Redlining, blockbusting, and the effects of discrimination in U.S. real estate history.

It’s a terrible, unconscionable reality that we have to acknowledge discrimination in the history of U.S. real estate and housing, but it’s equally important to shine a light on these wrong doings so we can understand their effects and actively promote equal opportunities for all families, regardless of race, color, creed, or religion.

Racism in real estate wasn’t just a clandestine, unspoken practice among a fringe group of segregationists, but systematically ingrained in many of our governmental and economic institutions. Two such ways racism in housing were put into play were through “redlining” and “blockbusting”.

To put the long, hard struggle of African Americans to achieve high levels of home ownership in context, we need to look all the way back to the early 20^th century and the advent of Jim Crow laws. Once slavery was made illegal with the Emancipation Proclamation and the end of the Civil War, overtly racist practices still existed well into the 1900s in the form of Jim Crowe laws. African Americans were discouraged or prohibited from voting, getting good jobs, doing business with whites, using the same restaurants, beaches, schools, etc. as whites.

Redlining is the practice of steering certain minorities, usually African Americans, toward certain lower-income and blighted neighborhoods, essentially keeping white neighborhoods segregated. It’s origins in private banking are thought to have started with the Home Owners Loan Corporation (HOLC). During the Post War housing boom in the U.S., HOLC devised a system of rating neighborhoods based on desirability and other economic factors. There were four ratings: green, which was the most affluent and homogenous white areas, blue, yellow, or red, which was primarily inhabited by minorities and in lower income and distressed neighborhoods.

Real estate agents, property managers, insurers, banks, new homebuilders, underwriters, and lenders steered African Americans away from the green areas and to the red areas, which was called red-lining. Often times this was done overtly, but there were subtle ways of keeping blacks out, like increasing the price of services or financial products, or just not showing homes. In those areas, banks refused to lend because they deemed those neighborhoods high risk. But at the same time, blue and green neighborhoods received the brunt of economic assistance, new business incentives, and redevelopment funds, so it was a vicious cycle of housing discrimination that was almost impossible for black families to escape.

Redlining actually started as an official, though unpublicized, federal policy. In 1934 the New Deal brought about sweeping changes to stimulate the economy, and one of them was the formation of the Federal Housing Administration, FHA, to promote widespread home ownership through the Housing Act. The FHA, although a governmental organization, adopted the practice of creating “residential security maps” in 239 cities. These maps were supposed to gauge lending risk but really served to segregate white homeowners and neighborhoods from parts of the city where African Americans and minorities were allowed and encouraged to buy.

FHA underwriters were under strict orders to adhere to these neighborhood maps as primary criteria in their loan approval process. Redlining through FHA standards officially ended in 1950 but private banks and lenders, as well as real estate professionals, went on well into the 1970s and 1980s.

Businesses were subjected to the same lending standards, which diverted small business loans and any chance of economic development away from working class and minority neighborhoods.

Although it’s hard to imagine a business practice more despicable and unethical than redlining, that’s exactly how we can describe “blockbusting,” which was widespread even less than 50 years ago. Unscrupulous real estate speculators used race as a tool to artificially manipulate property values in certain neighborhoods…and make fortunes. When certain developers wanted to buy up all the property in a certain middle class or working class white neighborhood they would purposely sell a certain number of homes to African American families.

That in itself was no problem but they would play up the narrative of “neighborhood decline” and exploit fears of declining home prices. Using these manufactured fear tactics, they would convince enough white families to sell their homes and create an outright panic. Soon, everyone was selling their homes, even if they were racially tolerant, because of the impending real estate crash in their neighborhood. Of course the speculators who started the fear mongering would buy up these properties, often for pennies on a dollar. They would then turn single-family homes into multi family units and apartments and cram them full with tenants without providing proper maintenance or safe, livable conditions.

These are just two of the methods used systematically and legally discriminate against African Americans in our recent history, but unfortunately, there are many more. The FHA, HUD, the Supreme Court, the Community Redevelopment Act, and the Fair Housing Act enacted blatantly racist policies that manifested in white flight to the suburbs and urban decay around primarily black neighborhoods.

It’s almost impossible to calculate the cumulative financial toll for African American families over the generations, but one conservative estimate is that discrimination has caused black homeowners to pay more than $10.5 billion in extra home payments. The same study goes on to find that mortgage payments for black homeowners are on average 54% than for their white counterparts, costing them an additional $4,000 a year in payments. And the loss of educational opportunities, based on property taxes, is even more profound.

Economists cite low home ownership rates and the effects, like poor education and joblessness, as a major factor in the wealth disparity. Middle class blacks haven’t been able to parlay economic advancement into generational wealth and security through home ownership like many white families, essentially being shut out of the American Dream.

5 Ways the Federal Housing Administration changed mortgages forever.

In the dark days of the United States Great Depression, banks had failed, the monetary system all but collapsed, and the real estate marketing was in shambles.  Home ownership was a rarity in those days to being with – by some estimates up to 70% of people rented.  But as people lost their jobs, their incomes, and their trust in the banking system, foreclosures and defaults on mortgages reached epidemic proportions.  So many people walked away from their homes that the banks were forced to “call due” existing notes in an attempt to gobble up whatever cash and assets they could.  But this just quickened the cycle of values plummeting and more people losing their homes.  No banks wanted to lend because of the risk and certainly few people wanted to buy a home under those conditions.  

Something had to be done, so the Federal Government, under President Franklin Delano Roosevelt, initiated the Housing Act of 1934, with the aim to insure loans made by private banks and commercial lending institutions to trigger home buying and home building again.  They knew no amount of monetary policy would be effective if they didn’t build in insurances for banks and consumers – creating confidence in the system, once again.  Part of this Act was the creation of the Federal Housing Administration, the FHA, who’s sole purpose was (and is) to stabilize the mortgage market, regulate rates of interest, and promote home buying.

Here are 5 ways the Federal Housing Administration changed mortgages forever: 

1. Lower down payments.

Prior to the FHA’s new mortgage plan, home buyers traditionally put up to 50% of the home’s value down as a deposit. That means you had to come up with half the value of the property in cash!  But the FHA changed that by lowering down payment requirements, offering mortgages with only 20%, 10%, or even lower deposits.  Thus, 80% and 90% Loan To Value mortgages were born, allowing access for a huge new group of home buyers. 

2. A qualification process.

In the old days, small town banks did business based on a borrower’s reputation in the community.  Basically, they knew the person and the kind of business they did, so they’d vouch for them and approve the loan based on anecdotal information.  The FHA did away with that, instead setting up a structured qualification process based on their ability to repay.  That’s where income qualification ratios and employment verifications factors came in, and later, credit score.

3. Lengthened loan terms.

Up to the time of the Great Depression, mortgage loans were only for 3-5 years, or up to 5-7 for a longer-term loan.  The FHA lengthened the term of the loans to 15 years, and later to 30 years.  Like many of these changes, once the FHA offered these new, improved mortgage provisions, traditional lenders and banks all followed step, to stay competitive.

4. Standards of quality.

In order to bolster confidence and assure the value of a property, the FHA put in play standards of construction.  They mandated a qualified inspection before they allowed a mortgage loan on a home. FHA appraisals factor in 8 criteria, with “Relative Economic Stability," constituting 40% of the appraisal value, and "protection from adverse influences,” another 20%.

5. Amortization.

Traditionally, mortgages only had Interest Only payments, and after the 3-5 year term was up, a big balloon payment for the rest of the balance.  Of course we can see how this led to mass defaults, so the FHA instituted the novel concept of amortization, meaning a set schedule of interest and principal payments every month.  The mortgage started out with heavy interest payments, but as they stayed in the loan and time went down, started paying off their principal more and more.

These measures were wildly successful in turning around the momentum of home ownership in the United States.  In 1935, Colonial Village in Arlington, Virginia was the first large-scale rental housing project built and funded with the Federal Housing Administration’s backing and insurance. From there the economy rebounded and home ownership rates rose to all-time highs a decade later as soldiers came back from World War II and settled back in to their American Dream, with the help of FHA-backed mortgages.  

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