Mortgage Lending Patterns in Detroit from 1960 to 1975: a Comparative Study of Commercial Banks, Mortgage Companies, and Savings and Loans.

Abstract

The issue of redlining of inner city neighborhoods has been of concern since the early 1970's. Studies based on lending activity have thrown little light on the issue because they were unable to separate supply and dem and effects. Mortgage application studies have successfully isolated lenders' treatment of applications from dem and effects, but because of their restriction to a small subset of possible lenders, these studies failed to provide information on the structure of local mortgage markets. This study uses mortgage activity data in Detroit to focus more explicitly on the structure of local mortgage markets. Several features distinguish this analysis from earlier studies. First, it uses a comparative approach, focusing on mortgage companies, commercial banks, and savings and loans. The model specification includes price and income as dummy variables to allow each institution to follow different non-linear patterns. The study covers the 1960 to 1975 time period, allowing an examination of the effects of FHA's 1968 inner city mortgage programs on the three institutions. The differential reactions of the three institutions to these programs provides important insights into lender behavior and provides guidance for future policies to deal with the inner city finance problem. FHA's inner city mortgage programs clearly increased the number of mortgages written in inner city neighborhoods. However, mortgage companies were responsible for all of the increase. Savings and loans were most active at the high end of the housing market over the whole study period, though among lower priced Census tracts, they were more active in non-white tracts than in white ones. Commercial banks also showed some preference for the top. FHA loans have been associated with redlining because of the ab and onment problems that resulted from the 1968 FHA programs. However, the lesson of the 1968 programs is not that FHA destroys neighborhoods, but that indiscriminate lending destroys neighborhoods. The answer is to ensure that FHA follows strict underwriting st and ards in the inner city. The fact that savings and loans and commercial banks primarily serve the top of the market is of little concern, if they do so without regard to race.