An activist group is accusing the FHA program of letting lenders make government-guaranteed mortgages in minority communities without regard for the creditworthiness of borrowers.
In a study being presented today to the housing and community opportunity subcommittee of the House Banking Committee, the Chicago Fair Housing Alliance found significantly higher default rates for FHA loans in minority census tracts than in white census tracts. For instance, minority neighborhoods made up all but four of the 118 Chicago-area census tracts with abnormally high default rates.
This is the second recent study to criticize the FHA program, which is overseen by the Department of Housing and Urban Development. In October the National Training and Information Center in Chicago released a report showing that FHA default rates are higher in inner-city neighborhoods.
"FHA is not doing anyone a favor if they allow lenders to make loans that borrowers cannot afford," said Bernard Kleina, president of the fair- housing alliance, who is scheduled to testify at today's hearing.
As a result of higher default rates, minority communities also experience higher foreclosure rates, Mr. Kleina said. This increases urban blight and makes it harder to revitalize neighborhoods, he said.
A HUD spokeswoman criticized the report, saying "lenders were responsible for any discrimination in the FHA program. To shift the blame on FHA is wrong," she said.
The study, funded by the John D. and Catherine T. MacArthur Foundation, said the program encourages higher default and foreclosure rates by giving lenders an incentive to make as many loans as possible without punishing them if they go bad.
For instance, it said servicing fees for FHA loans are 1.75 times higher than for conventional loans. Also, the agency insures 100% of a loan, which means lenders and investors need not worry about the quality of their portfolios, the study said.
To eliminate discrimination, HUD should cut servicing fees and reduce the amount of the loan that is insured, the group said. HUD also should move quicker to sell foreclosed homes, it said.