Landmark housing discrimination settlement with Fannie Mae sets key precedent

(Reuters) - One of the most comprehensive national investigations of housing discrimination conducted under federal civil rights laws led to a landmark $53 million settlement on Feb. 7 between government-backed mortgage company Fannie Mae and fair housing organizations.

The agreement resolves a six-year-old lawsuit alleging Fannie Mae marketed and maintained foreclosed homes in predominantly white neighborhoods, while consistently allowing homes that the government-sponsored mortgage provider owns in similar majority-Black and Latino communities to fall into disrepair. The case establishes for the first time that the Fair Housing Act applies to the upkeep and marketing of foreclosed, lender-owned properties.

The complaint by the National Fair Housing Alliance and 20 other local fair housing groups was based on a four-year investigation, spanning 39 metropolitan areas and more than 2,000 properties. The investigation was conducted between 2011-2015 in Memphis; New Orleans; Chicago; Las Vegas; Prince George’s County, Maryland, and other locations across the country.

It details an overlooked part of a set of practices – like racially-disparate property appraisals – that restrict lending and housing access for families of color, deepening the racial wealth gap and contributing to state-sponsored segregation.

The investigative findings and settlement lend support to arguments that the federal government should take a more active role investigating and prosecuting discriminatory practices in housing and in funding more private-sector enforcement. Grants from the Department of Housing and Urban Development supported the underlying investigation, but both HUD and the Department of Justice have been historically reluctant to ramp up their use of the government’s most effective tools against housing discrimination – field “testing” to uncover biased practices and pattern-and-practice lawsuits. Testing refers to the department using people who pose as customers, buyers and borrowers to gather information about compliance with civil rights laws.

Amy Nelson, executive director of the Fair Housing Center of Central Indiana, told me the settlement funds will support fair housing programs, including down-payment assistance and renovations.

I asked whether there's a link between the practices uncovered by the recent investigation and other -- intentionally or systemic -- discriminatory processes by government officials, lenders and actors in the housing market.

“They really are all tied together,” Nelson said. “It’s just different forms of extremely harmful discrimination that shuts Black people out of home-buying, whether that’s in access to certain neighborhoods, receiving a discriminatory appraisal in refinancing or selling, or having a foreclosure next door not being marketed or maintained -- which impacts the value of their own homes.”

A HUD spokesperson pointed to a Feb. 9 statement applauding the settlement and urging mortgage lenders to “take steps to avoid" discrimination in their portfolios of foreclosed homes. The Department of Justice didn’t respond to a request for comment.

A Fannie Mae spokesperson said the settlement resolves “legacy allegations,” adding that they require “the same property maintenance standards in all neighborhoods.”

Fannie Mae has made changes in response to the litigation, including raising standards for property maintenance and inspection, especially in majority non-white communities, according to the settlement agreement. The settlement doesn’t include admissions of liability.

Of course, 2016 is hardly the distant past. And the complaint, which was only resolved this week, alleged that the apparent violations were “ongoing,” and that Fannie Mae didn’t change its behavior when presented with initial findings. (The National Fair Housing Alliance also has pending lawsuits with nearly-identical allegations against some of the largest U.S. banks.)

Nonetheless, it is instructive to consider “legacy” here.

The federal government famously and officially adopted “redlining” policies -- a program to segregate housing by subsidizing "whites-only" developments – in the 1930s, 40s and 50s, as National Public Radio reported in May 2017.

A growing body of work has documented the continuing legacy and evolution of those practices, including scholarship by Princeton University professor Keeanga-Yamahtta Taylor and Andre Perry, a senior fellow at the Brookings Institution.

The investigation that led to the Fannie Mae settlement is linked to the 2008 mortgage crisis, which is widely recognized to have hit people of color harder because of discriminatory practices in homebuying. (Fannie Mae became the owner of a significant number of foreclosed properties in the wake of the crisis, according to the complaint.)

It relied on Fannie Mae’s own, industry-standard maintenance norms, according to the complaint.

Inspections systematically found more unsecured doors, broken windows, visible trash and other maintenance deficiencies at foreclosed homes in minority neighborhoods than in similar majority-white neighborhoods. Nationwide, 24% of Fannie’s properties in communities of color had 10 or more deficiencies, compared with just 6% in predominantly white neighborhoods. The disparities persisted even when controlling for non-racial factors, like property age and crime statistics.

The settlement isn’t an admission, but there’s plenty of recent evidence that discriminatory practices remain pervasive in homebuying.

An analysis by the Federal Housing Finance Agency in December last year found that appraisers routinely use overt references to race and ethnicity in property descriptions that are potentially unlawful. And a federally commissioned report by the National Fair Housing Alliance released on Jan. 19 described the evidence of discrimination in appraisals from several recent studies as “stunning and disturbing.”

Last month, the Justice Department reached a settlement with the Housing Authority of the Town of Lone Wolf, Oklahoma, after conducting bias testing. Employees allegedly told white testers that units were available and showed them vacant apartments, but falsely told Black testers there were no vacancies.

The Department filed a similar lawsuit on Jan. 25, against the Housing Authority of Ashland, Alabama. That case alleges a pattern-and-practice strikingly similar to those seen in past eras of state-sanctioned segregation: Officials have allegedly been steering Black applicants away from three overwhelmingly white low-income housing complexes and steering white applicants away from disproportionately Black ones, according to the DOJ.

Because of that de facto segregation policy, not a single Black person has even applied to a particular, mostly white complex in more than six years, the DOJ said.

Lawyers for Ashland and Housing Authority representatives didn’t respond to requests for comment. The case remains pending.

The investigation underlying the Fannie Mae settlement is only further evidence of the evolving nature of discriminatory practices in homebuying. The federal government could stand to do much more enforcement on this end, given the importance of home-ownership to wealth-building and the social benefits of living in diverse communities.

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