Redlining and FHA Underwriting in the Wake of the Great Depression
“Ten Things Your Child Should Know” and “Stories about Black History”
Redlining and FHA Underwriting in the Wake of the Great Depression
Homeownership is one of the greatest ways to generate wealth in our society.
The federal government provided powerful support for millions of people who experienced difficulties holding on to their homes during the Great Depression. While there were African Americans who benefited from these efforts, the programs were not rolled out equally and were often very racist.
The goals and efforts were similar to housing goals of today.
For instance:
“FHA mortgage insurance provides lenders with protection against losses if a property owner defaults on their mortgage. The lenders bear less risk because FHA will pay a claim to the lender for the unpaid principal balance of a defaulted mortgage.
Loans must meet certain requirements established by FHA to qualify for insurance. (Department of Housing and Urban Development)
In 1933, the Home Owner’s Loan Corporation (HOLC) was created, to fulfill the immediate need in the wake of the Great Depression and shortly thereafter, in 1934, the Federal Housing Administration (FHA) was created as a part of the National Housing Act on June 27, 1934. (The Federal Housing Administration, later, became a part of the Department of Housing and Urban Development’s Office of Housing, in 1965.)
Access to credit and small business investments have made the difference for many people who have had these advantages.
Harry S. Truman’s Statement
Harry S. Truman best summed up the impact of the Home Owner’s Loan Corporation in his statement, delivered March 9, 1950, on the “Record of the Home Owner’s Loan Corporation.”
“THIS OCCASION marks another step in the successful completion of the work of the Home Owners' Loan Corporation. It has already paid off the last of its $3,500 million (or 3,500,000,0000) of bonded indebtedness. It is now making its first repayment, of $26 million, to the United States Treasury on the $200 million advanced by the Government in 1933 as capital stock.
“The Home Owners' Loan Act was one of the emergency measures passed during the first days of the Democratic administration in 1933. Foreclosures on city homes were then running at the rate of 1,000 every day.
“In 3 years the HOLC refunded the overdue mortgages of more than 1 million families with long-term loans at lower interest rates. These loans, with later advances, amounted to nearly $3 1/2 billion.
“Not only did these funds save families from foreclosure. At the same time, they enabled banks, insurance companies, savings and loan associations and other real estate investors to exchange defaulted mortgages for $2 3/4 billion in cash and Government bonds. This new life blood saved many hundreds of financial institutions--permitting them to pay off their depositors or investors as necessary and to remain in business. (We helped to save banks and financial institutions.)
“Furthermore, the HOLC program aided city and town governments in meeting their payrolls and keeping up their essential services. As payment for the overdue taxes of HOLC borrowers, local governments received nearly half a billion dollars in less than 3 years. (We helped to sure up local governments with tax dollars that replaced lost revenue from unpaid local taxes.)
“In all these ways the HOLC program was an outstanding example of the intelligent investment of public funds to meet urgent depression needs--helping to save homes, businesses, and local governments from the disastrous effects of widespread unemployment and loss of income.
“The families whose homes were saved were encouraged to hold on to their properties and repay their loans. (This support directly helped individuals keep their homes and some were able to develop wealth, overtime, as a result of their homes appreciating in value.)
As mentioned above, this helped many families develop wealth over time, as their homes increased in value and they were able to pass on those benefits to their children (i.e., using the equity to pay for college, passing on the value of the home in their estates when they passed away, selling the homes eventually for profits when the housing market bounced back, etc.)
This support for housing, family stability and eventual wealth was not distributed equally and often targeted African Americans for disinvestment and designated their neighborhoods as hazardous for development. The ways in which the housing apparatus disinvested in Black neighborhoods and Black home ownership, and the mindsets that went into these efforts, are well-documented.
Redlining
“Redlining” refers to the practice whereby lending institutions refused to offer home loans in certain neighborhoods, based on the income, racial or ethnic composition of the area. The term “redlining” stems from some lenders' practice of using a red pencil to outline such areas. (Office of the Comptroller of the Currency, March 2014)
As noted in House Resolution 829, February 4, 2020:
“Federal Government redlining provided the foundation and legal impetus for the racially discriminatory housing practices principally responsible for a disparity in housing wealth;”
“….redlining used the authority of the Federal Government and leveraged the borrowing power of that Government to reinforce racially discriminatory incentive structures in the housing market that substantially contributed to the persistent segregation still seen today;
FHA Instructions
Underwriting Manual: Underwriting and Valuation Procedure Under Title II - Federal Housing Administration
1938
The practices used, and mindsets behind these practices, can be read in the February 1938 Federal Housing Administration’s Underwriting Manual.
The Underwriting Manual provided instructions for….
Underwriting and Valuation Procedure Under Title II of the National Housing Act
For example, pricing a residential property vs. competitive locations
“Similarity of price range does not provide a basis for such comparisons if certain racial aspects render the locations actually noncompetitive.”
Protection from “Adverse Influences”
“This feature has a total weight of 20 points, which indicates it is one of the most important features in the Rating of Location. Protection from Adverse Influences is concerned with more than zoning and deed restrictions. These are of great importance, but they do no represent all of the protection which is or may be afforded a location. Where little or no protection is provided from adverse influences, the Valuator must not hesitate to make a reject rating of the feature.
➤The Federal Government supported the use of physical barriers to separate Americans of different races, namely African Americans from white Americans.
“…position of a location may afford reliable protection from adverse influences. If a location lies in the middle of an area well developed with a uniform type of residential properties, and if the location is away from main arteries which would logically be used for business purposes, probability of a change in type, use, or occupancy of properties at this location is remote. The degree of immunity offered to a location because of its geographical position within the city is to be considered. Natural or artificially established barriers will prove effective in protecting a neighborhood and the locations within it from adverse influences. Usually the protection from adverse influences afforded by these means includes prevention of the infiltration of business and industrial useless, lower class occupancy, and inharmonious racial groups. A location close to a public park or area of similar nature is usually well protected from infiltration of business and lower social occupancy coming from that direction. Hills and ravines and other peculiarities of topography often make encroachment of inharmonious uses so difficult that protection is afforded. A high speed traffic artery or a wide street parkway may present the expansion of inharmonious uses to a location on the opposite side of the street. However, if a high speed traffic artery passes directly through a desirable neighborhood area with similar development on each side of the artery, the noise and attendant danger constitute an adverse influence, rather than a protection.
So Federal Government workers were actually looking for and supporting the use of physical barriers to separate the races in the 1940s, 1950s and earlier—add that to the Jim Crow laws that were passed throughout the South, to public school segregation throughout the country, to sustained lynchings of African Americans throughout many places in the country, to the deliberate destruction of entire communities, to unfair hiring practices and discrimination, to violent voter suppression, to vulgar and negative stereotypes depicted in the news media and in Hollywood, to slavery—and you still had people saying that Black people ought to pull themselves up and stand on their own, while white people were getting supported all along.
© Copyright 2020 Danita Smith, Red and Black Ink, LLC
House Resolution 829
Resolved, That the House of Representatives acknowledges—
(1) the history and lasting impact of the Federal Government-created problem of redlining; and
(2) that the Federal Government has a responsibility to take any and all necessary affirmative actions to ameliorate the direct negative impacts of redlining. which was referred to the Committee on Financial Services
References:
Community Reinvestment Act, Fact Sheet. https://www.occ.gov/publications-and-resources/publications/community-affairs/community-developments-fact-sheets/pub-fact-sheet-cra-reinvestment-act-mar-2014.pdf
H.Res.829 - Acknowledging the history and lasting impact of the Federal Government-created problem of redlining and the responsibility of the Federal Government to address such impact. Sponsor: Rep. Clarke, Yvette D. [D-NY-9] (Introduced 02/04/2020). https://www.congress.gov/bill/116th-congress/house-resolution/829/text
Richardson, Jason, Mitchell, Bruce C., Meier, Helen C.S., Lynch, Emily and Edlebi, Jad. Redlining and Neighborhood Health. National Community Reinvestment Coalition. Accessed November 2020. https://ncrc.org/holc-health/#_ftnref12
“Statement by the President on the Record of the Home Owners' Loan Corporation, March 9 1950.” Harry S. Truman Library and Museum and the National Archives. Access November 2020 https://www.trumanlibrary.gov/library/public-papers/51/statement-president-record-home-owners-loan-corporation
The Federal Housing Administration (FHA). Department of Housing and Urban Development's (HUD). Accessed November 2020. https://www.hud.gov/program_offices/housing/fhahistory
Underwriting Manual: Underwriting and Valuation Procedure Under Title II of the National Housing Act. Federal Housing Administration, 1938.