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Arthur Lyons conducted a more detailed study of two Chicago communities and found similar results. He found neighborhoods where over 80 percent of all mortgage transactions were FHA-financed, while other neighborhoods were less than one-fourth FHA. Surprisingly, he found the quality of buildings and the creditworthiness of the borrowers to be higher in the FHA neighborhoods. In terms of population, the only notable difference 49/

was race.

Another Chicago report documented the types of racial movement related to FHA lending. Researchers took a sample of 699 single-family FHA commitments from a six-week period during the spring of 1974. As expected, the found that 96.5 percent of the FHA property buyers in the city of Chicago were minority. They also found that 78.9 percent of all FHA buyers in the entire metropolitan area were minority. Most striking was the difference between the communities FHA buyers were moving from and the ones where they were moving. Fifty-one percent moved from predominantly black to transitional areas. 50/

a central, but elusive If the only finance.

Integrated neighborhoods are goal of national housing policy. mechanism available in certain neighborhoods is FHA, and if that tool is used almost entirely to finance housing for minorities, then government policy is unintentionally supporting the resegregation, not the integration, of neighborhoods.

These studies illustrate the role FHA lenders play in supporting the dual housing market, allowing minorities different access to credit than whites. Minorities must rely heavily on FHA lenders, primarily mortgage bankers, with all the risks that entails.

It is thus clear that mortgage bankers attain monopolies on neighborhood lending, that they are primarily lenders for minorities, and that they are drawn to working through real estate brokers in communities undergoing rapid transition. A dissertation on Disinvestment

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and Neighborhood Decline by Judith Feins illustrates just how rapidly this transition occurs and explains how mortgage bankers can benefit from accelerated rate of transition. 51

Ms. Fein examined three Chicago communities which had undergone significant racial transition. All three areas witnessed a high housing turnover rate (an annual average of over 13 percent). For the Roseland community, conventional lenders decreased their mortgage market share from 58 percent in 1965 to 10 percent by 1970. the same time, FHA/VA lending increased from approximately 8 percent in 1965 to almost 85 percent by 1970. The two other transitional communities experienced the same rapid five year change.

At

The speed with which residents left these neighborhoods does not suggest a normal process of neighborhood change; instead it suggests a fear-inspired flight by residents, the type of process associated with blockbusting and "panic peddling" real estate practices. With these neighborhoods FHA lending was obviously not employed as a stabilizing or revitalizing tool. It was instead a mechanism which fostered a high volume of rapid property turnovers.

As

Fein suggests several reasons why mortgage bankers stand to profit from this rapid transition process. pointed out above, the existence of an FHA lender monopoly forces a seller to accept the payment of discount points. If sellers can be persuaded that the neighborhood is rapidly "falling to pieces", every month may mean a fall in the worth of their property, a loss in their housing equity. As a result, "Sellers are often willing to pay whatever points the lender asks since they have no alternative as to buyer financing and fear greater losses if they delay 52/ the sale." The greater the fear of declining values, the more points the mortgage banker can charge.

There is thus a strong incentive to encourage rapid neighborhood transition. Furthermore, as previously

noted, mortgage companies thrive on a rapid and high volume

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of loan originations. These two factors do much to explain why FHA lending is clearly associated with neighborhoods in rapid transition.

Most mortgage companies do not participate directly in racial steering or panic peddling. That is the work of unethical and poorly regulated real estate brokers. Furthermore, FHA is a factor in rapid racial transition but not the primary cause. Steering and racial transition occurred before FHA's entrance into the cities and would occur in its absence. Mortgage bankers and other FHA lenders have in many cases subverted the stated goals of U.S. housing policy. This intent was well expressed in a 1968 HUD administrative directive:

The purpose of the (legislative) amendment
is to permit and encourage use of FHA mortgage
insurance in older, declining urban areas,

in order to provide housing for low and moderate
income families and to contribute to the up-
grading or stabilization of such areas.

53/

Mortgage bankers have instead often contributed to the destabilization and decline of older urban areas.

Meanwhile, HUD, with its primary obligation to administer Title VIII of the 1968 Civil Rights Act, has done little to intervene in relationships developed by unethical real estate brokers and FHA/VA lenders. No obligation is placed on FHA/VA mortgagees to ensure that they do not collaborate in lending practices which restrict open housing opportunities for minorities.

CHAPTER IV

THE REGULATION OF MORTGAGE BANKERS

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The states have, by and large, left mortgage bankers unregulated. Only two states have enacted laws which specifically regulate aspects of the industry, and one of these limited its requirements to annual disclosure of lending patterns until it enacted broader coverage in September, 1977.54/ Although mortgage banks are subject to state laws governing the formation, duties and benefits of corporations, those laws seldom have had much regulatory impact on mortgage lending practices. A few state statutes for the licensing of real estate brokers are defined broadly enough to include 55/ mortgage bankers, but these statutes do not regulate

the mortgage banking functions of originating and servicing mortgages and thus do not protect the homeowners who are the consumers of mortgage bankers' services. Thus a HUD national housing policy review concluded that "... State supervision has been minimal." 56/

Furthermore, mortgage bankers are generally not subject to the regulatory measures of state or federal banking regulatory agencies.

Mortgage bankers are not within the jurisdiction of the banking regulatory agencies unless they are subsidiaries of banks or bank holding companies. Then, depending upon the parent corporation's structure, records might be examined by a state banking agency, the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Federal Home Loan Bank Board, or the Federal Savings and Loan Insurance Corporation.

The burden of regulating mortgage bankers falls solely on HUD. The Department grants approval to firms to participate as lenders in HUD's mortgage insurance programs, and, occasionally, withdraws approval from offending firms.

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But there is a fundamental conflict between HUD's central commitment to maximize loan volume to encourage housing production and lower interest rates, and its commitment to regulate lenders carefully in order to ensure high loan underwriting standards. There is a question whether the Department whose primary goal is producing housing can balance that goal with regulation in the interests of the consumer, any more than we can depend upon General Motors to set its own safety and environmental standards.

This section reviews the historical development of HUD's system of regulating mortgage banks and other FHA-approved lenders and assesses the weaknesses of that system. The following section recommends reforms in regulation and other steps to ensure more responsible lending practices and greater protection for the homebuyers, the neighborhoods, and the federal Treasury.

HUD's Licensing Procedures

"A license is an official permit to do what one desires to do to become a lawyer, to drive a motor car, to sell a cosmetic." 57/ HUD's authority to license mortgagees to participate in HUD-insured mortgage programs is broadly defined: "To be eligible for insurance under this section a mortgage shall have been made to, and be held by, a mortgagee approved by the Secretary as responsible and able to service the mortgage properly." 58/ Thus, a license to originate and service HUD-insured mortgages may be granted only if the mortgagee is "responsible and able to service the mortgage properly."

The HUD Secretary's discretion to decide who is a "responsible and able" mortgage servicer is virtually unlimited. No statutory standards are prescribed for the Secretary's guidance. HUD has responded to this challenge by devising a permissive licensing system which is based on a tacit presumption that mortgagees with sufficient capital assets and experience are "responsible and able."

59/

According to HUD regulations, a mortgage banker may be licensed if it has as its "principal activity the lending