For seasoned real estate professionals, the subprime mortgage crisis still casts a long shadow. It was so disastrous for Californians that its effects are still being studied and argued in courts today.

Since 2009, local and national fair housing advocates have studied the fallout of the foreclosure crisis within communities of color and within predominantly white neighborhoods and have noticed some stark differences between neighborhoods, differences which they claim violate the Federal Fair Housing Act (FFHA).

Such disparate treatment prompted fair housing groups to file a discrimination lawsuit in 2016 against the government-sponsored enterprise and secondary mortgage market holder Fannie Mae.

Fannie Mae had maintained foreclosed properties it was marketing for sale in white neighborhoods differently from foreclosed properties located in predominantly Black and Latinx neighborhoods, according to the lawsuit.

Now, fair housing organizations will have more revenue to double down on outreach and assistance to their communities. Fannie Mae settled the case for a historic $53 million in February 2022, according to the settlement agreement.

$35 million of that sum will go directly towards activities, outreach and assistance to promote fair housing in metropolitan areas nationwide, with California’s Bay Area receiving $1.5 million, according to the San Francisco Chronicle.

The settlement agreement was the first federal court ruling to determine that foreclosed properties are subject to fair housing laws, according to the National Fair Housing Alliance (NFHA).

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Disparate impact claim sticks

Between 2011 and 2015, local and federal fair housing organizations collected data on over 2,300 foreclosures in 38 metropolitan areas across the U.S.

The data indicated Fannie Mae discriminated between neighborhoods based on racial composition, according to the national fair housing organization’s lawsuit announcement.

The fallout from the subprime mortgage crisis granted Fannie Mae ownership of a vast collection of foreclosed properties. This type of mortgage holder-owned, foreclosed property is referred to as real estate owned (REO) property. [See RPI e-book Real Estate Economics, Chapter 5.1]

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On becoming REO property, the mortgage holder assumes all duties and responsibilities of ownership, including upholding ordinary maintenance. These maintenance activities help with the marketing of the home, assuring the property will receive the highest and best price on the open market while also supporting neighborhood stabilization.

However, the fair housing organizations maintain in their lawsuit that REO property owned by Fannie Mae located in predominantly white neighborhoods were far more likely to have their properties free of trash, debris, overgrown grass, vines and weeds, and have their doors and windows secured than REO property located in communities of color.

On the contrary, the properties in majority Black/Latinx communities were much more likely to be left in a state of disrepair. These neighborhood blights courtesy of Fannie Mae’s negligence further depleted home values of neighboring owners, contributing to the widening wealth gap in the U.S., according to the lawsuit’s claims.

The national statistics collected and analyzed by the fair housing organizations found:

  • 53% of Fannie Mae REO properties in white neighborhoods had fewer than five deficiencies, while 24% of Fannie Mae REO properties in neighborhoods of color had fewer than five deficiencies; and
  • 24% of Fannie Mae REO properties in neighborhoods of color had ten or more deficiencies, while only 7% of Fannie Mae REO properties in predominantly white neighborhoods had ten or more deficiencies.

Fannie Mae initially sought to dismiss the claims, and was partially successful in doing so, convincing a federal district court they did not hold discriminatory motives. However, Fannie Mae was unable to entirely dismiss the fair housing groups’ claims that a disparate impact occurred to the communities, according to the 2019 decision.

Despite the large payout, Fannie Mae’s settlement does not contain any admission of wrongdoing.

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Persistent wealth gaps and inequities

The racial homeownership gap today is as wide as it was in the 1960s, before the FFHA was signed into law.

Today, the homeownership rate is:

  • 63% for white households in California and 74% nationwide;
  • 44% for Latinx households in California and 49% nationwide; and
  • 37% for Black households in California and 45% nationwide, according to the U.S. Census Bureau.

Segregation laws and discriminatory government policies such as redlining historically prevented wealth accumulation for people of color in the U.S. and in California. Widespread discrimination of the past affects generational wealth today.

In addition to historical reasons for low homeownership rates among racial groups, research analyzing racial inequities in homeownership presents a complex and multi-faceted view of how these gaps emerged and persist. Some of the explanations for the gap include household formation patterns, financial literacy, access to credit, household income, geographic location, down payment assistance from parents and implicit and explicit biases, to name a few of the possibilities, according to related research.

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Perhaps most significantly, a shortage of available low-income housing has exacerbated the factors already affecting homeownership rates. In recent years, reductions in both for-sale inventory and new residential construction has created a significant supply-and-demand imbalance. These market conditions result in rising home prices, an event which firmly took hold in 2021.

In 2022, rising mortgage interest rates squeeze prospective buyers even further, especially first-time homebuyers who are frequently cost-burdened through renting. Paying out more than 30% of a household’s monthly income for rent affects a prospective buyer’s ability to save up for a down payment. Simultaneously, rising inflation, supply chain disruptions and a less-than-ideal jobs market further diminish wages and savings.

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Standardized practices ensure equal treatment

Historical, social, economic and personal factors all intersect in myriad, complicated ways. The effects of these synthesized factors contribute to different homeownership rates and home values between racial groups.

Communities of color are affected by compounding forces which affect the community’s ability to financially invest in itself and pass that wealth down to the next generation. As the lawsuit against Fannie Mae demonstrates, some of those forces in question are the REO properties for which Fannie Mae holds responsibility of maintaining, which they did not tend to do as proficiently in communities of color than in white neighborhoods.

Now, with more funding thanks to Fannie Mae’s settlement, these communities will have additional support, resources and outreach to help close that persistent and complicated homeownership gap. At the same time, Fannie Mae prides itself on improving housing affordability and racial equity, and is putting that goal into action, according to their statements on social responsibility.

Fannie Mae defended themselves adequately enough to convince the court they did not have intentional motives to discriminate. However, they were unable to dismiss the claims the fair housing groups presented, since evidence pointed to a disparate impact, regardless of motive.

Thus, the best lesson for real estate professionals through this case is to treat all people — including their properties and neighborhoods — the same with a standardized approach. Preferential or differential treatment is inherently risky, so keeping practices standardized and identical is optimal for maintaining fair housing compliance.

Related Video: Different Treatment is Discrimination

Click here for more information on differential treatment under the Fair Housing Act.

Want to learn more about the history and forecast of REO property and home sales in California? Click the image below to download the RPI book cited in this article.