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U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to notice, at 10:00 a.m., in room 2128, Rayburn House Office Building, Hon. Rick Lazio, [chairman of the subcommittee], presiding.

    Present: Chairman Lazio; Representatives Ehrlich, Kelly, Kennedy, Gutierrez, Hinchey, Jackson, J. Maloney of Connecticut, Carson, and Weygand.

    Chairman LAZIO. Good morning. The hearing will come to order.

    In today's hearing, we are going to examine whether the Federal Housing Administration is expanding or limiting consumer choice in residential housing finance. This is neither the first, nor the last, time the subcommittee will conduct a hearing on the laws, policies, programs, and administration relating to that agency.

    I know that I speak for many of my colleagues on both sides of the aisle who strongly support FHA's mission. The agency fills a large, unmet demand for lending to low- and moderate-income home buyers and is an essential conduit for expanding home ownership. Our purpose in conducting this hearing, as in earlier hearings, is to better understand the agency's policies and programs and to strengthen and improve its operations.
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    Members of the subcommittee will recall that on April 1 of this year, we conducted a hearing on FHA's property disposition performance. Our interest at that time was to hear testimony and recommendations on how to reform program deficiencies in the foreclosure and disposition process. In our examination of FHA's property disposition programs, our goal was, and remains, to make certain that we have done everything possible to keep individuals and families in their homes. If foreclosure becomes inevitable, our goal must be to maintain the property, keep it viable, and make it available to a qualified buyer as soon as possible.

    In the course of that hearing, one of the witnesses submitted a draft of a study conducted by the Chicago Area Fair Housing Alliance entitled, ''The Two Faces of FHA: The Case of Government-Supported Discrimination Against Minority and Racially Changing Communities.'' A principal conclusion of that study is that, ''High levels of FHA lending and accompanying levels of default and foreclosure in minority and racially changing communities are not the results of natural market forces; rather, they are the result of racially discriminatory lending practices and irresponsible administrative practices which go unchecked.'' Moreover, the study contends it is not private lenders; it is FHA, through its policies and practices that, ''limits housing opportunities, contributes to segregation, and perpetuates the myth of race as a contributor to community disinvestment.'' These are serious charges.

    Discrimination by any lender has always been immoral. Since 1968, when Congress passed the Fair Housing Act, it has also been illegal. In my opinion, if a Federal Government program, however well-intended, is perpetuating systematic discrimination, it is more than a crime; it is a tragedy.

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    FHA was created to tear down the barriers to home ownership. The practical reality, however, is that, because the program services a high-risk population, its cost of operation and its insurance premiums are higher than those in conventional private lending and mortgage insurance.

    Consequently, since FHA loans are more costly for the buyer, they should be the loan of last resort for consumers unable to obtain a conventional loan. Similarly, since FHA loans are more likely to default than conventional loans, FHA should be going to great lengths to avoid concentrations of FHA lending that we know will severely affect racially changing neighborhoods and communities in transition.

    Historically, FHA's played a critically important role in helping first-time, low- and middle-income home buyers qualify for mortgages through its single-family mortgage insurance program. Minority home buyers, in particular, who have faced both economic and discriminatory barriers to home ownership, have benefited enormously from FHA and its low down payment loan programs.

    At least one of the witnesses that we will hear from today believes that FHA has become the only loan offered to many minority applicants, despite the fact that they have the income and credit to qualify for less expensive conventional loans. It has been alleged that FHA has also become a principal source of neighborhood blight and disinvestment, due to its resulting concentration of high defaults.

    My hope is that the allegations are not true. My fear is that they indeed, may be. Since the Chicago Fair Housing Alliance Study was brought to our attention just over one month ago, we received a similar fair housing report that showed a pattern of FHA steering in Montgomery County, Maryland. Periodic reports of fair housing compliance are a requirement for any community that receives the community development block grants, and we intend to take a closer look at these practices in other communities.
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    It is not clear that all the fair housing advocates who found high levels of FHA lending in minority communities share the conclusions made by the Chicago Fair Housing Alliance. That is why we have asked the author of the Chicago study and, at the request of the Ranking Member, Mr. Kennedy, we have also invited the executive director of the Fair Housing Council of Greater Washington, DC.

    I'd like to turn to Mr. Kennedy.

    [The prepared statement of Hon. Rick Lazio can be found on page 36 in the appendix.]

    Mr. KENNEDY. Thank you very much, Mr. Chairman. I appreciate you calling this hearing.

    Fair housing is a critical issue and one that affects the rights of minorities to share in the American dream of home ownership. When minority home-ownership rates trail our national home-ownership rate by some 20 percent, something is wrong.

    Unfortunately, I think it's sad that the majority party has waited 3.5 years since taking power to hold its first hearing on fair housing and fair lending. I'm also extremely unhappy with the way that this hearing has been handled. The majority party has excluded critical witnesses and has tried to turn the very important issue of fair housing into a thinly veiled attack on the Federal Housing Administration.

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    I want it stated for the record that HUD gave timely notice to the Chair that it wanted to testify before this subcommittee. HUD's request was flatly rejected. How can this subcommittee refuse to listen to the primary Federal agency, that deals with and enforces the Fair Housing Act, is beyond me. I heard you say in your opening statement you hoped that these allegations are not true, and yet, we are not even allowing the Federal agency in charge of this program to even testify today.

    Moreover, as the pattern of the recent subcommittee hearings, the request I made, along with Ranking Member LaFalce, to have a representative from the National Community Reinvestment Coalition to testify was also rejected, and while I appreciate the Chair's accommodation of our request to have David Berenbaum testify, the majority party has given short shrift to experts who are dedicated to fighting discrimination, but what is particularly upsetting is the transparent approach of the majority in trying to turn the issue of fair housing into a crusade to argue that the FHA is the enemy of minorities and that it contributes to discrimination, because the fact is that nothing could be farther from the truth.

    I call the subcommittee's attention to a Federal Reserve Board study which concluded that FHA bears two-thirds of the Nation's credit risk for low-income and minority borrowers: two-thirds of the credit risk for low-income and minority borrowers, while private mortgage insurers bear only 6 to 8 percent, and Fannie Mae and Freddie Mac, only 4 to 5 percent.

    I also call attention to a letter that I would like to submit into the record on behalf of the Leadership Conference on Civil Rights and other civil rights housing and consumer groups expressing support for the FHA and its role in minority home ownership. The letter points out that the financial institutions continue to discriminate and that the FHA has stepped in to fill the limited financing choices caused by such discrimination.
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    [The information referred to can be found on page 155 in the appendix.]

    I also cite a letter that I would like to submit into the record by the county executive of Montgomery County. That's the same county which has sponsored one of the two studies that is a subject of today's hearing. The letter states that Montgomery County's strong support for Secretary Cuomo's proposal to raise the FHA loan limit—the letter also makes the central case for this increase, that it is of ''great benefit to the residents of this county where the cost of housing is higher than the average for the Washington area.''

    [The information referred to can be found on page 154 in the appendix.]

    Mr. KENNEDY. All of these facts clearly contradict the premise by the majority party that the FHA is bad for minorities. In any event, let's turn to today's testimony.

    A review of the MacArthur Foundation report on Montgomery County indicates several clear conclusions. First of all, discrimination continues in conventional markets. The Montgomery report notes that Blacks and Hispanics are more likely to be denied a loan that white applicants. Similarly, the MacArthur report's executive summary notes that, ''FHA lending to minorities often fills a vacuum created by discrimination in the conventional markets.'' This report concludes that HUD should structure its fair lending initiatives to eliminate conventional lending's discrimination that contributes to high levels of FHA lending to minorities. Democrats agree. That's why I'm announcing that Democrats on the subcommittee are sending a letter to appropriators asking for HUD's budget request for increased funding to fully enforce the fair housing laws, including giving funds to local community organizations to help fight discrimination.
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    The letter also asks for increased funding for housing counseling to give minorities and other borrowers the ability to shop for the best possible loan rate. Specifically, our letter supports an $8 million funding increase for the Fair Housing Assistance Program. The increase is necessary to fill the anti-discrimination housing Initiative which will support the doubling of enforcement actions to eliminate housing discrimination. If this Congress is serious about remedying discrimination, it should appropriate the funds needed for such enforcement.

    We also support a funding increase in the amount of $14 million for the Fair Housing Initiatives Program. This increase is needed to fund a number of proposed initiatives including an $11 million increase to fund additional organizations under the Private Enforcement Initiative and for funding for increased education and outreach.

    Private organizations focus on remedying precisely the types of discrimination documented in today's hearing, and we support a funding increase for housing counseling. Pre-purchase housing counseling is desperately needed to increase the knowledge base of first-time home buyers to assist in the critical decisions, such as the selecting of a lender, inspecting homes for structural defects, and avoiding overpaying for homes.

    Today's hearing includes testimony that many minorities are eligible for lower-cost, conventional loans, but do not press this issue because they are not fully aware that of their mortgage options. Counseling can make them more fully aware of these options.

    Mr. Chairman, we would welcome your signing-on to our letter, and we believe that full funding for fair housing enforcement is the most important thing we can do to fight discrimination. I hope we can get your support for that, Mr. Chairman.
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    Chairman LAZIO. Maybe we can prepare a consensus letter.

    Mr. KENNEDY. Well, that sounds pretty good to me.

    Chairman LAZIO. We'll deal with some of the structural issues, also.

    Mr. KENNEDY. Well, that's fine. I think that there are some issues that need to be dealt with, and FHA can make improvements.

    You've held a number of hearings dealing with the issues of FHA property inspections, appraisal quality, lender actions, and property disposition activities. The MacArthur Foundation report raises some of these same issues. In response to these hearings, we have rolled up our sleeves to develop a set of proposals to address these concerns.

    Today, I am announcing that, within the next week, I will be putting forward a concrete set of proposals to improve FHA, along with Representative LaFalce and other Democrats, and I hope that your support and help would be coming as well, Mr. Chairman.

    The proposals would create a mandatory three-day home purchase right of rescission by requiring all home purchases to be financed by FHA to have an inspection contingency which can't be waived for three days. It would protect home—well, that's great; it's your position. We look forward to your support on this letter, Joe—protect home owners in default, change the loss mitigation and incentives and procedures to encourage services to pursue the approaches which avoid foreclosure, and direct FHA funds to be used for more counseling in delinquent homeowners to develop non-foreclosure options. Joe, did you support that, too, or—Joe? I just wondered. OK—require FHA to investigate community group's allegations that lenders making FHA loans on properties with serious structural defects and take appropriate actions; require the FHA to certify appraisers through written exams and annual training, and more than quadruple the funding for the pre-purchase of home ownership counseling. Taken together, these proposals address concerns raised by the community groups that have come before this subcommittee.
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    Mr. Chairman, I could go on here, but the fact of the matter is that what I believe is that there are a series of initiatives that can be taken up that can help improve FHA, but I don't believe that we ought to be using FHA, or using these issues, to simply eliminate FHA which, after all, has done the vast majority of the lending which ultimately goes toward the poorest people and the minorities in an inordinate number, and if we end up going after and attacking that agency, and undercutting its ability to make these loans, the fact of the matter is Fannie, Freddie and the private lending community are simply not going to provide the same level's of lending into those communities, and we will end up hurting the very people that we are here to protect.

    Thank you very much, Mr. Chairman.

    Chairman LAZIO. I thank the gentleman.

    Mr. Ney.

    Mr. NEY. Thank you, Mr. Chairman. I just wanted to talk about, I guess, a couple of points here.

    First of all, as far as the Chair is concerned, and I'm not going to speak for the Chair, but I assume that this is a whole ongoing series of debates on this subject, trying to achieve a good purpose for people across this country.

    Now, I happen to have something for the record here where a Member—just because we need to talk about, I guess, privileges of the Chair, how we—I'm a new Member, relatively, three years, but how we kind of learn things around here, I guess.
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    Here's a Member's statement, ''Are you part of the staff or are you testifying? What is this?''

    Chairman of the committee: ''He's a witness that I called up''—points to the witness—''Go ahead to continue.''

    The witness starts, ''Thank you.''

    The Member of the committee: ''We've got a witness list here, and all of the sudden somebody shows up.''

    The Chairman: ''That's right, and that happens to be the privilege of the Chair, and when you get the majority, you can have the same privilege, Mr. Marks.''

    Chairman Kennedy: ''We kind of learned the privilege of the Chair, I guess, from a while back here, and——

    Mr. KENNEDY. Excuse me, if the gentleman would yield——

    Mr. NEY. Are you asking me to yield time?

    Mr. KENNEDY. Yes. Would the gentleman yield?

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    Mr. NEY. Yes.

    Mr. KENNEDY. I don't have any problem—if the Chair wants to add a witness to today's testimony, he's not going to get a problem from me.

    All we did was request that the Federal agency which is in charge of this particular organization be allowed to come and testify. HUD requested on a timely basis and was denied that opportunity.

    Mr. NEY. Reclaiming my time, I'm just saying the answer we used to get—it's right here in writing.

    Mr. KENNEDY. Baloney. That's just not an equivalent situation.

    Mr. NEY. I'm reclaiming my time. Mr. Chairman, I'm reclaiming my time.

    Chairman LAZIO. The gentleman's got the time. Mr. Ney has got the time.

    Mr. KENNEDY. It's a cheap shot, Bob.

    Mr. NEY. It is equivalent of how things were run because to remark toward our Chairman of how things are run, and this is how it was run, and this is not the type of response we give back to you, but when you ran it—it's that when you get it, you run it the way we ran it, but I'm just saying this is the type of statements people got around this building.
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    Now, as far as the issue also of casting a aspersion, that what have we done, we haven't done anything in three years; subcommittees have had hearings; people have been communicating. Now, I'm not one who's made one single public comment about FHA. You can't find anything where I have been slamming FHA, and I'm here to listen, but as far as what have we done in three years, I love it around here, and I came in on the 104th Congress, but, you know, ''you haven't done anything in three years.'' To fix a system that sat here for 40 years in this building and just threw money at things and didn't listen to people, and didn't listen to people from Chicago or people who wanted to talk about an issue, but all of the sudden you want to talk about something around here; you are attacking something.

    But I always love the comments to defend some type of sensitivity people have around this building that now, you know, we haven't done anything in three years. Well, I think things weren't done for a long old time in this building, and we're beginning to have to try to get at ways to correct situations and have debates and have that energetic give-and-take of public debate for the good of people, but to just always say, OK, well, you didn't do anything for three years—well, sometimes it's tough to correct a system that sat there and just rotted internally here.

    So, let's get to the subject matter and forget who did what and when, but I'd just like to point out, history has a way, I guess, of sometimes repeating itself, but in our case, it's not repeating itself because we're going to get down to the facts of what's good for people, and then this Congress debates it, and hopefully, it comes out best for the American people.

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    Chairman LAZIO. Thank you, gentlemen.

    Mr. Gutierrez.

    Mr. GUTIERREZ. Yes. The gentleman would like me to yield. Our subcommittee Ranking Member, Mr. Kennedy, I'd like to yield to him.

    Mr. KENNEDY. Thank you very much, Mr. Gutierrez.

    I would just like to respond briefly to the idea that somehow or another, because the Democrats have been in power in the Congress for some period of time—I mean, the reality is that the major problems with HUD took place under the leadership of none other than the Secretary of Housing, Sam Pierce, who was out there dealing away housing units to the highest bidder, that many of these abuses took place under both Sam Pierce as well as Jack Kemp.

    Now, I mean, we can go back through the history of this, but the point I was trying to make is that if the Administration comes before this subcommittee in a timely fashion on an important issue, that that particular agency regulates. It seems to me—I don't think, Bob, you could ever cite a situation where I, as Chairman, or anybody else, denied them the ability to come and testify. And what I'm really concerned about is that we are using an issue of fair housing to undercut the FHA, which is a very important lender to the minority communities and the poor communities of this country. And I think that, you know, we can get into a situation where, you know, you and I are throwing snowballs at each other, but what I'm saying to you is that there hasn't been a single hearing on this issue. So when we end up having a hearing on this issue, we end up not even inviting the Federal regulator that's in charge of it.
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    So it gives one the impression that this thing is set up to draw a conclusion before we've even heard a reasonable, fair presentation of what, in fact, is going on out there, and that's what I'm objecting to. You know, that's what I'm objecting to. And if what occurred in the situation that you cited was that I—and I don't remember the thing, but if I ended up inviting an extra witness, and somebody objected to it, of course, and I wouldn't—I mean, if Rick wants to have an extra witness come and testify before us today, I mean, I might squawk about it a little bit; he could overrule me, and we'd go on from there, but that's different than denying the major Federal regulator to come and testify before a subcommittee when you are attacking what that regulator does.

    I yield back to my friend, Mr. Gutierrez.

    Mr. GUTIERREZ. Thank you.

    Well, Mr. Chairman, I'm glad that we're here this morning to review the FHA Single-Family Mortgage Program. I talked to the Chairman before, earlier this year, about the importance of reviewing the FHA.

    I think the FHA does a job that is absolutely necessary and essential and critical. I think it can improve on the work that it's doing, and I think we have an obligation to review those areas in which the FHA is not living up to its mandate fully, but I don't think we should even begin to discuss the FHA in terms of its elimination because it does a hell of a lot more good than it does bad, and I think we can focus on those areas.

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    As I spoke to Chairman Lazio earlier this year when we were walking—I'm happy he's had—I know he had a hearing on the home ownership, which I thought was really good and timely, and this hearing today, so that we can get a full view of FHA because it is about—you know, it's not fair, and I brought it up before when we had all the Assistant Secretaries from HUD. And I said to all of them, I said, ''Did any of you ever buy a house without getting a home inspection?'' I mean, I don't know anybody who buys or sells a house without a home inspection. You buy a brand-new car; at least you get a warranty with it, and everybody learns as you get older, but I just really think we've got to seriously think about inspections.

    And you know, Mr. Chairman, I know that they may be looked at as discriminatory, or some may say, well, why do these homeowners have to do it and others don't? I just think it's a practice that we should lend credence to. I don't think it's discriminatory because I assure you that the rich and the wealthy buy inspections, and they do not rely on their mortgage companies or their lenders, and so I'm kind of an advocate that the poor and those who want to get into the market should have the same thing. And the fact is that, you know, when I didn't have 20 percent for my mortgage, I used to have to buy some insurance to cover my mortgage. Once I got up to 20 percent, they said, ''Hey, Luis, you don't have to buy this anymore from FHA,'' and they sent this check in the mail because my property was re-evaluated, and I no longer owed more than 20 percent of the value. Hallelujah for those days.

    My poor sister, she was over there financing her mortgage, and she was so happy. She thought she had the number, and then they said, ''Oh, no, you need $52.50 more a month because you don't have 20 percent of the value of the home as a down payment.''

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    So people do that. We know there are reasons, but we've got to restructure this program so that it's done well, and we've got to get—I want more non-minorities in the pool at FHA, and get them into the pool at FHA so we can balance this, and so that it can be fair.

    Thank you, Mr. Chairman. I look forward to working with you.

    Chairman LAZIO. I thank the gentlemen. Mrs. Kelly.

    Mrs. KELLY. Thank you, Mr. Chairman and Ranking Member Kennedy, I want to thank you both briefly for bringing this issue of fairness of the FHA before the subcommittee.

    I want to take a minute to echo the sentiments of Chairman Lazio as to our intent here today. We are here to look at ways to improve the FHA programs. All of us here strongly support the mission of the FHA and want to ensure that the policies of the FHA result in the best homes and communities for low- and moderate-income.

    I think it's very troubling to hear of studies such as this one, ''The Two Faces of FHA: The Case of Government-Supported Discrimination Against Minority and Racially Changing Communities.'' The conclusions in this report that discrimination within the FHA program is not the result of natural market forces, but rather the result of racially discriminatory lending practices and irresponsible administrative practices which go unchecked, is a very serious charge that we should closely examine.

    I want to thank the witnesses for joining us here today to share their insight so that we can better understand the issue, and I look forward to working with my colleagues on this, on both sides of the aisle, to try to rectify a situation which seems to be something that we do need to do something about.
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    Thank you very much, Mr. Chairman.

    Chairman LAZIO. I thank the gentlelady.

    Any other Members wishing to make an opening statement? Mr. Weygand.

    Mr. WEYGAND. Thank you, Mr. Chairman.

    I just want to echo some of the comments of my colleagues. I thank you, Mr. Chairman, and the Ranking Member, for having this hearing today, but I also have to echo the comments of Congressman Kennedy, in that we did not have some of the players who really should be here before us today.

    FHA provides a very, very much-needed program in my district, and I think that many of the people that use it recognize what a valuable tool the Federal Government has given them. What we should be doing is, just as Representative Kelly said, we should be improving the system, fixing the system, and not throwing out the system, and I look forward to doing that. I hope, Mr. Chairman, we will have the opportunity, later on, to hear testimony from the Department that oversees this program because they really should be here.

    Chairman LAZIO. I thank the gentleman.

    There was a request from Mr. Kennedy to include certain documents that he referred to in his opening statement in the record. I also ask to include the document, ''Fair Lending in Montgomery County, a Home Mortgage Lending Study.'' Without objection, all of these documents will be included in the record.
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    [The information can be found on page 59 in the appendix.]

    Chairman LAZIO. Mr. Ehrlich.

    Mr. EHRLICH. Real briefly, first, I want to thank the Chairman for having this hearing.

    The FHA is a very important issue to many of us, and maybe it's broken, or maybe it needs to be replaced, but this is a long process, and this hearing, I think, is the first step along the road to really coming to the determination in mind, I think in the minds of many of us, about the appropriate role for an entity like FHA. So, I really congratulate the Chairman for what he is doing.

    Secondly, coming from Maryland, I know the Chairman is familiar with the recent study with respect to Montgomery County, Maryland and practices that are very bothersome to anyone in this Congress, particularly those of us from Maryland. So, I think your timing is very appropriate, and I look forward to hearing what the witnesses have to say, and I thank the Chairman.

    Chairman LAZIO. I thank the gentlemen.

    If there are no other Members that wish to make an opening statement, I'd like now to turn to our first panel, and we'll hear from one of our colleagues, Representative Danny Davis of Illinois. Congressman Davis represents part of the Chicago metropolitan area. He's asked to testify today on his views regarding discriminatory practices that persist within the FHA programs, and I want to welcome and thank Representative Davis for taking time out to prepare his statement, come before the subcommittee and share his thoughts.
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    The gentleman is recognized. Thank you.


    Mr. DAVIS. Let me thank you, Ranking Member Kennedy, and all the Members of the subcommittee for convening this hearing today. Let me thank you, in particular, for giving me the opportunity to testify about the practices and procedures employed by the Department of Housing and Urban Development and the Fair Housing Administration in carrying out their mission as the implementors of our housing laws.

    As I am sure my colleagues are aware, the Chicago Area has become a case study, a poster child, if you will, for some of the failings and shortcomings in the administration of our housing laws. These shortcomings have played out in our communities and have proven to have a devastating effect on our residents.

    We're all familiar with some of the problems: a huge default rate among owners of FHA-insured properties, the deterioration of our public housing units, a lack of quality, affordable housing, the depletion of our section 8 housing stock, and currently, a lack of consensus on where to locate and rebuild replacement housing for public units that are being demolished as we speak, and even the steering of homeowners from certain communities on the basis of race.

    These problems are crying out for solutions from our national leaders. It will, without a doubt, take some very bold, courageous, and creative steps to surmount these daunting challenges that have evolved over some period of time. I believe that our approach to these important and fundamental issues and concerns must transcend all partisan politics, and I believe we have in this room, on this subcommittee, and in Secretary Cuomo, the will and the manpower to meet this challenge.
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    With that said, let me address, briefly, some of the concerns raised by the study conducted by the Chicago Area Fair Housing Alliance.

    Let me first commend Dr. Calvin Bradford and CAFHA for the very insightful, thorough, and hard work that they have clearly put into this project. Your study, as many others conducted by other Chicago think tanks have done, has come to the attention of the Chairman and Members of the subcommittee and has prompted this much-needed discussion.

    At the outset, let me say that discrimination, in terms of the steering of prospective homeowners by private bankers and real estate agents to certain communities and areas on the basis of race, is deplorable, unacceptable, and must be stopped. Moreover, to the extent that HUD policies have facilitated or permitted discriminatory practices by private real estate agents and mortgage bankers to go unchecked, I believe we can all agree that this must be remedied. I'm willing to work with Members on solutions to these problems, whether these solutions call for increased funding for fair housing enforcement, stronger anti-discrimination laws, or better monitoring of lending patterns, and their effects on communities, or any other creative and effective solutions.

    With this said, let me state that, fundamentally, I believe HUD has done a good job in terms of increasing home ownership opportunities for prospective buyers who have gone unserved for one reason or another by the conventional lending market; yet, I believe that we can improve in terms of ensuring that these homeowners are not unprepared or short-lived, and we can implement policies and programs that foster permanent home ownership by these buyers.

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    Improvements in this regard do not necessarily call for a complete overhaul of HUD. In fact, I believe there are some measured steps that we can take to improve the success of our housing programs.

    I have introduced a bill entitled The FHA Property Inspection Act. In my district, many of my constituents in pursuit of the American Dream have agreed to purchase FHA-insured homes although the developers of these properties have prevented them from having an inspector survey the premises for structural damages. As you may expect, some of these properties have serious structural flaws. This state of affairs has placed the home buyer in a rather untenable position, and faced with the choice of making their homes habitable and safe, or foregoing a mortgage payment, in many instances, they have foregone the mortgage payment; thus, creating a high rate of default.

    I believe, Mr. Chairman, that measures like this one and others can go a long way toward remedying the problems that we face with the Department of Housing and Urban Development. I certainly appreciate your giving me the opportunity to testify this morning and look forward to working with you and other Members to remedy these situations. I thank you very much.

    Chairman LAZIO. I want to thank the gentleman for his testimony, his concern for his community and, certainly, the non-partisan nature of his comments. Let me ask a couple of questions.

    First of all, I know you must be familiar with Dr. Bradford's work and the study that are the focus of this hearing. Do you share the conclusion of the report that the structure of FHA—its 100 percent guarantee or servicing fees that are substantially higher than comparable privately insured mortgages—really does impact the community, what is the impact, and do you identify those issues as important issues for us to address?
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    Mr. DAVIS. If we look at the history of redlining, if we look at the practices of discrimination, we look at the inability of certain types of individuals in our society to amass enough resource or sizable down payments to make purchases, when we consider all of those factors, unequivocally and without a doubt, there has been a tremendous impact. It has been a positive impact for the most part.

    I think what we have seen, and what we continue to see, unfortunately, is that institutions and agencies oftentimes take on the characteristics of the environment in which they're placed, and they sort of follow, without even being aware of it, the trends that have been established as the patterns of operating and doing business in that particular geography. And I'm afraid that in Chicago, this happens more often than not, and agencies often find themselves caught up in doing business the way it is perceived that business is done in the Chicago-land area.

    Chairman LAZIO. What kind of impact does that have on the neighborhoods in the area that you represent?

    Mr. DAVIS. The impact has a tendency to, rather than solve a problem, it helps the situation for a period of time, but then the problem resurfaces later on because now we end up with abandoned properties, with defaults, and with long periods of time, in many instances, where nothing happens except the property is there; it becomes dilapidated; it becomes an overall problem, plus it's a loss of money. It's a loss of resource, and so it ultimately helps; later on it becomes a problem.

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    Chairman LAZIO. I don't want to put you in an uncomfortable position, but is it fair for me to assume that you believe that there are some structural problems with FHA that lead to the type of circumstance that you've just outlined? Is that a pattern, in your opinion?

    Mr. DAVIS. I think that FHA, like all agencies, is constantly becoming, and as we continue to review what has been, I'm an individual who believes that new occasions call for new truths, that ancient situations sort of make certain kinds of remedies uncouth, as the philosopher said. So, what may have worked at one time does not work at another time, and because times are constantly changing, then the review of the operating procedures, the policies, and practices of agencies must also take place so that we keep up with the times.

    And so, I think HUD has done good work, without a doubt. I mean, I'd be the last person to suggest that HUD has not done good work, but I'm saying that HUD, like all other agencies, must advance with the times, and it's time to change some of the practices and procedures that have been established and move ahead.

    For example, I could never understand how you can make a purchase of some property without knowing what it is that you're buying. I mean, I've never understood that, and I think that will go a long way toward preventing the recurrence of abandoned properties, sitting, nobody knowing what to do with them.

    Chairman LAZIO. Do the findings of this report surprise you, and do you agree with the conclusions?

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    Mr. DAVIS. The findings do not surprise me, because I think the findings suggest that it's an ongoing, living document. It's an ongoing, living process, and I believe what the report has attempted to do is provide us with a blueprint, not only for what is, but also with some recommendations and suggestions of what can be, and we can take the report as well as we can take the former work that HUD has done and buildupon it to make sure that this agency does, in fact, carry out its mission, and that it does so in a more effective way than what it's already done.

    Chairman LAZIO. I want to thank the gentleman, and appreciate very much the credibility and attention that he brings to this issue. Hopefully, we'll look at ways in which we can ensure that the type of discrimination that appears to be the case, certainly in Chicago and Montgomery County, and possibly in many parts of America, is eliminated. By your focus and your presence, you have helped focus our attention on that and for us to look at ways in which we can do that while preserving the basic mission of FHA.

    And we'll now turn to Mr. Kennedy.

    Mr. KENNEDY. Thank you very much, Mr. Chairman.

    First of all, let me just say to Danny that I very much appreciate his observations and his concerns about the failure of FHA to solve many of the problems that exist in cities throughout the country, because I think there's no question that that's true. The real issue is whether or not we are going to be part of a process of blaming the victim rather than advancing a solution.

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    And the difficulty that I see here is that we're in the process right now, later today on the House floor, of enacting legislation, supported by and initiated by the Republicans, that will effectively gut CRA. We are watching the amendment that was passed in here that protected fair housing, so that any of these major mergers that are going to take place can take place without any fair housing protections, and even if there is a consent decree against a bank, they're still going to be allowed to merge.

    The idea that, somehow or another, Fannie and Freddie are going to move into this marketplace is utter hogwash. The truth of the matter is that when you look at Fannie and Freddie, both of those organizations required the same 100 percent guarantee that FHA requires. They do it. They're a little sneakier about it because, instead of them doing it themselves, they get the PMIs to do it, and then they charge you a fee afterwards.

    So, I mean, this whole thing is—you know, what we're doing is saying to the one agency who is forced to only take the poorest of the poor, to only take people that are high credit risks, that perhaps don't do their job—there's no question they don't do their job as well as we would like them to, and I think everybody is in recognition of the fact that we ought to be asking them to do a better job. But if you end up gutting FHA, or you say to FHA, the only people you can lend to are the very, very poor or the high credit risks, and then we turn around and say, look at FHA, gosh, look at the default rates that they have, isn't that terrible, but we're certainly not going to let FHA get anybody who is a moderate-income person into their risk pool, then what is our solution?

    We're not going to force the banks to lend. We're certainly not going to get the insurance companies to lend. We're certainly not going to get the securities firms to lend. We're not going to force Freddie and Fannie to lend. We're not going to force the PMIs to lend. We're not even going to force them to report to us what there stats are on who they lend to, but we're going to go after the very agency that we set up to try to fill this void, and then scold them for the bad job they do. That's what this is all about.
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    And, Danny, I'm sure you don't want to be a part of an attack on what that sole mission is, but rather to force us to try to come up with innovative and creative solutions to solving the problem. I'm just cautioning that if what we end up doing is allowing FHA to be attacked, and attacked, and attacked, without recognizing, as you have in your testimony, the importance of us, despite the fact that it might not be particularly popular, to stand up and fight for the agency that is looking out after the very people that the private institutions of this country don't look out after, then we could end up undercutting the very mission that we're trying to accomplish.

    I don't know if you'd have any comments on that.

    Mr. DAVIS. Well, I certainly don't take issue with anything that you say. As a matter of fact, I, for one, will defend FHA to the death, if you will. I represent one of the most poverty-stricken districts in all of the United States of America. As a matter of fact, in my congressional district is 68 percent of the public housing in the city of Chicago. I have more than 135,000 people below the poverty level in my congressional district alone. I have struggled with the question of poverty all of my adult life, in terms of looking at it, dealing with it, working with it, living amongst it.

    Agencies like FHA have been godsends for low-income people, and the things that I'm hoping and looking for are ways to make the agency more effective than what it has already demonstrated itself to be. And so, I share your zest and zeal for its protection and would never, under any stretch of the imagination at this point in our history, want to see anything happen to it other than it have the resources that are necessary to carry out its function and that we shape it in such a manner that it really becomes the protector of fair housing that we intended for it to be when it was created.
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    Mr. KENNEDY. Well said. Thank you very much.

    Chairman LAZIO. Thank you, gentlemen. Other questions?

    Mr. Ehrlich.

    Mr. EHRLICH. Just real briefly, Chair.

    Congressman, I really appreciate your comments. As someone who's had problems with HUD and Federal courts and consent decrees, and we can certainly agree, disagree about what's that best methodology with which to get to the bottom line which is equality of opportunity, I think we can all agree. I really appreciate your words today, but the bottom line here is I thought this hearing was not about H.R. 10—we're going to debate that today—nor about CRA. It's about one Federal program that, as you said, has done some decent things, some good things, but has some serious flaws that, when we appropriately exercise our oversight responsibilities, we need and should look into. That's why earlier I made my comments concerning my appreciation for what the Chairman is doing today. So, I really appreciate your comments,
    but I think this is a very legitimate hearing, and there's a great need for it.

    Chairman LAZIO. Thank you, gentlemen.

    Are there any other questions?
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    Mr. Gutierrez.

    Mr. GUTIERREZ. Number one, I want to thank Congressman Danny Davis for being here this morning. I had the privilege of serving with the Congressman in the Chicago City Council for several years and now the added privilege of serving with him in the U.S. House of Representatives, and we share many communities. Actually, you can't get in or out of Congressman Davis' district, unless you've got a boat or you're a good swimmer, without going through my district. I literally surround it, and so we're tied together from downtown as we reach out, and we're tied together not only philosophically and politically, but we're tied together as communities that are emerging together. And I know that some of the same problems and some of the same issues that have brought Congressman Danny Davis here are some of the same issues that concern me, and that is basically what happens long-term, what happens five, six, and seven years.

    And, Mr. Chairman, I think we have to look at FHA and say to ourselves, what are the mortgage companies and mortgage lenders out there in our neighborhoods who are abusing FHA and abusing at the same time our community, because there are mortgage lenders out there that say, that's all we're going to do, is FHA. If I'm a mortgage broker, I get 1.5 points if I go to some company, but I get 3 or 4 if I use FHA; I'm going to process the papers with FHA; then, I kind of wash my hands of it because I've already made my fees. It's now FHA's responsibility, and now I work with certain real estate brokers in the neighborhood, who happen to have—this is adjacent to the mortgage—and this is not something that I'm just making up. Congressman Davis and I—I mean, they exist: here's the real estate broker; here's the mortgage company; everything's FHA; everybody makes fees; everybody makes money; they recycle the housing; and then, you've got a piece of abandoned property out there.
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    And so I think, one of many, obviously, enforcement, getting people—we've got to challenge Fannie Mae and Freddie Mac to keep coming out to the neighborhood and bringing all those institutions that they do business with to bring loans to our community. There's many things that we need to do.

    But one of the critical things that I want to congratulate Congressman Danny Davis is bringing the issue and preparing at least an initial step legislatively in terms of how it is we inspect these properties, because I think that's not the whole problem. That's part of the problem.

    And lastly, Mr. Chairman, figure out how we get the greatest number of people, understanding that not everyone can be guaranteed homeownership, that there are steps that need to be taken, and if we allow mortgage brokers and companies and real estate brokers unscrupulously to go out there and say, you can own a home, when indeed you are not ready town a home, then we're going to have problems.

    So yes, we wanted to deal, but we want all the good with none of the bad. Is there anything wrong with that? I don't think so, and that should be the purpose of this hearing, and I'm sure that's the purpose of Congressman Danny Davis and this person.

    Maximize: I want to have as many people own a home that can own a home, so that our community can be whole, because we do not do justice to the community when we just give a blank check that everyone should own one. That's not the right procedure, because we heard those that are struggling to own one.
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    So I don't know if that's Congressman Danny Davis' point, but I'm certainly going to work with the Congressman. I don't know if you'd like to respond, Congressman.

    Mr. DAVIS. No. I just thank you very much, and I certainly share your comments.

    Chairman LAZIO. Thank you, gentlemen.

    Are there any other questions?

    Mr. Hinchey. Do you want to make the unanimous consent request that your opening statement be included in the record? Without objection, so ordered. The gentleman is recognized.

    Mr. HINCHEY. Thank you very much, Mr. Chairman.

    I want to express my appreciation to you for holding this hearing. I think it's very important to focus on the issues of fair housing and lending discrimination, and I'm very glad that we are doing that. I regret a couple of things, however, about the way that we're going about it.

    First of all, I think that the timing is not as good as it ought to be. This hearing is being held on the same day when the most important banking bill of the year is being discussed on the floor of the House, and many of the Members are preparing for that debate. This bill, H.R. 10, essentially guts CRA. If we're concerned about fair housing and lending discrimination we ought to be concerned about the Community Reinvestment Act. H.R. 10 tears the Community Reinvestment Act apart, undermines its effectiveness, and, in effect, robs the Community Reinvestment Act of much of its effectiveness. I think that most of us are torn today between this hearing and preparing for the debate out on the floor.
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    I also wish that, in the context of this discussion, both FHA and HUD had the opportunity to be here and to participate in the hearing. I think we could all learn a great deal more about the issues of fair housing and lending discrimination if FHA and HUD were allowed to participate in the proceedings. It doesn't make any sense to me, frankly, that they're not here. This is an important issue that deserves our attention, and you're right in scheduling this hearing.

    The FHA has been pressed to downsize, and now they've reduced the size of the agency so dramatically, perhaps even—and this I find fault with them—perhaps even recklessly. They now find themselves subject to criticism for not being able to do their job as effectively as the law envisions, and it seems to me that we're in danger here of criticizing government for not doing what it's supposed to do, while we rob it of the resources to carry out those responsibilities. It hardly seems fair to attack the FHA for not carrying out its responsibilities after we've taken away its ability to carry out its mission. FHA can't carry out its responsibilities unless it's given the wherewithal, the tools, and the capacity to accomplish its purposes and objectives.

    And finally, I think in this context we ought to be looking at private sector lending institutions and their practices and behaviors because I suspect that we will find that poor people are being steered to the FHA because the private sector, the private market, and banks don't want to lend to them. If the private sector were participating under the law—the way the CRA envisions, we wouldn't have this problem. We wouldn't be criticizing FHA, because much of this problem would be being addressed in the private sector, where it appropriately belongs.

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    So I hope that in the context of this subcommittee's examination of the issues of fair housing and lending discrimination that we will give FHA and HUD the opportunity to participate in a meaningful way. I also hope that we will recognize that much of the present problem—people who are not getting the lending they need, despite their eligibility and ability to repay can be attributed to the private sector's unwillingness to give them the credit they deserve.

    And, Mr. Davis, I would be delighted to hear what you have to say about that.

    Mr. DAVIS. Oh, I would agree with you wholeheartedly, unequivocally, and without a doubt, and it means to me hearings like these and opportunities like these to explore, to look at where we are and keep advancing and keep pushing and moving ahead.

    I work with many community organizations, groups, like most people do, and I can tell you that your comments fit right in line with those that I hear almost every day, in terms of how we move from where we are into the direction of where we actually need to be. And as long as there is the hope and the work and the effort, and I think as long as reasonable people can interact, then there is a good possibility that not only do we move ahead, but that we do so finding solutions to what we've generally raised and seen as being problems. So I appreciate your comments, and I share them.

    Chairman LAZIO. Thank you, gentlemen.

    Are there any other questions?
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    Mr. Weygand.

    Mr. WEYGAND. Thank you, Mr. Chairman.

    I want to thank my colleague and classmate for being here today to testify. Danny, I'd like to ask you a couple more specific instances where you think FHA should be improved or some of the places where you see we have an area that needs improvement or correction.

    You mentioned something that has come up before this subcommittee before, and the Chairman has, in a previous hearing, brought it to light about the issue of home inspections. We think that home inspections, many of us think that it is a necessary part of the FHA program, and it is not there now and causes a number of faults. But could you identify, perhaps in your district, something that you're privy to, other areas or things that you see really do cause a problem with the FHA operation?

    Mr. DAVIS. Well, I think home inspections, as you just indicated, obviously is one.

    And then there's the whole question of the possibility of going with the flow in terms of trends toward where people look and where people who are expected to want to purchase ought to purchase.

    Mr. WEYGAND. Then the lenders directing them into other areas——
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    Mr. DAVIS. Lenders suggesting that here's where you can get financing for, and if you can get financing in an area, that's kind of a direction. You know what I'm saying?

    Mr. WEYGAND. So, that's oversight by officials to be sure lenders are not, in fact, doing redlining by redlining.

    Mr. DAVIS. Absolutely. I mean, there are subtle ways of doing redlining as well as overt ways of doing it.

    Mr. WEYGAND. Right.

    Mr. DAVIS. And I think we see a certain amount of the subtlety in redlining these days and also in terms of even insurance rates—I mean, the whole works. I mean, there are still areas of inequity that must be addressed and looked at, and if we don't bring them out and put them on the table, then we sometimes miss the opportunity. So I think that those are three areas, in particular.

    Mr. WEYGAND. Thank you. Thank you, Mr. Chairman.

    Chairman LAZIO. Thank you very much, Mr. Weygand, and I want to thank the gentleman for coming before the subcommittee and for his thoughtful testimony.

    Mr. DAVIS. Thank you very much, Mr. Chairman. You've been overgenerous, and I really appreciate the opportunity to be here.
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    Chairman LAZIO. It's my pleasure.

    Next panel, please come forward.

    Let me begin by thanking the witnesses for their efforts in getting here, preparing the testimony, their patience in waiting to be called forward, and their good work.

    Generally, the Chair or a Member would introduce members of the panel, but I would like to recognize Mr. Kleina who has served as the Executive Director of HOPE Fair Housing Center for 27 years. HOPE promotes equal housing, lending, and insurance opportunities through education, research, outreach, enforcement training, and advocacy.

    Have I left anything out, Mr. Kleina?


    Mr. KLEINA. Thank you very much.

    Chairman LAZIO. I'm happy to recognize you, for the purpose of introducing Dr. Bradford and Mr. Petruzak.

    Mr. KLEINA. Good morning, Mr. Chairman and Members of the subcommittee.
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    The Chicago Area Fair Housing Alliance, of which I am president, is the largest regional consortium of public and private fair housing agencies in the United States. In 1994, the Chicago Area Fair Housing Alliance undertook this research project to understand how and why FHA single-family insurance programs adversely impact the communities they are entrusted to serve. This was a multi-phase project including research, testing, community outreach, and the research and the community outreach was funded by the MacArthur Foundation, and most of the testing that was conducted was funded under the Fair Housing Initiatives Program through HUD. Our research indicates a pattern of FHA lending that limits housing opportunities, perpetuates the myth of race as a contributor to community disinvestment, and ultimately leads to community decline.

    HUD has invited us to meet with them after this hearing to go over the recommendations of the study.

    Here with me today is Dr. Calvin Bradford, the author and researcher of this study, and John Petruzak, Executive Director, South Suburban Housing Center, who designed and coordinated the testing program.

    Thank you very much, Mr. Chairman.

    [The prepared statement of Bernard Kleina can be found on page 38 in the appendix.]

    Chairman LAZIO. Thank you, Mr. Kleina.
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    Dr. Bradford.


    Dr. BRADFORD. Thank you very much.

    You already have my statement before the subcommittee and the study, so I'm just going to highlight a couple of points.

    Chairman LAZIO. Let me just reiterate that the written statement, will be included in the record in its entirety for all witnesses.

    Dr. BRADFORD. Thank you very much.

    I do appreciate the chance to bring these issues before this subcommittee, and I appreciate the sensitivity of these issues.

    I going to say I've done research on fair housing and on FHA and reinvestment for 25 years. I spent a lot of time in the streets of communities in Chicago and Cleveland and Detroit and Baltimore and Philadelphia with people in the neighborhoods that are impacted by the problems of FHA lending, and I would start by saying, I have never once in that 25 years, in all the devastation surrounding these people, heard one of those people recommend eliminating the FHA program. I heard one group propose eliminating it back in the 1970's, and this was a white organization that thought if they could eliminate FHA they could stop minorities from moving into their community.
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    So, I don't think there's anything in the report or in our approach that suggests that there's anything wrong with the FHA program's goals or that the FHA program should be held back. In particular, I think we're very supportive of supporting increased funding for their fair housing enforcement activities and also for their oversight of Fannie and Freddie, because if we are going to have any increased lending by the private market, and the private market has the most important role to play ultimately, HUD is going to have to be able to monitor and assess that lending, and set the proper goals, and also enforce compliance with the fair housing laws.

    But having said that, it's a difficult issue to face the consequences of a lot of impacted FHA lending, and there are serious consequences for these neighborhoods, and It's interesting for me to note that in the majority markets, for the racial majority, FHA is the American Dream Machine, and I think everybody looks at that as a way of getting a home. In the minority markets, it's actually a larger player, and in a lot of markets we look at, half the buyers, or more than half the buyers, who buy homes need FHA or use FHA to buy those homes. So it's one of the great ironies to me that the anti-redlining movement of the 1970's and a lot of the fair housing movement of the 1980's and 1990's has been based in these minority neighborhoods, led by leaders who have FHA loans trying to restructure and reform the FHA program because of the damage it also does to their neighborhoods which they want to reform.

    When we looked at our study, and I say our study was done in Chicago, but I don't look at it as a Chicago study, we have evidence from other Government Accounting Office studies and other research that shows similar patterns, even in the last year, in Albany, Atlanta, Baltimore, Buffalo, Cleveland, Dallas, Denver, Detroit, Los Angeles, Minneapolis, Newark, Philadelphia, Richmond, Rochester, San Antonio, San Bernadino, St. Louis, St. Petersburg, Syracuse, Tampa, and parts of the Washington, DC. area. It is a large-scale issue, and that's why I think it is a matter of congressional concern.
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    And it is true, as has been reiterated, I think, here several times, that we feel FHA runs its programs presently in a way that actually contributes to discrimination rather than fight discrimination, not in the sense of them serving individuals. They do an aggressive job making sure that minorities have access to FHA loans, but have not been diligent on the other side of looking at what those impacts are of concentrating their loan programs in these neighborhoods.

    Our specific findings will show steering. I know at the end of March, Secretary Cuomo was testifying before, I think, a different subcommittee here in the House, and he stated that he'd never seen any evidence of steering toward FHA, and he said he believed in the private market and people wouldn't use FHA if they had conventional products because it was more expensive. I think you find in our study, and in the other testimony you're going to hear today, clear evidence of steering.

    Whatever economic theory is out there, it doesn't work that way in the market. One reason is in Chicago just five lenders control 44 percent of all the FHA loans made, and those lenders decide whose going to get which product. We've seen by our measures of poor underwriting, the same measures the industry uses, that high levels of poor underwriting are concentrated almost exclusively in minority and racially changing neighborhoods. So that on one end, they're steering buyers who could be served by conventional markets to FHA. At the other end, they're making very questionable loans, and I think everyone here has raised issues about that, and they're not providing forbearance and relief like they should.

    Representative Kennedy made an important amendment to a bill that eliminated the assignment program. The amendment provided an alternative for a partial claims payment program. HUD testified, I think, before your subcommittee about a month ago, saying that they anticipated providing relief to about 5,000 people in default that would help save their homes. The assignment program used to provide relief to 15,000 people. The partial claim program could, in my estimation, essentially serve the critical failings of the assignment program and the same population, and so far in 1997, it's only been used 111 times by HUD, and in 1998 only 291 times. So HUD simply isn't using the resources: it is what we called in our report ''seduced and abandoned.'' I agree that HUD plays a critical role in serving low- and moderate-income people, but you can't have a massive effort to provide lending to marginal borrowers and then abandon them when they get into trouble and then let that result in abandoned homes in the neighborhoods.
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    So, our conclusions are that these reforms need to be made, and there are three sets of recommendations. I'm not going to make a point about them individually, but just list the categories, and the first one is changing some of the structural incentives.

    Mortgage companies get so much more in servicing fees from FHA loans, and now FHA is even paying them extra money to process foreclosures, and I think you have to understand the magnitude of that. The big servicers who are in it for servicing fees are servicing hundreds of thousands of loans. On a $100,000 loan balance, an average balance of $100,000, the difference between an FHA servicing fee and a conventional fee is $190 per year. If the market can simply make 100,000 more of its loans in its portfolio FHA loans, it's going to make $19 million more that year, which is more than the present enforcement budget for HUD.

    So, there is really money at stake here and real incentives. We have to change the incentives. We have to monitor Fannie and Freddie. I think Representative Kennedy is absolutely right: Fannie and Freddie have no real desire, have shown no real effort, in trying to serve this market, and if we are going to get increased service out of the private market, it's going to come through the efforts of Fannie and Freddie. HUD has to have the resources to improve its monitoring and goal-setting for Fannie and Freddie, and Fannie and Freddie might even try disclosing to us really who they're serving and where their loans are, so we know what they're doing.

    And finally, we need to identify these high-risk areas and develop special incentive programs. One of the chief among them, in my view, is risk-sharing with the private sector because the private sector is able to handle defaults and foreclosures more effectively with less damage on the neighborhood. So, we need to do some things in the private sector mode.
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    Thank you, Mr. Chairman.

    [The prepared statement of Dr. Calvin Bradford can be found on page 40 in the appendix.]

    Chairman LAZIO. I thank you, Doctor. I appreciate it very much.

    Mr. Petruzak.


    Mr. PETRUZAK. Thank you, Mr. Chairman.

    Fair housing testing has been one of a variety of means utilized by the members of the Chicago Area Fair Housing Alliance in the Two Faces study to obtain objective data on the operation of loan mortgage processing in the Chicago metropolitan area, and testing has also been the major tool that's been utilized to enforce the tenants of the fair housing act.

    Mortgage lending testing practices utilized by the CAFHA members in the Two Faces study are based upon procedures that have been developed by the National Fair Housing Alliance over the last ten years. These methods that NFHA has developed have been used to train not only private fair housing agencies to do investigations, but to also train the fair housing investigators of the U.S. Department of Housing and Urban Development.
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    Race was the predominant factor used and tested for in the study. In a typical race-based mortgage lending test conducted for the study, a race-white tester and a race-black tester of the same sex and approximately age were matched by a testing coordinator. Then the coordinator carefully calculated, through script information given to the testers, a standard scenario where each tester would qualify for a conventional loan. The testers were sent out, and their experiences were recorded carefully. A standard practice in setting up these tests was to always have the black tester slightly better qualified than their white counterpart for a conventional loan.

    All of the mortgage lending tests conducted allowed for each black-and white-matched tester to have qualified for a conventional loan at each institution it tested. The testers were instructed not to ask or refer to conventional or FHA products, specifically, but to have the loan officer make recommendations to them.

    Other tests were conducted during the study to monitor the linkages between realtors and lenders referring prospects for mortgage financing. Matched racial teams of testers initially visited real estate offices and carried out the tests on mortgage lenders, and then that they were referred to by the realtor.

    The results of these tests show an alarming amount of loan product steering of white testers to conventional loan products and black testers to FHA products. In one test, a lender that only offered conventional products, the loan officer worked with a white tester to qualify them for a 30-year, fixed loan, and at the same institution, they instructed the black tester to get an FHA loan, which was clearly not even offered by them.
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    At one of the largest FHA lenders in the Chicago area, a white tester was given information about both conventional and FHA products before a recommendation was made to seek an FHA loan. Another white tester was pre-qualified for two different types of conventional loan products offered by the agency. The two matched-black testers in this scenario were immediately recommended FHA products by the loan officer they saw before they even had a chance to give financial qualifying information.

    The sales market test revealed that minority testers' housing choices were steered to areas that were in predominantly minority areas or racially changing areas. The black testers were, in many cases, steered to high-volume FHA lenders by realtors before any financial qualifying information was obtained.

    The finding of the tests conducted by the two studies have been supported by subsequent mortgage lending testing conducted by the South Suburban Housing Center in the last two years. In 1996 and 1997, our programs had been funded through the U.S. Department of Housing and Urban Development's Fair Housing Initiatives program. CAFHA supports the continuation of these important fair housing enforcement programs that have been initiated this year by Secretary Cuomo. We concur with Representative Kennedy's support of the FHIP funding for these important fair housing initiatives.

    What these testing results show, most effectively, is that there is a pervasive amount of racial stereotyping that
goes on in the mortgage lending market. If you are a white prospect, you will be able to obtain a greater amount of loan product choices and are likely to be recommended conventional products even if you are in a borderline-qualifying situation. If you are a black prospect, the financial institution is likely to start promoting FHA as soon as you walk in the door and even before you're able to give any qualifying information.
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    This type of activity is properly identified as loan product steering. It has direct fair housing implications. It serves to limit potential housing choices of blacks and other minorities in the housing market. Minority home buyers who would otherwise be qualified for conventional products are channeled into the FHA system. FHA lending, as this study shows, is systematically concentrated in minority and racially changing areas, fostering the promotion of separate and unequal housing markets.

    Thank you.

    [The prepared statement of John R. Petruzak can be found on page 50 in the appendix.]

    Chairman LAZIO. Thank you.

    Now, I want to turn to an old acquaintance of mine, David Berenbaum, who's the Executive Director of the Fair Housing Council of Greater Washington. He's achieved a national reputation as a fair housing expert and advocate and served as the inspiration and the primary consultant for the Washington Metropolitan Area's Regional Fair Housing Planning Analysis of Impediments Initiative. He's developed Fair Lending Insurance Advertising Accessibility, Community Reinvestment Act, Employment and Home Mortgage Disclosure Act compliance initiatives, and he also has outstanding roots, as a Long Islander. Great to see you again. I turn it over to you.

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    Mr. BERENBAUM. Thank you, Mr. Chairman. It's good to see you again as well.

    Mr. Kennedy, Members of the subcommittee, it is an honor to be here with you today to discuss this very serious issue for not only the Greater Washington area and the Nation. I would like to compliment the members of the Chicago Fair Housing Alliance as where as the Montgomery County Human Relations Commission for the outstanding work that . Chairman, to this subcommittee so that it can be flushed out entirely.

    I have submitted my written comments and, like Dr. Bradford, I'd like to summarize those comments.

    The FHA mortgage program is a critical vehicle for home ownership across the Nation. It represents an opportunity for those who are not served adequately by the conventional mortgage marketplace to achieve our national bipartisan goal of home ownership.

    Secretary Cuomo, as well as Members of Congress, have been outspoken condemning acts of discrimination, as the Chairman has said, not only as in immoral issue, but, frankly, due to its patent illegality and its social bankruptcy. It costs our Nation millions of dollars each year every time someone is denied a mortgage or a lending opportunity.

    The Fair Housing Council of Greater Washington, in cooperation with the Council of Governments, in the Washington area and all of our local entitlement communities decided to work together in partnership with industry to assess the extent of housing discrimination, so that together we could move ahead and strike at the heart of bias, bigotry, and hatred which exists and, collectively, implement fair housing programming.
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    The Fair Housing Index program uses objective processes, uses statistically relevant methodology to assess the extent of housing discrimination in our community: 42 percent rate of rental discrimination, 37 percent of sales discrimination in the Greater Washington area, and most recently, in March, an overall rate of 41 percent lending discrimination. These figures have shocked the community, and it initiated a dialogue between not only fair housing advocates, but industry leaders, about how we can work together to challenge discrimination.

    The strongest work in the area of fair housing has been through the bipartisan efforts of not only the executive office, but of Congress, and I celebrate, for example, Mr. Chairman, the recent self-testing regulations in the mortgage banking industry that have been passed. That is one of the solutions to what we are speaking to today, as well as increased enforcement on the part of HUD and the Department of Justice, simultaneously.

    In preparation for today's hearing, the Fair Housing Council went back to the Fair Lending Index study, and we looked at tests. There were 150 matched-pair tests conducted where FHA mortgage products were presented to our testers. There were actually 41 instances where FHA mortgage products were discussed, and I'm happy to report in 26 of those instances there was equal treatment, meaning there was equal professional service to white, black, and Latino home seekers, and that is to be celebrated. But, unfortunately, there were also 15 instances where there was mortgage product steering, where simply because someone had a racially identifiable voice or based on the color of their skin, they were immediately, without any review of their individual qualifications or what would be the best mortgage product for them, told that FHA mortgages were a product of choice.
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    There is much talk about the word ''steering.'' Home Mortgage Disclosure Act data, as documented by the studies being discussed today, are certainly an indicator, a call for action, but I can tell you, as a matter-of-fact legal statement, that what we documented in our testing was steering, a violation of the Federal Fair Housing Act, and what is called for is not only a tough look at the FHA mortgage program as discussed by these studies, but also for the other GSA's, for Fannie Mae, for Freddie Mac, to take a proactive role in ensuring that every mortgage applicant, the largest financial purchase of the average American's life, is an objective, fair, and sound business call for everyone, so that businesses make their money, so that government expands home ownership, and so that Americans have equal, fair housing treatment as they buy their homes.

    Thank you.

    [The prepared statement of David Berenbaum can be found on page 53 in the appendix.]

    Chairman LAZIO. I want to thank you very much. I want to thank all the witnesses for their testimony, and I have a few questions that I would like to pose.

    Let me begin by asking this question of both Dr. Bradford and Mr. Petruzak. Dr. Bradford, you conclude in your report, and I'm going to quote you that: ''Where any private lending on mortgage insurance institutions engaged in activities with such clearly differential impacts for white and minority communities . . .''—you're referring to those that result from FHA lending—''. . . HUD and the Department of Justice would surely file suit for discrimination under the Fair Housing Act.'' Am I correct in saying that the basis of your conclusion is, at least in part, from the information gained from the testers? Mr. Petruzak, you were just testifying as to the use of the testers and the fact that the African-American testers had at least as impressive documentation as the white testers. Is that accurate?
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    Mr. PETRUZAK. Even better.

    Chairman LAZIO. Even better, so that was, obviously, purposely done.

    Mr. PETRUZAK. Uh-hum.

    Chairman LAZIO. And that in some of these cases, even before this documentation was submitted, or even before lenders knew how qualified the applicant may be, there was a pre-judgment on the part of some of the lenders. Did I understand that correctly?

    Mr. PETRUZAK. That is correct. There was stereotyping that was done.

    Chairman LAZIO. So, judgement on the part of some lenders was even before the point where the documents or the financial records were submitted. Would you say that that is the most excessive or obvious type of steering that occurs?

    Mr. PETRUZAK. That was the most common type of steering that we saw.

    Chairman LAZIO. It was the most common type. Then you were able to compare white-tester applicants who had inferior financials to the African-American testers?

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    Mr. PETRUZAK. Comparable, but slightly inferior.

    Chairman LAZIO. Slightly inferior. And what is the import of that? I mean, obviously those African American testers with slightly better financials being steered toward FHA. What does that mean for the individual?

    Mr. PETRUZAK. It means that they're being denied the whole range of options available to them.

    Chairman LAZIO. And so what?

    Mr. PETRUZAK. There are all kinds of conventional options that rival FHA lending products right now that African-Americans are being deprived of.

    Chairman LAZIO. But why does that make a difference? Are they better?

    Mr. PETRUZAK. As we are trying to point out, the way the FHA program is being run right now, there are some inadequacies in it that are not present in the private conventional market and that there are a lot of African-Americans that could be better served by conventional products than by FHA products, and they're being denied that.

    Dr. BRADFORD. I'd just add to what John's saying. At any given time in the market, FHA interest rates tend to be slightly higher than conventional rates. You'll pay more over the life of the loan for insurance. Our studies, and I think past experience, indicates that if you get in trouble on the loan, you are likely to receive less assistance as a defaulted homeowner under FHA than under conventional programs. So there are risks that are posed for the buyer, and at any given point in time, the borrower should have the option of deciding where they want to spend their money and how they want to spend it and how much they're going to spend.
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    Mr. BERENBAUM. Mr. Chairman.

    Chairman LAZIO. You may also respond to that, Mr. Berenbaum.

    Mr. BERENBAUM. In Prince George's County, Maryland, upper-middle-income African-American applicants, for example, in 1994 approximately 75 percent of those applicants obtained FHA mortgage products. Of course, there are extremes, as you are saying what is the difference. Prince George's County is the most affluent suburban openly African-American community in the Nation. We have high education, high income.

    Over the life of the mortgage, these homeowners literally are paying a race tax. If the average home costs $200,000, as it is quickly approaching in Prince George's County, in fact, that translates to an average of $25,000 per homeowner. That is money that these families could be investing in small businesses, into the community, educations, and other important aspects of daily life.

    Chairman LAZIO. Now, when you refer to this race tax, does that also include the fact that FHA insurance is not really canceled? You can't cancel FHA, but you can cancel PMI.

    Mr. BERENBAUM. Absolutely. That is also a factor in cost. We believe that there should be 60, the Fair Housing Council of Greater Washington, 60, 100 mortgage products competing in an open marketplace. If FHA is the best mortgage product, fine, but if there are other or more cost-effective products available, they should be available in an equal opportunity manner, and frankly, that's what every financial institution says they're doing.
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    I'll add, there's another factor involved here. I do support CRA and what it has done for the Nation, but many financial institutions who report under CRA have been so focused in increasing their ability to say, we have approved ''x'' number of loans, that they are lumping together middle-income affluent African-Americans and Latinos, and they are being treated literally as marginal applications, and that is a problem. That is discrimination. Products should be offered to who they are qualified for.

    Chairman LAZIO. Dr. Bradford, going back to Mr. Berenbaum's point about this race tax, why does this occur? Steering occurs for what, you argue in your report, I think, are structural reasons with the FHA program. Can you distinguish why there is discrimination? Is it because of the structure of FHA, the lenders, or is it both?

    Dr. BRADFORD. Well, I think you'd have to say it's both. I think Congressman Davis was correct. You know, there's been a pattern of using FHA loans for minorities, and the real estate agents and the lenders keep using it, but there are also structural issues. One reason the lenders keep marketing it so heavily is because the mortgage banking industry handles most of the loans in this country, now, and they're making their money through the servicing fees, and it's easier to steer minorities to FHA because they have fewer choices in the market. So, it's harder to steer whites toward FHA because there are so many companies competing for their business. If you charge them more, they're going to go somewhere else. So, it's really an exploitation of this market, and I think we need to reassess whether those servicing fees are adequate. There are some higher servicing costs with FHA if you actually do the servicing and don't foreclose. But, I think, they have gotten way out of line with the actual cost in the market. So, I think, you have to look at those incentives and try and level the playing field without—well, you still have to make sure that a lender's going to get the money they need to service that loan and recognize the fact that higher risk loans are going to require more servicing. So, right now, those incentives are going the wrong way.
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    The 100 percent insurance creates incentive for them not to care a great deal about the underwriting, especially combined with HUD's lack quality control methods. And, although we've recommended a couple of measures, one of them, maybe, not giving 100 percent insurance, I think the one that I'm most in favor of is developing risk-sharing mechanisms with the private market because the private market is able, in my experience, to get to a defaulted lender faster and provide more relief at a time when it's still likely to save the loan and also to manage a foreclosed property more efficiently, and HUD would benefit from incorporating those processes into their own loan program, so that HUD would actually operate more efficiently, so that it could serve these neighborhoods without the side effects that it has now.

    Chairman LAZIO. Thank you, sir. Just a conclusion: there seems like there's either this race tax, which is a result of exploitation. The argument would go, it's because of higher servicing fees—excessively high servicing fees—that are paid to FHA lenders, as opposed to ones paid on a conventional or privately insured mortgages.

    There is also the 100 percent guarantee that you argue is a factor. I think I'm hearing from all the testimony that there is a disparate impact on the community, as well as the individual, because of the concentration of FHA defaults and the abandoned properties. These are having a negative affect on, in particular, African American and Latino communities. Is that a fair statement?

    Dr. BRADFORD. Right, but the effect of the foreclosures and, to some extent, the delinquencies, is not necessarily incentives built into the program; it's poor management on HUD's part, and it needs to restructure the way it manages that portfolio so it doesn't have that effect, so that it can provide the same options it provides in the White market for home ownership without the negative aspects of it.
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    Mr. BERENBAUM. Mr. Chairman.

    Chairman LAZIO. Yes, Mr. Berenbaum.

    Mr. BERENBAUM. I would like to qualify what you have said and take a slightly different tact on it. I do believe there is discrimination on how FHA mortgage products are being marketed by mortgage corporations, banks, and others who are participating in the program. I do believe there's a greater need for oversight on the part of HUD and those institutions in the program. But, the FHA loan program, particularly in many suburban communities—I concur in urban and areas of poverty there are dangers with FHA over the term, but also, right now at this very time, whether we look at Montgomery, Fairfax, whether we look at suburban communities, Suffolk County, Long Island, FHA mortgage programs are expanding opportunities around the Nation. Those communities are, in fact, benefiting because there are more single family homes that are owner-occupied.

    If you look at a product you have to also look at it in an objective way to say, ''what good is it doing?'' The product is not the problem. Yes, it should be tweaked to improve it so that the disparate impact issues that are being brought to the table today are addressed. The real issue is the broader issue, documented for the first time in the Fair Housing Index. We have discrimination in the mortgage marketplace, in the sales marketplace, and as companies are merging, whether it be the mega-mergers of, in fact, the insurers and the bankers, or the more quiet mergers, where we have real estate companies, on a national level, creating affinity relationships, or sister corporations that are, in fact, mortgage corporations, we need to look at these issues together to examine their impact and move ahead in a bipartisan way to ensure there are voluntary compliance programs, and yes, when necessary, enforcement, public or private.
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    Chairman LAZIO. Thank you very much.

    Mr. Kennedy.

    Mr. KENNEDY Thank you very much, Mr. Chairman. I just wanted to briefly straighten out one issue that you mentioned in your opening statement, Dr. Bradford. In the amendment, which you referred to, regarding the elimination of the assignment program, you should understand that there was an effort made by the Republicans to just completely eliminate the entire program, and the amendment I offered, really, just tried to protect the lost mitigation effort that was there. It wasn't an attempt to—I think, there was a little twisting in your interpretation of what actually happened.

    In any event, I wanted to just get back to the—I think that there seems to be a general agreement that there is a problem in lending to minority communities around the country. I think there seems to be a general agreement that there has been a distinct lack of effort made by private institutions to affect that discrimination; that we do not see banks, private mortgage insurance companies, or Fannie and Freddie, entering that market; that there seems to be an agreement that there are problems with the way Fannie—excuse me—FHA's program operates in the low-income community.

    And, so the real question is what are we going to do about that?. And, what I caution each of you, and particularly, I guess, Dr. Bradford, is that there is a very great danger that you play with when you come into an environment where there has been a dramatic reduction in the overall amount of housing that is being provided to low-income communities by this Government, where there has been a dramatic reduction in the amount of money that is spent on homeless people, where there is a stripping away, currently, even today, an effort to create incentives to get banks to lend into the low-income communities, and this current bill, that's on the House floor today, will dramatically reduce the amount of money that even the existing banks have to put into low-income communities.
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    And, I say that so that you understand that when you come in and start attacking a program that is designed to assist the very people that you're trying to do your life's work to make sure it get home mortgages, that when you come in here and start criticizing that, that your testimony can be twisted in a way that ends up enabling other forces at work in this Congress to simply stick it—a spike right through the heart of the program. And, you should just recognize that and take that into account in how you conduct yourself before this subcommittee.

    It doesn't mean that you shouldn't tell what the problems are, but you should understand just how close you're coming to really hurting a lot of people that you're trying to look out for.

    I would just like to ask you just a couple questions. When you did your study, did you go behind the numbers that you cite in your testimony about the largest Chicago area lenders, and, I, specifically, am wondering whether or not the—all the evidence indicates, and had HUD been invited to testify, they, I think, would have documented that FHA borrowers could not qualify for conventional loans either because of a lack of down payment or blemished credit history, or plain discrimination and other factors, and I wondered whether or not that was a part of your study, and, I'd just like to point out, in addition, that when you talk about this reduction of below 100 percent, I just hope that you would acknowledge that the other PMIs and Fannie and Freddies all require the same 100 percent. I mean, they do it a little differently, but they do require the same 100 percent.

    So, if you're going to—I just think we ought to make sure that we're dealing with a level playing field here, and I'm concerned that the study that you've done may, in fact, have been flawed, not in the criticisms of FHA, which I readily acknowledge is a reasonable thing to do, but in terms of what the implication of the underlying study actually says about whether or not FHA has been discriminatory.
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    Dr. BRADFORD. On your first point, I certainly yield to your interpretation of the partial claims program. I didn't mean to interpret it differently than you've presented it. It's terrific that you were able to save something.

    In the study, itself, obviously, I think, the testing was designed, in particular, to see whether people who were eligible were being steered or not being steered to FHA because we didn't have access to actual files. I've been involved in several lending discrimination cases where I have been able to look at files, and it actually would be difficult to assess whether someone's eligible for a conventional loan from an FHA file because the lenders tend, particularly, not to list all your assets. As long as they get enough assets to qualify you for an FHA loan, they stop listing your assets and so it would be even hard to determine from their files.

    Mr. KENNEDY But, you did mention, in your answer to the Chairman's question, the fact that you felt that White borrowers are steered to the private mortgage companies or to the banks and that just minority borrowers are steered to FHA, so that would not tend to bear itself out if the underlying data indicated that the minorities were, in fact, creditworthy?

    Dr. BRADFORD. Well, I think the testing does. We have minority borrowers who are more creditworthy than the Whites who are steered to FHA. That shouldn't happen.

    Mr. KENNEDY OK, and if that's the case, then the question is, why isn't—why aren't you pointing your finger at the private mortgage companies rather than going after the one agency that's trying to help? You know what I mean, that's what I was saying, this whole hearing tends to feel to me like we're blaming the victim—not going after the guy who's creating the problem.
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    Dr. BRADFORD. Well, I understand that concern. You know, the purpose of this study was to look at the role that FHA plays in this. Clearly, I've worked on cases in which fair housing groups have pursued complaints. In fact, we've filed complaints with HUD about FHA's steering and HUD's attitude is that they don't see any problem with steering people to FHA, and that's been their past attitude. So they haven't enforced that part of the Fair Housing Act, so it's been a serious issue in that regard, the fact that——

    Mr. KENNEDY But, I don't know, I mean I would—that's why it's too bad that we don't have HUD here because you just said something that, I'll bet you, if Secretary Cuomo was sitting here, he'd, you know, he'd be jumping right down your throat about the fact that he thinks that that would be an inaccurate statement about what FHA has done. I'm pointing out to you something very directly, which is that you've got a study that is critical of the one Federal agency that is trying to make loans in the minority community and you have given a pass on the very institutions that have created the problem.

    If you're going to come before this subcommittee, I mean, OK, fine, you know, save it that FHA has had some problems with it. But, you go do a whole study that blames FHA for discrimination and lending because FHA is the only people lending to the Blacks or Hispanics because the big banks aren't, or even the little banks aren't, or the private mortgage insurance companies aren't, as Fannie and Freddie aren't, you know, we've got this whole thing ''bass-ackwards.'' I mean, I just object to it because, I think, you play right into the people's hands that will end up gutting FHA and leaving the people that you're here trying to protect, high and dry. That's the way it goes around here. No more questions.

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    Chairman LAZIO. Thank you.

    Mr. Jackson.

    Mr. JACKSON. Thank you, Mr. Chairman, and I certainly want to associate myself with everything that the Ranking Member, Mr. Kennedy, has said, and has reiterated. I also want to take this opportunity, Mr. Chairman, to welcome Mr. Petrusak, the Executive Director of the South Suburban Housing Center from the very center of my district, in Homewood, Illinois, and also Dr. Calvin Bradford from Des Plaines, Illinois. Welcome before our subcommittee.

    I can't, Dr. Bradford, underestimate or understate what Congressman Kennedy has indicated to you about the context within which your study and your report has been released before this subcommittee. My father always told me, and I never did figure this out until later in life, that a text out of context is a pretext.

    The focus of this hearing, from my perspective, Mr. Chairman, should not be in challenging the FHA, which has significant problems, but to challenge the steerers. This is about people steering people away from the conventional market to the FHA; people who are qualified to function in the conventional market and receive loans in the conventional market, but because the conventional market is practicing racial discrimination, gender-based discrimination, cultural discrimination, or which-side-of-town-you-live-on discrimination, is, from my perspective, the gravamen of the problem.

    Now, I represent 600,000 people in the Second Congressional District of Illinois. That's in the city of Chicago. Your report is in a particular economic context. The north side of Chicago—everything north of McCormick Place—is growing at about 20 percent per year. It's almost as if the city of Chicago is growing en route to Milwaukee.
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    In my district and Mr. Lipinski's district, the Third Congressional District, the economy is growing at about eight percent per year, in part, because of the growth associated with his airport, Midway Airport, and Southwest Airlines.

    In my district, the Second Congressional District of Illinois, where I represent the same number of constituents that Mr. Blagojevich represents in the Fifth and Gutierrez in the Fourth and Mr. Lipinski in the Third, my 600,000 constituents, the top 11 businesses in my district only employ 11,000 people. So, most people in my district go north to work or they simply do not go to work at all and, therefore, they end up on some form of public assistance.

    Mr. Chairman, Chicago is still the most segregated city in America, so, by definition, loans and lending, in that particular economic context, will show great disparities in how Federal programs are applied in light of Chicago's very real racial, discriminatory, segregated realities that persist even unto this day.

    And, so, overwhelmingly, in the Second Congressional District, many African Americans that I represent apply for FHA loans, in part, because they are steered, by people who are racially discriminatory, to apply for FHA loans, not because the FHA has a problem. They are steered because they live in my district, because they live in an area that is not growing at the same rate that the city of Chicago and the rest of the city of Chicago is growing. They're steered toward FHA and not toward First Chicago or any of the other large mortgage and lending companies. They are steered by somebody who is practicing racial or gender-based or cultural-based discrimination, to the FHA, which becomes the catch-all for first time home buyers. And, if there were no FHA, these African Americans would be full time renters. That's just the reality.
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    So, it occurs to me that what we should be debating and discussing here is the full enforcement of the Fair Housing Act; that we should be discussing and reiterating our support for the Community Reinvestment Act, which you are, Mr. Chairman, very well aware that Mr. Baker, our colleague, is offering an amendment today on the House floor, to H.R. 10, the banking legislation, to completely eliminate CRA, Community Reinvestment Act, from any consideration in H.R. 10, therefore making it even more difficult for people to receive these loans.

    This hearing should be about the Community Reinvestment Act, the Fair Housing Act, Equal Credit Opportunity Act, and this Congress ought to be honest with these people who've done these studies: that we are not enforcing these laws; that we're not spending the money to enforce these laws, to end discrimination in conventional lending. And, as a result of not fighting discrimination in conventional lending, all that's left that African Americans and Latinos and others can apply for is in FHA. Whatever the Government has left that we can apply for because the private sector is ignoring us, is what's available.

    So, my question, I guess, to those panelists, and I gather my time has expired—would enforcement of existing laws, I mean full enforcement, I'm not talking about present enforcement, I'm talking about full enforcement—money we can't even imagine being behind the enforcement of these Acts because we simply haven't been spending the money behind these Acts. Would full enforcement of the Community Reinvestment Act, the Fair Housing Act, the Equal Credit Opportunity Act, and enforcement on lenders and realtors to remedy their steering practices, mentioned again in the two phases of FHA, be a significant step toward ending racial discrimination in housing?

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    Dr. BRADFORD. Well, I'll respond right away. Absolutely. It'll make a tremendous difference. And, in fact, while we were focusing on HUD, we've written other studies and done other work to focus on discrimination of individual lenders.

    HUD is the prime—HUD is charged by the Government of being the premiere fair housing enforcement agency of the Government. They need to have more funds to carry out that task in a reasonable way. You can't just give them the responsibility and not the resources to do it. So, while we've been critical of HUD for, itself, not investigating and going after lenders who engage in steering, and that's part of the report, it's also part of the report that the lack of conventional lending, I think, is a major problem.

    The reason FHA is in those neighborhoods is because conventional lending's not in those neighborhoods, and we want HUD to be much more aggressive in its monitoring and goal setting for Fannie and Freddie to make sure that someone takes seriously the need to move the private sector into those neighborhoods. And, that has to be done.

    But, that—there's a fee that goes with that, and Congress has to be willing to pay the money. You have to pay the money to HUD to monitor Fannie and Freddie so you're not the tail that's being wagged by the dog, which is really what happens there in a strange situation, and you have to have the Fair Housing Enforcement money so HUD can actually carry out its obligations and those would make tremendous differences all the way, as we recommend, from the real estate steering, from people go to get a house, all the way through the mortgage process, and the remaining process because that's our critical problem.

    Mr. JACKSON. So, then, I think it would be helpful to understand—at least, appreciate—then, that the free market, in and of itself, is not remedying discrimination and housing?
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    Dr. BRADFORD. That's absolutely true.

    Mr. JACKSON. So, we need Government enforcement and involvement in the free market to even have banks consider lending in communities like the ones that I represent, Inglewood, Southshore——

    Dr. BRADFORD. Yes. That's right. I mean, you know, those are your communities and for years it's been a unique feature that the people organizing around mortgage lending have said that we want the private sector in our community; we believe the private sector's can serve our community. They've not been trying to push them out and do something else. But, it's not willing to do it, and you're going to have to move them to that point.

    Mr. JACKSON. I totally accept that, so now we're really getting to the gravamen of the problem here: enforcement of existing laws for conventional lenders who are not following the law and are finding ways around the law. We're not talking about challenging the FHA, which is doing the very best it can for first time home buyers, many of whom are in my district, but in similarly situated districts across the country who, without the FHA, would simply be renters. They would not be first time home buyers because the conventional market is simply ignoring them where the basis of the discrimination actually is occurring, is that correct?

    Dr. BRADFORD. Well, I think, that's largely true, although, our concern is that because the conventional market doesn't serve these markets, and the FHA loans are concentrated there, HUD has an obligation to make sure that the operations of the FHA program don't add to the problems in these neighborhoods, so it's a reform issue, too.
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    Mr. JACKSON. But, I gather, Dr. Bradford, you would also support, that if this Congress had hearings on conventional lenders who are not fully enforcing the Community Reinvestment Act, Fair Housing—the Fair Housing Act, and other credit opportunity acts, that that would be a worthwhile focus as well if we're truly trying to challenge racial discrimination. Is that correct?

    Dr. BRADFORD. It's more than worthwhile, it's absolutely essential if you're going to get this market to function properly.

    Mr. JACKSON. Thank you very much, Doctor. Thank you, Mr. Chairman.

    Chairman LAZIO. Thank you, gentlemen. Before we close, I want to enter into the record a New York Times piece from today called, ''Home Loans Discriminate, Study Shows.'' It quotes a spokesman for the Department of Housing and Urban Development, HUD, as agreeing that elements of the program ''require additional improvement and reform.'' Certainly, I think, your study reflects, and testimony reflects, that there is discriminatory steering by application.

    [The article referred to can be found on page 153 in the appendix.]

    The heart of the study is that there are structural incentives in FHA for that steering. The servicing fee is 75 percent higher than the private sector's—and, on several occasions, there have been comments on FHA's 100 percent coverage. I wonder if you could just speak to that final point. I think, we all agree that there are things that we could support, whether it's counseling or fair housing enforcement. But the question is, are there strong structural incentives that drive market forces toward this discriminatory result?
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    Dr. BRADFORD. Well, I think it's pretty clear in my report. I think there are strong structural incentives. I don't—I couldn't measure, at this point, whether the structural incentives outweigh the pure discrimination as it functions in America because the level of discrimination is so high. Clearly, mortgage lenders that I work with, some of the largest in the country, will tell you they'd always rather make an FHA loan than a conventional loan; they make more money on that loan. And, they're going to exploit the discrimination that exists in America, but they also are the discrimination. I mean, when you look at the fact that 25 lenders out of 500, in Chicago, control virtually all the FHA loans, if they decide to give you an FHA loan, there's no market force working out there, that's their internal decision to make money off of you and exploit the limitations of the——

    Chairman LAZIO. So, we say, both paths should be pursued.

    Dr. BRADFORD. And, how much the incentives would work if HUD and Fair Housing Enforcement had the resources it needs and could eliminate all the rest of the discrimination, I can't say, but they clearly both do exist.

    Chairman LAZIO. When Mr. Berenbaum talks about African American applicants—home buyers getting ripped off for $25,000, as they're trying to move up the economic ladder, there's clearly some strong signals that this subcommittee and this Congress should be sending out that that will not be tolerated, both in terms of structural incentives and in terms of application.

    So, I want to thank the panel for their strong testimony and for bringing this to light. I think, you've heard from the testimony that there is a strong consensus of support for FHA's basic mission. We want to continue that. There's no way I heard any strong voice on the subcommittee or in Congress that wants to undermine FHA. The challenge here is to make the adjustments and make this program truly meet its original mission of helping first time home buyers and those people who are in underserved communities, or have been historically discriminated against.
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    So, for those reasons, I thank this panel for their excellent testimony, and this hearing is now in adjournment.

    [Whereupon, at 12:04 p.m. the hearing adjourned, subject to the call of the Chair.]

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