THE ACTION last week by the Federal Housing Administration to begin to address the problem of "flipping" in Baltimore is desperately needed and long overdue.
FHA will force lenders and others who participated in fraudulent schemes to overcharge for homes to disgorge their profits and reduce loans to the actual value of the home.
The FHA initiative, while it ought to be applauded, ignores one of the principal causes of the problem -- racial discrimination by banks and other lending institutions in mortgage lending.
As a result of discrimination, the African-American community in Baltimore experiences profound barriers to credit for home purchases. This discrimination drives many prospective homeowners into the arms of charlatans offering easy credit at exploitative interest rates for over-priced homes.
On May 17, the Public Justice Center, a nonprofit civil rights and anti-poverty legal organization, released a 250-page study of home mortgage lending discrimination in Baltimore. The study examined the differing treatment of white and African-American applicants and differing lending practices in white and African-American neighborhoods from 1995 through 1997. We ranked lending institutions and carefully analyzed the lending practices of the 16 worst ranked banks. This list included some of the largest lenders in the country such as Chase Manhattan, Bank of America and Sun Trust.
The results of the study were shocking.
The 16 worst-ranked banks made more than 18,000 home purchase loans in the Baltimore area during the study period. Only 93 of these loans, less than one-half of 1 percent, were conventional mortgages to African-Americans in African-American neighborhoods.
White applicants are twice as likely to get loans as similarly situated African-American home purchasers. The racial disparity in lending grows with income. In the lowest income range, the rate of conventional loan application failure for African-Americans was 1.2 times the rate for whites. In the highest income range, the failure rate for African-Americans is 2.1 times the rate for white applicants.
To the extent that loans are made in the African-American community at all, they are disproportionately more costly government guaranteed (FHA) loans. FHA lending is more expensive and has a much higher rate of foreclosure. FHA foreclosure practices lead to abandoned homes and blight, which further depresses home values
The disparity in FHA lending is not explained by income. In all income groups, African-Americans received FHA loans at a higher rate than whites. In the highest income group, FHA lending was 2.22 times higher for African-Americans than for white home purchase loan applicants.
Mortgage lending discrimination is destroying Baltimore. African-American communities are effectively deprived of necessary capital for home purchases and many African-American families are prevented from purchasing a home or are forced to use shady lenders charging high rates or employing fraudulent schemes.
In addition, discriminatory lending practices cause communities to suffer. Discrimination reduces mobility by suppressing the housing market and denies African-Americans the same opportunity to accumulate wealth through home equity as their white counterparts. Lower house prices also lower the tax base, depriving the city of much-needed tax revenue.
It is time for the city, state and federal governments to take this problem seriously. Until anti-discrimination laws are enforced, and credit is equally available regardless of race, Baltimore and its neighborhoods will continue to suffer and decline.
Jonathan M. Smith is executive director of the Baltimore-based Public Justice Center.