loans. As someone who works at a nonprofit housing organization that both develops units and provides counseling, I am in favor of significantly expanding the availability of counseling. The time might be ripe for better counseled borrowers to take advantage of some recent relaxation in credit standards. But is the location of bank branches and loan offices as much or a greater factor driving disparities in access to mortgage loans? This is the subject of an upcoming blog post.

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna, Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter

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Home Mortgage Lending Disparities is a Clarion Wake up Call to Work Together

The Home Mortgage Disclosure Act (HMDA) data shows glaring credit needs and gaps but also opportunities for stakeholders to constructively close the gaps in the District of Columbia. For communities, reducing disparities in lending represents opportunities to increase wealth building and economic development. For lenders, reducing disparities are opportunities to increase profitable and safe and sound lending.

As discussed in previous columns, the Consumer Financial Protection Bureau (CFPB) is required to enhance the data to include more information on the financial characteristics of applicants and loan terms and conditions. The explanatory power of analysis will increase further and we will be able to say more in future columns in coming years.

During 2013, the most recent year for which HMDA data is available, disparities were the widest for African-Americans and low- and moderate-income applicants in conventional home purchase lending.[1] While representing 46.9 percent of the city’s households, African-Americans received a mere 8.8 percent of the conventional home purchase loans issued in the District of Columbia. Similarly, low- and moderate-income borrowers constituted 59 percent of the borrowers in the District but received only 22 percent of the conventional loans during 2013. In contrast, as the chart immediately below shows, whites and middle- and upper-income borrowers received a considerably higher percentage of loans than their percentage of households in the city.

conventional loans by race and income in DC 2013

Such wide disparities by race and income should be used to stimulate more discussion than finger pointing. In a contentious environment, advocates will sometimes yell racism and lenders

will become defensive and dismissive, saying these disparities are due to differences in creditworthiness and lack of down payments. In a more productive discussion, the stakeholders will sit down and try to further probe to what extent these differences are due to lack of marketing in underserved communities, creditworthiness, and other factors. Innovative marketing approaches and programs such as low down payment loans and alternative methods of considering creditworthiness have been developed to narrow these types of gaps in the past. Hopefully, the wide disparities in the District’s data will prompt stakeholders to devise methods for narrowing the disparities. Why, for example, are the disparities much less for Hispanics than African-Americans? Figuring out this puzzle may narrow some of the gaps for African-Americans.

Denial rate analysis in the table immediately below sheds some more light on the disparities. African-Americans applicants were denied 17 percent of the time while white applicants experienced a denial rate of 5.7 percent in the District of Columbia during 2013. Dividing the rate for African-Americans by the white rate reveals that African-Americans were denied 3 times as often as whites. Likewise, low- and moderate-income borrowers were denied 2.3 times as often as middle- and upper-income borrowers. Hispanics had a disparity ratio lower than African-Americans and low- and moderate-income borrowers.

Some questions immediately arise by the disparities in denial rates: were African-Americans the least qualified followed by low- and moderate-income borrowers while Hispanics were better qualified and therefore experienced denial rates similar to whites? Or is there foul play here in that the differences in creditworthiness are not as great as the denial rate disparities suggest? Better data including data on creditworthiness that the CFPB is to provide in future years should help answer these questions. But also candid discussions among stakeholders should help. Lenders should be asked to frankly discuss what differences they see in African-American, Hispanic, and low- and moderate-income applicants compared to each other and their more advantaged counterparts.

Conventional Home Purchase Denial Rates
Rate Disparity Ratio
African-Americans

17.3%

                         3.0
Hispanics

7.4%

                         1.3
Whites

5.7%

                         1.0
Low- and Moderate-Income

12.9%

                         2.3
Middle- and Upper-Income

5.6%

                         1.0

The picture becomes a little clearer when considering Federal Housing Administration (FHA) home purchase lending. A lender assumes the loss when a borrower defaults on a conventional loan, but the federal government assumes the loss when a borrower defaults on a FHA loan. An FHA loan is therefore more expensive for the borrower in terms of paying for insurance to protect the federal government against default.

What is immediately apparent in the table below is that the disparities are wiped out in some cases and vastly narrowed in other cases. African-Americans received 58 percent of the FHA loans issued in the District during 2013 while constituting 46.9 percent of the households. For Hispanics, the percentage of loans and households were virtually identical while for low- and moderate-income borrowers, the percentage of loans was lower than the percentage of households but the disparity was vastly reduced compared to the conventional lending.

FHA lending allows lower down payments generally than conventional lending which may explain the reduction in some of the disparities. While this is encouraging, it must also be remembered that FHA lending is more expensive for borrowers than conventional lending, and we ultimately want more progress on reducing disparities in conventional lending. Also, conventional loan volume (5,240 loans) is much higher than FHA loan volume (691 loans) in the District, meaning that focusing on reducing disparities in conventional lending is more effective in yielding more loans to underserved populations.

FHA loans by race and income DC 2013 23423

FHA underwriting generally permit lower credit scores than conventional underwriting guidelines. This is likely reflected in the denial rates which is higher for all groups but markedly higher for whites whom had a denial rate of 5.7 percent in conventional lending versus a rate of 12.3 percent in FHA lending (see table below). A similar phenomenon occurred in the case of middle- and upper-income applicants. This shows that not all whites nor middle- and upper-income applicants have good credit either. More counseling and education can be beneficial for them as well. Higher denial rates for all groups resulted in lower racial and income denial rate disparities for FHA than conventional loan applicants.

 

FHA Home Purchase Denial Rates
Rate Disparity Ratio
African-Americans

19.5%

                         1.6
Hispanics

23.5%

                         1.9
Whites

12.3%

                         1.0
Low- and Moderate-Income

18.5%

                         1.5
Middle- and Upper-Income

12.7%

                         1.0

HMDA analysis can be maddening. Why are the disparities in the case of conventional lending so high? Is financial education and preparation so poor as to render African-Americans and low- and moderate-income applicants helpless in the lending marketplace? Or are lenders engaging in redlining and other bad behaviors? But before throwing in the towel, comparing the results of conventional lending to FHA lending shows that reducing disparities is possible and that perhaps some of the lessons and practices in FHA lending can be applied in a safe and sound way to conventional lending. The only way to find out is for the stakeholders to bite their tongues, refrain from intemperate rhetoric, roll up their sleeves, and work with each other to improve equity and efficiency in the lending marketplace. By shining a spotlight on disparities and credit gaps, HMDA is a clarion call saying it is time to redouble efforts and work together.

 Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna, Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter

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Cheaper To House

Human beings lie, obfuscate and misrepresent, but numbers do not. According to a recent survey, numbers show that it is cheaper to house homeless individuals than leave them on the street. At the beginning of each year, the Department of Housing and Urban Development (HUD) requires a very thorough survey of each city’s homeless population, in which HUD recruits volunteers to go out and count the homeless. This survey is critical in developing sound policies to combat homelessness.

A supporting survey, The May Central Florida Commission on Homelessness indicated that their region spends $31,000 a year per homeless person on just the salaries of law-enforcement officers to arrest and transport the homeless. This doesn’t even begin to take into the account the cost of jail stays, emergency room visits and hospitalization for medical and psychiatric issues. In comparison, it would cost about $10,000 to provide a homeless person with a home and a caseworker to supervise their needs.

While these numbers are based on a survey done in Florida, studies done all over the country show similar findings: a real strategy to help the homeless is far more cost effective than trying to sweep the problem under the rug. These studies show that while more financial resources are helpful, strategic efforts are the foundational tool in combating this problem.

As the District continues to navigate its way through its affordability crisis, tough choices in resource distribution will need to be made. We are anxious to see what this year’s budget brings as far as creative resource distribution and strategies – we will keep you posted!

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Over-investing in Homeownership?

 

The columns criticizing the nation’s emphasis on homeownership continue. Last week, Charles Lane, an opinion writer for the Washington Post, wrote a piece called “The Diminishing Returns of Today’s Homeownership Polices”.

He was prompted by a depressing statistic that the homeownership rate is 64 percent in 2014, the same rate as in 1994, despite twenty years of bipartisan efforts to boost homeownership rates.

Mr. Lane directly attacks low-down payment lending programs, stating, “In truth, the low-down-payment loans many people were encouraged to take during the boom were not much different from leases, in economic terms. They were wealth-building tools only in the speculative sense that, yes, you could convert a tiny equity stake into massive gains — if housing prices never ceased rising.” He continues that encouraging low income people to invest so much in housing is “in violation of the first principle of investing, which is to diversify risk.”  Mr. Lane concludes that the nation should basically dispense with homeownership programs and embrace market policies, “especially shorter-term mortgage products that require large down payments and share the risk of interest-rate volatility between borrowers and lenders.” A regime such as this would essentially wipe out the counseling and low down payment programs that Manna has successfully employed for thirty years.

A recent academic paper discredits Mr. Lane’s thesis by suggesting that lending to modest income people was not one of the principal causes of the crisis. The paper states mortgage growth during the crisis was not characterized by “unsustainable credit flowing disproportionately to poor people.” Indeed, predatory lenders were not primarily targeting the poor but minority communities. When I was at the National Community Reinvestment Coalition, I authored a series of reports over three years called “Income is no Shield against Racial Disparities in Lending.”Other academics had similar findings: risky lenders were not so stupid that they targeted the poor with unaffordable loans, but they were abusive enough to focus on working and middle-income minority communities.
The solution is not to diminish efforts to expand homeownership to modest income people. Rather, the solution should be to prohibit dangerous lending that does not consider borrowers’ abilities to repay and to increase enforcement of the fair lending laws against targeting minority communities with abusive loans. Last week’s column described important provisions in the Dodd-Frank Consumer Protection and Wall Street Reform Act that are designed to curb abusive lending.
Recently, Manna had a reunion of homeowners living in units rehabilitated and developed over Manna’s 33 year history. We asked homeowners to videotape their testimonials that effectively rebut positions such as Mr. Lane’s. One homeowner is an African-American single mother who raised four children. She said that Manna’s program required hard work. A participate in the Manna’s Homebuyer’s Club (HBC) could not miss a single session and the HBC counselors helped her get a loan. She continues “Signing that piece of paper (the deed), getting the keys, being a single parent, and going from rental to owning a home was amazing.” She hopes to pay off the mortgage this year and feels that she is fortunate to have weathered the recession without selling or “going under.” Her experience lets her children “see what is possible.”
Another female client said that the HBC club made her “Comfortable with process. It was so smooth that it seemed like it didn’t even happen.” She was familiar with loan officers who had come to HBC meetings. “The biggest purchase in life was not even scary. The best day of my life was when I got the keys. Best feeling to wake up in next day in my own house. My son and I had a foundation…best feeling in the world. It gave me a purpose. No place like home.” A number of homeowners stated that the monthly mortgage is less expensive than rent. Well…there goes Mr. Lane’s theory of piling on risk. If the monthly mortgage is less expensive, then how can homeownership entail great risk, unless values come tumbling down? In the District, that has not happened. Two homeowners talked about how the location was advantageous. An African-American male said he was so grateful that the “Safeway, bank, post office, and cleaners” are within walking distance of his home. An older adult echoed those sentiments saying that the location was key since she had limited mobility. She concludes by saying that her home is “safe, secure, architecturally sound, and beautiful so Washington can continue to be our diverse nation’s capital.” The modest income homeownership programs’ contribution to safe, convenient, and integrated communities cannot be over-estimated.
A young man said he was born in Washington DC but did not think he could own a home here. He was so grateful that “Manna made an arduous process easy.” Another former renter stated that Manna helped the tenants buy the building. While she thought the process would take one year, it took three but she was so glad she stuck with the process.
And finally, two homeowners concluded that they have been homeowners for more than 15 years. They raised their children in their homes, and this was the greatest experience ever.
After a crisis caused by inadequate regulation of the financial industry, national statistics like the homeownership rate in 2014 plunging to 1994 levels may make some pundits conclude that the homeownership push is not worth it. However, this perspective is not informed by local variations in economic conditions or experience with careful homeownership programs for modest income people. All Mr. Lane had to do was come to the Manna homeowner reunion.Before he pens his next opinion piece, I would hope he would at least watch this video. I think he will change his mind.

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna, Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter

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