Key Points:
- For decades, federal policies for home loans locked Black families into ghetto-like neighborhoods in the 1940s, ’50s and ’60s.
- Prohibited from buying homes in the suburbs, they did not gain the equity appreciation in their homes that White families gained, resulting in generational wealth and higher quality of life.
We all know that discrimination against Black people in America continued beyond slavery. However, a lot of people, both Black and White, aren’t aware how discriminatory the country’s housing policies were. They weren’t separate but equal, but separate and very unequal.
Economists agree the residual effects of the historic federal housing policies and programs have had a negative economic impact on African Americans that will be felt for generations to come.
The Depression
The U.S. government housing programs began during the Great Depression (1929 -1933) with the government stepping up to help Americans of all races and to help stabilize the economy. Through the Home Owners’ Loan Corporation (HOLC), the federal government began buying up and refinancing delinquent loans to help families save their homes.
To further stimulate the housing market, the National Housing Act of 1934 created the Federal Housing Administration (FHA). This new agency insured mortgages issued by qualified lenders, which protected the lenders from homeowners who might default on their home loans.
Before the establishment of the FHA, purchasing a home could be tough, with most mortgages requiring homebuyers to pay 50% of the cost of the home upfront. To encourage new and first-time homebuyers, the new FHA loans offered more favorable loan terms with low down payments and interest rates, and longer repayment terms.
Redlined
As great as the FHA loans were, FHA policies made it nearly impossible for Blacks to qualify for these favorable loans.
Intending to develop national standards for analyzing the “risk” of a long-term home loan, HOLC created Residential Security Maps for 230 cities that were based on similar standards.
For each of these cities, they produced maps identifying neighborhoods they deemed safe to risky for home loans. Neighborhoods graded safest were given a grade of A and colored green on the map. “Still Desirable neighborhoods were given a B and colored blue. “Definitely Declining” neighborhoods were given a C grade and colored yellow.
“Hazardous” neighborhoods were given a grade of D and colored red – hence the term redlining. On the maps, these high-risk areas were outlined in red, or sometimes colored red.
Areas where Blacks lived were almost always classified as hazardous, no matter the income level of the Blacks living in the area. The FHA usually wouldn’t offer their amazing new mortgages in redlined inner-city Black neighborhoods, it didn’t matter how financially safe the buyers were.
Many private banks, savings and loans, and later the Veterans Administration, copied federal redline lending standards when making their mortgages.
Policies Supported Segregation
The FHA wouldn’t make a loan in a “Hazardous” area other than to Black buyers and they wouldn’t let qualified Black buyers purchase homes in green, blue or yellow areas.
The early FHA “Underwriting Manual,” which all lenders who issued FHA-insured mortgages were required to follow, had numerous references to the importance of maintaining racially separate housing areas as a way to maintain the “stability” of neighborhoods and to minimize decreasing values of homes they insured.
As an example, section 937 “Quality of Neighboring Development” in the Underwriting Manual read, “If a neighborhood is to retain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes.”
The Underwriting Manual also recommended highways as a good way to separate African-American from White neighborhoods. While policies like these weren’t a matter of law, they were published government regulations and they weren’t hidden.
Racial Covenants
Another way FHA and developers helped maintain segregated communities was by supporting the use of racial covenants or deed restrictions. Race covenants typically restricted selling or even renting a home to a person of color.
With no laws against them, racial covenants were an accepted practice in most new suburban developments in the 1950s. The FHA Underwriting Manual section 980G encouraged the use of restrictive covenants to “prohibit the occupancy of properties except by the race for which they were intended.”
Creating Ghettos
With African Americans restricted from moving into many areas due to racial restrictions, FHA underwriting policies and other lending practices, they were limited to purchasing homes — almost exclusively — in predominantly Black or redlined communities. The FHA and VA were sometimes willing to secure mortgages for qualified Black homebuyers wanting to buy homes within redlined areas. While this practice maintained segregated areas, it did generate a slight uptick in Black homeownership in the ’50s and ’60s.
Economic Consequences
Generations of Black families are still suffering from the economic consequences of residential segregation. Because African Americans were prohibited from buying homes in the suburbs in the 1940s, ’50s and ’60s, they did not gain the equity appreciation in their homes that White families gained.
As a result, today African-American incomes on average are about 60% of average White incomes, but African-American wealth is about 5% percent of White wealth. With most middle-class families in this country gaining their wealth from the equity they have in their homes, it’s easy to see how the enormous difference in wealth is almost entirely attributable to federal housing policies that kept Black homeowners out of suburbs and in segregated ghettos.
In the 1940s and ’50s, homes were affordable for working-class families – both Black and White – with homes selling for about twice the national median family income. Those VA and FHA homes financed during the period when Black families were shut out of the suburban market are now selling for $300,000 or $400,000, or eight to nine times the national median income.
The Fair Housing Act of 1968 made discriminatory housing practices illegal. But by then homes were no longer affordable for working-class Americans.
Off of their gained equity, White families were able to send their children to college, care for their parents in old age, and bequeath wealth to their children. None of those advantages accrued to African Americans, who, for the most part, were blocked from the suburbs.
