Housing policymakers were presented with a chicken-or- egg riddle last week with the release of a study that calls into question the government's loan guarantee program for minority borrowers.

The study by the Chicago Fair Housing Alliance concluded that the Department of Housing and Urban Development's FHA program has "contributed to conditions that undermine the vitality" of minority or racially changing communities, "contributed to white flight, and stimulated the racial fears that fuel continued segregation."

Defenders of the FHA program denied that it causes such problems. They said the program is targeted toward communities where such conditions exist, that the problems would be worse without FHA, and charged that the report was being used to advance a political agenda.

"I think it (the report) does a discredit to the overall discussion on discrimination,"said Michael J. Ferrell, chief lobbyist at the Mortgage Bankers Association, whose members make most FHA-insured loans.

To use the report "as a proxy to defeat" a pending proposal to expand the program "is pretty bad form," Mr. Ferrell said.

Still, the report raised some provocative questions.

Released last week at a House Banking subcommittee hearing chaired by Rep. Rick Lazio, R-N.Y., the study found that in Chicago's Cook and DuPage counties black homebuyers were often steered by mortgage brokers and real estate agents to FHA-insured loans and black neighborhoods. White homebuyers were offered cheaper conventional loans and shown homes in white neighborhoods.

The report said FHA loans in Chicago are mostly concentrated in minority and racially changing neighborhoods, where a mixture of poor government oversight and distorted profit incentives has led to disproportionately high defaults and foreclosures, a churning of homes, and neighborhood blight.

The predominance of FHA lending in these areas perpetuates discrimination by conventional lenders, the report said, concluding that the government would be better off targeting that discrimination than expanding the FHA program as the Clinton administration has proposed.

Under the administration plan, the FHA mortgage program would back loans as large as those purchased by Fannie Mae and Freddie Mac, the government- sponsored, publicly held mortgage agencies. And the FHA loan ceiling would increase by one-third to $227,000.

Some Republicans, such as Rep. Lazio, oppose the increase.

But William C. Apgar, assistant secretary-designate in the Office of Policy Development and Research at the Department of Housing and Urban Development, said the neighborhoods described in the study would be in worse shape without FHA-insured loans.

The economic decline of those neighborhoods is caused not by FHA's presence, but by the loss of jobs and other demographic changes, Mr. Apgar said.

Still, he said HUD is putting in place a system to evaluate the performance of lenders by neighborhood, rather than by entire metropolitan areas. That would enable the agency to spot unusually high defaults on loans in minority neighborhoods by lenders whose overall record looks good.

The report, which was funded by the MacArthur Foundation, recommends that the government pay smaller servicing fees to lenders for FHA-insured loans and provide less than 100% insurance to discourage brokers and lenders from making unsound loans.

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