The Indelible Color Line

Though overt racism has diminished greatly over the last 30 years, most American cities remain deeply segregated. A host of other problems, such as the lack of both public services and private enterprise in inner-city black neighborhoods, have persisted in part because of this segregation. The challenge today is no longer to thwart individual white racists or, certainly, the patent discrimination of the old "neighborhood improvement associations," which flatly excluded blacks. Rather we must address the legacy of nearly a century of institutional practices that embedded racial and ethnic ghettos deep in our urban demography. Specifically, the practices of mortgage lenders and property insurers may have done more to shape housing patterns than bald racism ever did.

Underwriting Discrimination

Real estate agents and federal housing officials long listened to sociologist and Federal Housing Administration (FHA) advisor Homer Hoyt, who concluded in 1933 that blacks and Mexicans had a very detrimental effect on property values. In its 1939 Underwriting Manual the FHA warned of "inharmonious racial groups" and concluded that "if a neighborhood is to retain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes." Until the 1960s the FHA insured the financing of many homes in white suburban areas while providing virtually no mortgage insurance in the urban markets where minorities lived. Similarly, until the 1950s the National Association of Realtors officially "steered" clients into certain neighborhoods according to race, advising that "a realtor should never be instrumental in introducing into a neighborhood a character of property or occupancy, members of any race or nationality whose presence will clearly be detrimental to property values in the neighborhood." Racially restrictive covenants were actually enforced by the courts until the Supreme Court declared them to be "unenforceable as law and contrary to public policy" in its decision in Shelley v. Kraemer, in 1948. But such covenants have persisted in practice even after they were officially declared illegal. In 1989, Urban Institute researchers found that racial steering and other forms of disparate treatment continued to block opportunities for approximately half of all black and Hispanic home seekers nationwide, whether they were potential home buyers or renters. Fair housing groups have continued to document the same practices through the 1990s.

By concentrating public housing in central city locations and financing highways to facilitate suburban development, the federal government has further reinforced emerging dual housing markets. And by subsidizing the costs of sewer systems, school construction, roads, and other aspects of suburban in fra structure, government policy nurtures urban sprawl, which generally benefits predominantly white outlying communities at the expense of increasingly nonwhite urban and inner-ring suburban communities.

The problem today is not that loan officers or insurance agents are racist. Rather, it's that their decisions are largely dictated by considerations of financial risk—and the evaluation of that risk has often been colored by questions of race. Unfortunately, it is sometimes hard to disentangle discrimination based explicitly on race from discrimination based on the credit and overall financial status of home owners, the condition of the homes they want to purchase, and the state of the neighborhood as it affects property values. Even if race per se is not a leading factor in lending or insurance decisions, urban blacks are more likely to have poor credit ratings and are more likely to be purchasing homes in neighborhoods with lower property values. These factors hurt their mortgage and insurance applications.

The Mortgage Gap

While the federal government actively encouraged racial segregation in the nation's housing markets until the 1960s, since then its official record on prohibiting discrimination has been more favorable. For example, the federal Fair Housing Act of 1968 and the Equal Credit Oppor tunity Act of 1974 outlawed racial discrimination in mortgage lending and related credit transactions, and in 1975, Congress enacted the Home Mortgage Disclosure Act (HMDA), which requires most mortgage lenders to disclose the geographic location of their mortgage lending activity. In 1989, Congress expanded HMDA to require lenders to report the race, gender, and income of every loan applicant, the census tract location of his or her home, and whether the application was accepted or denied. And in 1977, Congress enacted the Community Reinvestment Act (CRA), requiring depository institutions (primarily commercial banks and savings institutions) to seek out and be responsive to the credit needs of their entire service areas, including low- and moderate-income neighborhoods.

Still, recent research using HMDA data has found that black mortgage loan applicants are denied twice as often as whites. The most comprehensive study, prepared by researchers with the Federal Reserve Bank of Boston and published in the American Economic Review in 1996, found that even among equally qualified borrowers, blacks were rejected 60 percent more often than whites. The causes of this disparity, and particularly the extent to which outright discrimination accounts for them, continue to be hotly debated.

Other research suggests that discrimination of some sort must be stubbornly persisting. Paired testing—an investigative procedure whereby pairs of equally qualified white and nonwhite borrowers or borrowers from white and nonwhite neighborhoods approach the same lenders to inquire about a loan—has found that applicants from black and Hispanic communities are often offered inferior products, charged higher fees, provided less counseling or assistance, or are otherwise treated less favorably than applicants from white communities. Under writing guidelines like minimum loan amounts and maximum housing age requirements that are used by many lenders also are found to have an adverse disparate impact on minority communities. Over the past seven years the U.S. Department of Justice (DOJ) and the U.S. Depart ment of Housing and Ur ban Devel opment (HUD) have documented similar practices in settling fair housing complaints with 17 lenders involving millions of dollars in damages to victims and billions of dollars in loan commitments and other services previously denied to minority communities.


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Fortunately, there is some evidence that racial gaps are closing. Between 1993 and 1997 the number of home purchase mortgage loans to blacks and Hispanics nationwide increased 60 percent, compared to 16 percent for whites. The percentage of those loans going to black and Hispanic borrowers, therefore, grew from 5 percent to 7 percent for each group. These positive trends likely reflect several developments. The multimillion-dollar DOJ and HUD settlements of fair housing complaints certainly attracted the industry's attention. And under the Community Reinvestment Act, community-based advocacy groups have negotiated reinvestment agreements with lenders in approximately 100 cities in 33 states, totaling more than $400 billion in lending commitments. These settlements and agreements call for a variety of actions, including opening new branch offices in central city neighborhoods, advertising in electronic and print media directed at minority communities, hiring more minority loan officers, educating consumers on mortgage lending and home ownership, and developing new loan products. Sources ranging from the National Community Reinvest ment Coalition to Federal Reserve Chairman Alan Greenspan maintain that lenders have discovered profitable markets that had previously been underserved due to racial discrimination.

Yet this progress may be threatened by consolidation within and across financial industries as well as between financial and commercial businesses. For several years Congress has debated financial mod ern ization legislation that would permit and encourage consolidation activities among banks, insurers, and securities firms that are currently prohibited by various post–Depression era statutes, most notably the Glass-Steagall Act. Even in the absence of such legislation, financial institutions have found loopholes in the laws, and consolidation has occurred within and among financial service industries.

Several studies indicate that mergers and acquisitions decrease CRA performance. The Woodstock Institute, a Chicago-based research and advocacy group that focuses on community reinvestment issues, recently found that small lenders make a higher share of their loans in low-income neighborhoods than do larger lenders. According to John Taylor, president of the National Community Reinvestment Coalition, small, local lenders have an intimate knowledge of their customers that larger and more distant institutions cannot develop. In addition, consolidation across financial industries can result in the shifting of assets away from depositories currently covered by CRA to independent mortgage banks and other institutions not covered by this law.

No Insurance, No Loan

Before potential home owners can apply for a mortgage loan, they must produce proof of insurance. As the Seventh Circuit Court of Appeals stated in its decision in the 1992 case of NAACP v. American Family Mutual Insurance Co., "No insurance, no loan; no loan, no house." Unfortunately, not much is known about the behavior of the property insurance industry, in part because there is no law comparable to HMDA requiring public disclosure of the disposition of applications and geographic location of insured properties. What evidence does exist, however, demonstrates the persistence of substantial racial disparities—though as with mortgage lending businesses, it is impossible to determine precisely to what extent this disparity is due to outright racial discrimination.

In 1992, 33 urban communities voluntarily provided zip code data to their state insurance commissioners on policies written, premiums charged, losses experienced, and other factors. Analysis of the data by the National Association of Insurance Commission ers revealed that even after loss costs were taken into consideration, racial composition of zip codes was strongly associated with the price and number of policies written by these companies. Insurers were underwriting relatively fewer policies for black neighborhood applicants, and the policies they did write were often at higher premiums than for comparable white applicants from white areas.

More recently the National Fair Housing Alliance conducted paired testing of large insurers in nine cities and found evidence of discrimination against blacks and Hispanics in approximately half of the tests. Applicants from minority communities were refused insurance, offered inferior policies, or forced to pay higher premiums. Some applicants from these areas were required to produce proof of inspection or credit reports not required in other areas. Applicants from minority communities were also found to be held to more stringent maximum age and minimum value policy requirements. (Companies sometimes require that a house not be older than a certain age, or have a minimum appraisal value, before they will insure it.)

But there is evidence here, too, that these racial gaps may be closing, at least in certain markets. Four major insurers (Allstate, State Farm, Nation wide, and American Family), accounting for almost half of all home owners' insurance policies sold nationwide, have settled fair housing complaints since 1995 with HUD, the DOJ, and several fair housing and civil rights organizations. In October 1998 a Richmond jury found Nationwide guilty of intentional discrimination and ordered the insurer to pay more than $100 million in punitive damages to the local fair housing group, Housing Opportunities Made Equal (Home), which filed the lawsuit. These insurers have agreed to eliminate discriminatory underwriting guidelines, open new offices in minority areas, and market products through minority media to increase service in previously underserved minority communities. At the same time, several insurers, trade associations, and state regulators have launched voluntary initiatives to educate consumers, recruit minority agents and more agents for urban communities, and generally increase business in urban neighborhoods.

As a first step toward greater understanding of the issue, insurance companies should be required to publicly disclose information about the geographic distribution of insurance policies, which would lead to a range of studies just as HMDA did in the mortgage lending field. In addition, researchers should undertake follow-up studies to document the impact of recent legal settlements and indicate what has worked and why. Currently, evaluations of these efforts are included as part of the settlements, but the results are not for public consumption.

Institutions, Not Individuals

Discriminatory practices in the housing industry are often treated as the problem of selected individuals—consumers who happen to have the wrong credit or color, or providers who have prejudicial attitudes and act in discriminatory ways. Thinking this way, one loses sight of the structural and political roots of the problem and of potential solutions. Dismantling our cities' dual housing markets will require appropriate political strategies that address the structural causes.

Several steps should be taken to augment ongoing community reinvestment efforts. First, Congress should enact an insurance disclosure law, comparable to HMDA, that would permit regulators, consumers, and the insurance industry itself to understand better where insurance availability problems persist and why. This information would likely stimulate additional organizing, enforcement, and voluntary industry efforts to respond to remaining problems.

Second, additional paired testing would reveal specific policies and practices (related to pricing, types of products offered, and qualifying standards) that are delivered in a discriminatory manner, enabling enforcement agencies to target their resources and secure more comprehensive remedies.

Third, Congress should establish the following requirements for any significant merger, consolidation, or acquisition involving banks, insurers, securities firms, and related financial industries:

  • CRA provisions should assure that all institutions determine and respond to the needs of low-income residents and communities;
  • low-cost checking, savings, and other basic banking services should be available to low-income residents;
  • regulatory reviews should be conducted of all proposed restructurings to assure that an adequate plan is in place to meet community reinvestment objectives;
  • public hearings should be offered on any proposed significant restructuring to permit comment by all parties that would be affected prior to any decision by a regulatory agency on the proposal;
  • any subsidiary currently or subsequently found to be in violation of the Fair Housing Act or related fair lending rules should be excluded or divested.

None of these provisions would prohibit lenders, insurers, or other providers of financial services from engaging in transactions they find beneficial. But these guidelines would assure that the products and services of these industries are available throughout all of the nation's metropolitan areas.

If we are to address seriously the segregation and poverty that persist in urban America, we must continue to educate consumers about effective money management and providers of financial services about lingering discrimination. Public officials must also intensify redevelopment efforts in inner cities—once a city can demonstrate tighter labor markets, higher wages, and more jobs, lenders and insurers will start to market their products more aggressively in distressed but recovering areas. But as long as racial discrimination—whether by intent or effect—persists in the housing services industry, our cities will remain riven by segregation, leaving blacks and other minorities in underserved, undesirable locations.

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