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An article in the Journal of Money, Credit, and Banking, co-authored by Stanley D. Longhofer, a Federal Reserve Bank of Cleveland research economist, looks at the theoretical justifications for government intervention in the housing market and examines the various types of federal programs for increasing home ownership. The authors conclude that channeling funds to community development banks is an effective way for the government to address the problems that prevent poor people and minorities from buying homes.
The government intervenes in the housing market to overcome the effects of wealth inequality, to ease the difficulties lenders often face in getting reliable information about poor and inner-city neighborhoods, and to combat bigotry in mortgage lending. "A properly designed system of assistance for community development banks," say the authors, would have the best potential for solving the problems targeted by government intervention.
Community development banks, the authors note, are "a natural focal point for providing financial and business education for their communities, and they may have extra incentives to do so as stakeholders in their neighborhoods." Moreover, unlike government agencies, community development banks have a financial incentive for properly allocating funds, provided that the banks are also attracting uninsured investments from other sources. In addition, community development banks mitigate the effects of bigotry by providing an alternative source of lending funds.
In light of these and other advantages of community development banks, the authors conclude that "subsidizing community development banks to fill specialized needs and target assistance to specific neighborhoods will be more effective than mandating procedural requirements for existing banks."
The article "Housing-Finance Intervention and Private Incentives: Helping Minorities and the Poor" appeared in the Journal of Money, Credit, and Banking (August 1994, part 2). For a copy, contact Stanley D. Longhofer, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101-1387.
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