FHA Loans Can Improve Ratings, Research Suggests
Financial institutions can increase their loan commitments in minority neighborhoods by joining the Federal Housing Administration program, a recent study suggests.
The study, which was conducted by two professors and a Federal Reserve Board researcher, found that black and Hispanic home-buyers are more than three times as likely as whites to obtain FHA mortgages.
The FHA loans, which are guaranteed by the federal government, generally do not require so large a down payment as a conventional mortgages.
Currently, many of the nation's leading mortgage makers do not participate in the FHA program.
But institutions that want to increase their loans to minorities - and ratings under the Community Reinvestment Act - may find it useful to add FHA loans to their portfolios.
When performing CRA evaluations, regulators look at how institutions are serving low-income and minority neighborhoods in their markets.
"If, in fact, minority people are using FHA financing and there are many financial institutions that don't offer these loans," banks and thrifts may not be meeting the needs of this market, said Glenn B. Canner, a senior Federal Reserve economist and one of the study's authors.
"I have always felt that if institutions want to be aggressive about the CRA, they should offer a wide variety of products," he said.
The study looked at 182 families, all of whom qualified for conventional mortgages. Only 14% of the white families opted for FHA loans, versus 53% of the minority families.
Distorting Factors Excluded
"The disparity remained after controlling for the borrowers' age, income, marital status, credit history, amount of down payment, and other indicators of creditworthiness," said Stuart A. Gabriel, a finance professor at the business school at University of Southern California. He worked on the study with Mr. Canner and J. Michael Wooley, USC professor of public administration.
"The question must be raised whether minorities are being steered away from the conventional loan market because lenders believe they are too risky," Mr. Gabriel said.
The differences, he suggested, could be due to "ethnic-group steering by real estate agents, market specialization by mortgage lenders, and lender bias."
The researchers used 1980 census data and a 1983 Fed survey of consumer finances. The team analyzed creditworthiness, neighborhood characteristics, and expected appreciation of properties purchased.
Though fees and down payments have recently risen for FHA mortgages, the loans still generally require less down than a conventional mortgage. Lenders say interest rates are generally the same as on a conventional loan.
Many banks and thrifts say they do not offer FHA loans because the paperwork is onerous. Neither the American Bankers Association nor the United States League of Savings Institutions could provide information on what portion of banks and thrifts offer these loans.
At least three of the nation's top home lenders do not offer FHA mortgages: Citicorp Mortgage Inc., St. Louis; Home Savings of America, Los Angeles; and Great Western Bank, Beverly Hills, Calif.
Home orignated $13 billion of single-family loans last year, Citicorp $10.1 billion, and Great Western $10 billion.
Great Western, which has received a satisfactory CRA rating, said it can fulfill its market needs without using the FHA program.
"There is no doubt we write more single-family homes in low-and moderate-income neighborhoods in California than any other lender," said a spokesman for the thrift. "We are clearly successful even without offering the FHA/VA products."
Home Savings has been rated outstanding by regulators, while Citicorp's CRA evaluation has not been made public.