The clampdown is coming at a particularly awkward time.
A group of veteran bankers and private equity investors in Texas spotted an opportunity as the economy reeled a decade ago. They raised $1 billion, bought up hobbled lenders, and called their new bank Cadence.
But by 2017 its 13 branches across Houston were only in majority White neighborhoods, according to a Justice Department lawsuit accusing the firm in August of redlining. The bank quickly settled for $8.5 million as executives put the last touches on their next deal: a $2.8 billion sale to BancorpSouth.
A US crackdown on redlining is coming — and at a particularly awkward time for the financial industry. Not only is public awareness of racial inequity heightened, bankers are also pressing government authorities to approve mergers and acquisitions at one of the fastest clips since the 2008 financial crisis. To get their paydays linked to those deals, more executives may feel pressure to resolve government claims.
“Banks are apt to settle to clear a pathway,” said Richard Horn, a former senior counsel in the Consumer Financial Protection Bureau. “If they’re looking to get approval from their banking regulator for a particular activity — a merger or something else — it’s not good to have pending fair-lending allegations.”
Unlike a century ago, redlining is no longer the story of racist maps drawn by federal authorities that kept minorities from getting mortgages. It’s about finance executives chasing mortgage business in White communities while neglecting Black and Hispanic people nearby. Last year, the bureau filed a redlining lawsuit against one of Horn’s clients, Townstone Financial, which the mortgage broker is fighting.
But Cadence’s leaders arrived at a different decision. Their settlement is part of a pattern in recent years of lenders wrapping up redlining probes as they finished deals.
“Following a Houston-based bank acquisition in mid-2012, we recognized that the mortgage lending program was not where we wanted it to be,” said Paul B. Murphy, Jr., who runs Cadence Bancorp. After making improvements, “the percentage of our Houston residential mortgage lending in minority neighborhoods has reached 50% or above, exceeding our peers. We are pleased with our results today.”
‘Culture of integrity’
In September 2015, Hudson City Savings Bank agreed to pay $27 million after the CFPB and Justice Department accused the lender of avoiding New York’s most Black and Hispanic neighborhoods. Its branches, loan officers, mortgage brokers and marketing efforts skirted those areas by essentially pursuing business in a semi-circle around the neighborhoods, the government alleged. Weeks later, when M&T Bank Corp. completed its acquisition of Hudson City, a statement from executives ignored the suit entirely, and instead pledged to continue “the same character and culture of integrity and customer care.”
Andre Perry, a senior fellow who researches race at the Brookings Metropolitan Policy Program, identified a way for lenders to avoid redlining settlements. “That’s through inclusion,” he said. “You’ll avoid the protests, you’ll avoid the pain.”
Even so, the sum of $27 million isn’t a major burden for much of the finance industry. Top Hudson City executives were collectively slated to receive significantly more — between $3.7 million and $20.1 million apiece — as part of the takeover, according to a proposal sent to shareholders. Something unusual seemed to be happening when the Justice Department sued KleinBank in early 2017 for redlining in Minnesota: The lender fought back. It told a judge to dismiss the complaint because “the Department of Justice lacks the authority to direct a modest-sized community bank to expand into all of a major metropolitan area it has never served nor sought to serve.”
The lender settled a year later, weeks before a merger announcement with Indiana’s Old National Bancorp that touted Klein’s “strong community engagement.” This October, a lawsuit from the nonprofit Fair Housing Center of Central Indiana accused Old National of avoiding Black mortgage borrowers.
Old National announced a merger of equals with First Midwest Bancorp this June. A spokesperson for Old National said the lender “strongly and categorically denies the claims” but could not comment further on pending litigation.
The biggest fair-housing settlements predate Donald Trump’s time in the White House. Bank of America Corp.’s $335 million deal in 2011 and Wells Fargo & Co.’s $175 million agreement a year later settled accusations that Black and Hispanic borrowers had been steered into subprime loans — a practice academics sometimes call reverse redlining.
On Friday, when regulators announced that Trustmark National Bank had settled accusations of redlining in Memphis, Tennessee, Attorney General Merrick Garland said to expect more cases like it. Other officials said the sweep could also target the use of algorithms that violate fair housing laws.
“There’s this narrative that things have gotten better, we’ve made so much ‘progress,’ and we really haven’t,” said Elizabeth Korver-Glenn, who wrote “Race Brokers” and researches housing segregation at the University of New Mexico. Even if modern redlining looks different than its predecessor a century ago, she said, the system remains tilted.
Sometimes banks agree to settlements before they make acquisitions, not just before they get acquired. In June 2019, First Merchants settled a redlining lawsuit from the Justice Department that accused the lender of avoiding Black neighborhoods in Indianapolis. Within months, the bank finalized a merger with MBT Financial Corp. There was no response to messages sent to the bank. BancorpSouth, which is buying Cadence, spent more than $10 million in 2016 to settle accusations that it discriminated against Black applicants in Memphis. Regulators said they sent undercover testers to ask about getting a loan and found they were treated worse than White testers with similar credit.
When BancorpSouth completes the takeover, five Cadence executives are due to share more than $26 million, according to a regulatory filing. Redlining settlements tend to begin with pledges from banks to follow fair housing laws. That doesn’t satisfy Richard Rothstein, who wrote “The Color of Law,” a 2017 history of segregation. People aren’t allowed to remedy bad behavior “by simply saying, ‘We’re not going to do it again,’” he said. “In this case, that’s what we’re accepting.” Redlining has “permanent effects that need remedies that are as explicit as the violations in the first place,” he added. “I don’t expect to see them until there’s a new civil rights movement.”
S&P CoreLogic Case-Shiller also shows top three metros with the highest price gains.
The S&P CoreLogic Case-Shiller latest index found that home prices across the US climbed at a 19.8% annual rate in August – the same as the month before.
“While demand remains strong and buyers are still generally paying more for homes than the asking price, the slowing acceleration in home prices suggests that buyer fatigue is setting in, particularly among higher-priced homes where the acceleration in price growth from the previous month has been larger compared to low tier homes,” said CoreLogic deputy chief economist Selma Hepp.
The 10-City Composite annual gain fell from 19.2% in July to 18.6% in August. The 20-City Composite year-over-year gain dropped from 20% to 19.7%.
Hepp said that a surge in investor demand this summer had amplified the strong demand among traditional homebuyers.
“Together, demand pressures continue to drive home price growth higher despite some early signs of buyer fatigue and slight improvements in the availability of for-sale homes,” she said. “And while strong home price appreciation rates are narrowing the pool of buyers, particularly first-time buyers, the depth of the supply and demand imbalance and robust demand among higher-income earners will continue to push prices higher.”
Phoenix, San Diego, and Tampa posted the highest annual increases among the 20 cities in August. Phoenix was at the top with a 33.3% price gain, San Diego followed at 26.2%, and Tampa reported a 25.9% increase. Eight of the 20 cities experienced higher price increases in August than in July.
New data reveals rate hits nine-month low.
The number of bidding wars across the US has dropped to a nine-month low, according to real estate firm Redfin.
Figures from Redfin revealed that 58.9% of home offers written by the firm’s agents in September 2021 faced competition – down from a revised rate of 60.8% in August and a peak of 74.3% in April.
The data indicates that, while competition has been easing due to the housing market cooling from the typical seasonal slowdown, homes are still selling faster than usual for this time of year. Redfin pointed to the ongoing shortage of homes for sale as fueling the demand, with new listings falling 9% year-over-year in September.
“It’s typical to see a decline in competition as families head back to school and the weather cools down,” said Redfin deputy chief economist Taylor Marr. “Buyers also aren’t having to offer as much above the asking price as they were in the spring, when competition in the housing market was peaking. As mortgage rates continue to rise, we can expect bidding wars to keep slowing.”
The real estate firm also revealed that Raleigh in North Carolina was the housing market with the highest bidding-war rate of the 45 US metropolitan areas it analyzed, with 73.9% of offers written by Redfin agents facing competition in September. This was followed by Boston, Mass. at 71.7% and Indianapolis, Ind. at 71.4%. Sacramento, Calif., and San Diego, Calif. rounded out the top five, with bidding-war rates of 70.5% and 70.3%, respectively.
It is the first to do so.
Citigroup Inc. became the first Wall Street bank to agree to do a deep dive into its business to see if, and how, it contributes to racial discrimination.
The audit will be conducted by attorneys at Covington & Burling LLP, Citigroup said Friday on its website. The bank said the audit will focus on its 2020 commitment to dedicate $1 billion toward initiatives it hoped would help close the persistent racial wealth gap in the US, where the average net worth of a white family is nearly ten times higher than that of a Black family.
While Citigroup’s plan follows a similar move from BlackRock Inc. earlier this year, it breaks with its banking peers that have said racial audits are unnecessary after lenders introduced several initiatives in the past year such as investing in Black entrepreneurs and expanding credit. Calls for racial audits emerged following the racial injustice protests that swept across the US last year and President Joe Biden’s signing of an executive order to advance equality.
“Measurement and transparency are important components of the work we are doing to advance diversity, equity and inclusion,” Edward Skyler, executive vice president at Citigroup, said in the post. “We’re demonstrating our ongoing support for measurement and transparency by committing to conduct a racial equity audit.
Citigroup investors pressed the bank during its annual shareholder meeting to conduct an audit. The lender had even gone as far as asking regulators to block the resolution; its appeal was denied. Executives then urged shareholders to vote against the proposal, arguing the firm had already enacted measures to address racial inequities, including the wealth gap. While the proposal ultimately failed, it did garner approval from about one third of shareholders.
The audits are conducted by third-party groups, which analyze companies’ business models -- from policies to products and services -- to determine whether they cause, reinforce or perpetuate discrimination.
BlackRock said it will perform its audit next year. Airbnb Inc. and Facebook Inc. have conducted such audits in recent years. Starbucks Corp. had also hired Covington & Burling to do its audit.
SOC Investment Group, previously called CtW Investment Group, had filed the resolution to Citigroup, saying that the lender has a “conflicted history” addressing racial injustice. In 2019, the Treasury department’s Office of the Comptroller of Currency assessed a $25 million fine against the bank for failing to offer all eligible customers mortgage discounts and credits, which adversely impacted people of color.
SOC also said Citigroup’s minimum fees and daily balances for checking accounts disproportionately impact people of color and inhibits their wealth creation.
“By agreeing to a third-party racial equity audit, Citi is taking a critical step toward confronting centuries-old harms against marginalized communities that are still present to this day,” Dieter Waizenegger, executive director of SOC, said in the post. “We look forward to partnering with Citi to address these concerns to pave the way for a financial industry that understands entrenched racial inequity, changes the way it conducts business, and invests in the communities it serves to close the racial wealth gap.”
Citigroup has also been vocal about its desire to increase Black representation among its management ranks. The bank has said it hopes to boost the number of Black employees in the assistant vice president to managing director levels to 8% in the US by the end of the year, up from 6% in 2018.
Overall, Black employees made up roughly 10% of Citigroup’s US workforce in 2020. They make up about 7.6% of the top three ranks within the company, according to data compiled for regulators.
A cross-government effort has been introduced.
The Justice Department announced Friday a cross-government effort to investigate and prosecute redlining, the practice of banks discriminating against racial minorities or certain neighborhoods. It is the first major expansion of redlining investigations since the Obama administration.
As part of the effort, the Justice Department as well as the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency also announced a new case against Trustmark Bank for its treatment of Black and Hispanic borrowers in Memphis, Tennessee.
Despite a half century of laws designed to combat redlining, the racist practice continues across the country and the long-term effects are still felt to this day. The average net worth of a Black family is a fraction of a typical white household, and homes found in historically redlined neighborhoods are still worth less than homes found in non-redlined communities.
“Lending discrimination runs counter to fundamental promises of our economic system,” said Attorney General Merrick Garland, in prepared remarks. “When people are denied credit simply because of their race or national origin, their ability to share in our nation’s prosperity is all but eliminated.”
Garland said the department is currently investigating several redlining cases and expects it will be opening more in the coming months.
“We will spare no resource to ensure that federal fair lending laws are vigorously enforced and that financial institutions provide equal opportunity for every American to obtain credit,” Garland said. The Justice Department effort also includes the CFPB and OCC, two of the nation’s financial regulators that are often most involved with mortgage lending. It will also involve US attorneys’ offices with local experience in these neighborhoods as well as state attorneys general.
The department will also be expanding its analysis of bank lending activities to look for usual behavior patterns.
“It’s an endemic problem that requires all hands on deck,” said CFPB Director Rohit Chopra on Friday.
While there are still cases of historical redlining - where banks exclude certain neighborhoods - the Biden administration is focusing a significant part of this effort on modern-day redlining, which can often come from the algorithms and software banks use to decide whether to approve a loan.
The CFPB will be focusing much of its effort on algorithmic redlining, Chopra said “Digital redlining may simply ingrain old forms of discrimination.”
The Trump administration largely sidelined federal efforts to investigate redlining cases. The Trump administration brought its first redlining case in 2018 - nearly two years into the administration’s tenure - and largely dismantled the Civil Rights Division run by Vanita Gupta, who under the Obama administration had tried to expand redlining investigations.
The Justice Department, CFPB and OCC reached a settlement against Trustmark National Bank on Friday that would end allegations that the bank redlined against certain neighborhoods in Memphis.
Trustmark, a bank primarily found in the South with $13 billion in assets, will be required to open a mortgage office in a majority-Black and Hispanic neighborhood within the Memphis metropolitan area as well as contribute $3.85 million toward a fund to create loan subsidies for borrowers in discriminated neighborhoods. The agreement calls for a $4 million payment to the OCC and $1 million payment to the CFPB, for a total of $5 million.
Trustmark President and CEO Duane Dewey said in a statement that the bank fully cooperated with the DOJ’s investigation to “avoid the distraction of protracted litigation.”
The discriminatory acts happened between at least 2014 and 2016, and the bank has made efforts to fix these practices, he said.
Freddie Mac releases latest statement
Mortgage rates in the US continued to climb.
The average for a 30-year loan was 3.09%, up from 3.05% last week and the highest since April 8, Freddie Mac said in a statement Thursday.
While still historically low, mortgage rates have crept up in recent weeks. Higher borrowing costs could cut into purchasing power for potential homebuyers scouring a real estate market that has run hot for more than a year.
A shortage of listings has fueled bidding wars and driven up prices during the pandemic. While more homeowners have decided to put their properties on the market, shortages of materials and labor have held back new construction.
“Even as the availability of existing homes is improving, prices remain high due to homebuyer demand and limitations on housing starts,” said Sam Khater, Freddie Mac’s chief economist. “Despite these countervailing forces, we expect the housing market to remain strong as we head into the end of the year.”
Latest survey reveals fourth consecutive week of decline
Total mortgage applications slumped 6.3% from the previous week on a seasonally adjusted basis, according to the Mortgage Bankers Association (MBA) survey for the week ending October 15. On an unadjusted basis, it went down by 6% on the Market Composite Index.
Similarly, MBA’s Refinance Index saw a 7% decrease from the previous week – 22% lower than it was the same week a year ago. This marks the fourth consecutive week of its decline as rates have increased, bringing it to the lowest recorded level since July.
“The 30-year fixed rate has increased 20 basis points over the past month and reached 3.23% last week – the highest since April 2021. The 15-year fixed rate increased to 2.54%, which is the highest since July,” said Joel Kan, associate vice president of economic and industry forecasting at the MBA.
The refinance shares of mortgage activity went down from 63.9% to 63.3% this week, while the adjustable-rate mortgage share decreased to 3.3% of total applications.
Both the seasonally adjusted and unadjusted Purchase Index also declined 5% from the previous week.
“Purchase activity was 12% lower than a year ago, within the annual comparison range that it has been over the past six weeks,” Kan said. “Insufficient housing supply and elevated home-price growth continue to limit options for would-be buyers.”
Meanwhile, the FHA share of total applications remained unchanged from 10.2% the week prior.
On the other hand, the VA share of total applications went up from 10.2% to 10.4% while the USDA share of total applications from 0.4% to 0.5%.
New home sales activity slowed during the month
Mortgage applications for new home purchases fell 16.2% year over year in September, according to data from the Mortgage Bankers Association’s latest Builder Application Survey. Month over month, applications dropped by 4% on an unadjusted basis.
MBA’s estimates show that new single-family home sales were running at a seasonally adjusted annual rate of 843,000 units in September. That is 3.5% below the August pace of 874,000 units. Unadjusted, new home sales decreased from 71,000 to 66,000 month over month.
“New home sales purchase activity was weaker in September, and the average loan size rose to another record high, as homebuilders continue to grapple with rising building materials costs and labor shortages. The survey-high average loan size of $408,522 is evidence of higher sales prices from these higher costs, as well as the shift in new construction to larger, more expensive homes,” said Joel Kan, AVP of economic and industry forecasting at MBA. “The estimated pace of new home sales decreased 3.5% last month after a strong August reading, but the two-month sales pace is at its strongest since January 2021.”
By product type, conventional loans comprised 75.1% of loan applications, FHA loans 13.9%, RHS/USDA loans 0.5%, and VA loans 10.5%. The average loan size of new homes rose from $406,922 in August to $408,522 in September.
Freddie Mac releases results of its weekly Primary Mortgage Market Survey
The 30-year fixed mortgage rate jumped to its highest point since April, Freddie Mac reported Thursday.
Freddie’s Primary Mortgage Market Survey showed that the 30-year fixed-rate home loan averaged 3.05% for the week ending October 14, up from 2.99% last week. It was 2.81% a year ago.
Freddie Mac chief economist Sam Khater said that the modest upswing was not a surprise as inflationary pressure continues to build up due to the ongoing pandemic and tightening monetary policy.
“Historically speaking, rates are still low, but many potential homebuyers are staying on the sidelines due to high home price growth,” Khater said. “Rising mortgage rates combined with growing home prices make affordability more challenging for potential homebuyers.”
The 15-year fixed-rate mortgage also increased this week, up by seven basis points to 2.30%. Last year, the 15-year mortgage rate was 2.35%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) posted a three-basis-point increase to 2.55%. A year ago at this time, it averaged 2.90%.
New polling from Fannie Mae shows consumers increasingly gloomy over housing future
An increasing number of consumers believe it’s a bad time to buy a property, with less than a third stating that market conditions are favorable for buying a home, according to Fannie Mae’s latest Home Purchase Sentiment Index (HPSI).
The survey, taken from a poll of 1,000 respondents between September 1 and September 26, shows that only 28% of consumers believe it’s a good time to buy.
By contrast, a growing share of consumers (66%) report that it is a bad time to buy a home, reflecting a three percent increase compared to the previous month.
The survey highlights the wide disparity between home buying and home-selling conditions, the latter remaining mostly flat, with a strong majority of consumers (74%) maintaining that it is a good time to sell.
However, the most notable aspect is the percentage drop of respondents who say it is a good time to buy a home, falling from 32% in August to 28% last month - the lowest level since Fannie Mae began the monthly survey in June 2010.
Fannie Mae’s deputy chief economist Mark Palim said the drop to 28% was “the worst it's ever been”, adding that it reflected concerns about high property prices, which have shot up to an all-time high of 20% year over year.
Speaking to MPA, he said: “[The 28%] is the lowest it’s ever been. A year ago, in September 2020, it was at 54%, so it’s at an all-time [low], going back to when we started the survey.
“Home price is a major driver of that sentiment. During that time, if we think over the summer, we've had releases of different home price indices that have had around 19% year over year changes. That's pretty remarkable.”
Homeowners and renters were asked more than 100 questions used to track attitudinal shifts, six of which were compiled for the HPSI survey. Year over year, the full index is down 6.5 points, while the net share of those who said it is a good time to buy also decreased seven percentage points, month over month.
Palim said the slump in home building caused by a mixture of high construction costs, supply and labor shortages as well as zoning restrictions were affecting one specific sector.
He said: “When the supply becomes constricted, it’s the more moderately priced homes that are affected by price appreciation because that's where the supply’s the tightest.”
House price increases have a knock-on effect on people with lower incomes, as they are being edged out of the market due to the severe lack of affordable homes on the market, he explained.
“People move down, as they no longer can afford a certain neighborhood they were targeting. They go to a more modest neighborhood, but (that means) the people who would naturally be starting out in that most modest neighborhood have been pushed out,” he added.
Among the survey’s other takeaways is a suggestion that respondents were caught unawares when rates shot up nine points the week commencing September 20.
The data shows there was an increase in the share of respondents who say mortgage rates will go down in the coming year, increasing from six to eight percent, while there was a slight two percent drop in the percentage of people who expect rates to rise.
“They didn't see the rate increase coming, but neither did the bond market,” Palim remarked.
Respondents are however more optimistic about their job prospects, with 81% of those polled saying they are not concerned about losing their job, representing a small one percent drop from the previous month and reflecting a positive mood overall about the shape of the economy, he said.
Palim’s colleague Doug Duncan, Fannie Mae’s senior vice president and chief economist, had earlier said the data could be a reflection of respondents’ “generally lower incomes and their observation that the availability of affordable homes is lacking”.
He pointed out that although there was “a softening in consumers’ expectations that home prices will continue to increase”, in his view further home price appreciation – including low levels of inventory and low interest rates – will continue.