Deficiencies of the Act

I believe, however, that the information subject to disclosure will not shed much light on the above areas because of three glaring deficiencies:

1) There is no empirical framework provided for testing

the hypotheses that redlining exists, that it contributes
to the decline of neighborhoods, and that the FHA does
not improve the private market.

2) Key terms such as "qualified applicants," "decline of
neighborhood," "sound lending practices" and disinvest-
ment" are not defined.

3) No working empirical framework and definitions can be de-
vised which can make use of the information subject to
disclosure. The data can tell us little more than whether
redlining in the loose sense exists--something we already
know. Even the raw numbers of FHA loans will be incomplete,
because the majority of FHA lenders are not among the depos-
itory lending institutions covered by the Act.

To further insure the uselessness of the information, neither the Act nor the regulations provide for the collection, retrieval and processing of the millions of figures to be disclosed. Thus, even if the information were useful and a methodological framework were available, we could not retrieve and process the information. Some idea of the demand for the disclosed information may be gleaned from the experience of Chicago's largest S & L's. First Federal of Chicago has been bombarded with all of five requests so far, and Talman Federal has received one request for the information.

An Alternative Approach

There are much simpler and more direct ways than this to investigate the existence of redlining and whether it plays a role in neighborhood de

cline. Let me briefly summarize some of my hypotheses and findings. I hypothesize that:

1) The low number of private mortgage loans in certain urban
neighborhoods is due to the low demand for such loans on
the part of creditworthy buyers.

2) The high number of FHA loans in certain urban neighborhoods
is due to the high demand for owner-occupied housing by
households whose assets more properly place them in the ren-
tal market.

3) The high rate of private and public mortgage foreclosures in
certain urban neighborhoods is the result of a weak housing
market made weaker by a high level of housing construction in
the suburbs.

4) Private and public lenders are the victims, rather than the
cause, of neighborhood decay.

For the purposes of data selection and the testing of hypotheses, I would like to define three forms of redlining:

1) discriminatory redlining--the denial of private
institutional mortgage loans to conventional,
creditworthy buyers in certain neighborhoods;
2) weak housing market redlining--the denial of pri-
vate institutional mortgage loans in certain neigh-
borhoods because of the absence of conventional,
creditworthy buyers;

3) collapsed housing market redlining--the denial of
private institutional mortgage loans and FHA loans
in certain neighborhoods because of the absence of
conventional and FHA creditworthy buyers.

Further, I define a "conventional" buyer as a buyer whose available assets enable him to make a downpayment exceeding 20 percent of the purchase price. An "FHA creditworthy" buyer is a buyer whose available assets for a downpayment are between three and twenty percent of the purchase price.

One of my sources of data is the "1975 Residential Sales Data," which reports the address, type of mortgage, loan value, purchase price, and property characteristics for 6,300 sales of one-to-four unit homes in Chicago during 1975 as reported by the members of the Society of Real Estate Appraisers. These sales were address-coded to 830 census tracts, 76 community areas, and five racial zones in Chicago. The sample of 2,240 FHA mortgages and 4,060

gages and 17,970 conventional mortgages issued in Chicago in 1975. For the City as a whole, there was 57 sales per 1,000 homes in 1975, with 16 percent of the loans FHA... The average loan-to-vale ratio was 74 percent for conventional loans and 94 percent for FHA loans; and the average downpayment was $9,700 for conventional loans, and $700 for FHA loans; and the average sale price was $37,700 for conventional sales and $20,800 for FHA sales. Sales per 1,000 homes reached a low of only 6 in the inner zone of the older black ghetto, and a high of 65 in the outlying white zone. FHA loans accounted for half of the loans made in the older black ghetto, threefourths of the loans in the racial transition zone, and one percent of the loans in the outlying white zone.

In terms of my three definitions of redlining, twelve out of the 76 communities (all in the older black ghetto) mentioned had virtually no conventional or FHA sales; and one community had FHA loans, but virtually no conventional loans. Pullman, which is in the racial transition zone, registered 39 FHA loans with an average downpayment of 2 percent of value, and 9 conventional loans with an average downpayment of 40 percent.

Examination of sales and loan-to-value ratios for each of the 830 census tracts did not yield any evidence of discriminatory redlining. It was assumed that a creditworthy buyer rejected by conventional lenders would be forced to purchase a home with an FHA loan, and that it would be in his interest to make the equivalent of a conventional downpayment. Not a single one of the 2,200 FHA sales reported, however, showed a downpayment exceeding 20 percent of the value.

One may raise the objection that such an applicant might wish to make a downpayment somewhere between what his true assets enable him to make, and the minimum 3 percent required by the FHA. This possibility can, however, easily be explored by examining the statement of assets and liabilities that is a required part of the mortgagee's application (FHA Form No. 2900). I put this

question to officials in charge of examining the credit information of FHA home applicants, and I verfied the answers with the Director of the Chicago Area HUD office. These officials conceded that barely half the applicants could qualify for the minimum 3 percent downpayment, and that virtually none had sufficient assets to make a downpayment exceeding 20 percent of the value. Although the Area Director did not have first hand information of the precise statistics, one official contended that he would be surprised if more than one applicant a year, among the tens of thousands who apply for such loans in the Northern Illinois District, had sufficient assets to raise a downpayment exceeding 20 percent of the value. (It would take about 10 hours for a GAO examiner to verify the credit data for 1975).

Conclusions

I interpret these data to mean that, in the Chicago Metropolitan area, with 7 million people, perhaps one qualified applicant per year is denied a conventional loan and is obliged to turn to FHA for a mortgage. How do we reconcile this with the finding of Congress that some conventional lenders do not make loans in cases where buyers are creditworthy and the properties are sound? FHA is insuring a massive number of buyers with no more downpayment than the equivalent of a security rent deposit and with insufficient assets to maintain their homes. No one has ever asked why, if there indeed are creditworthy buyers being turned down by conventional lenders, they do not avail themselves of an' FHA-insured loan. .There is a refusal to face the fact that a permissive FHA policy is the only means presently available of clearing