The Birth of a Suburban Nation: The FHA's Contribution to America's Sprawling and Segregated Residential Patterns

The Federal Housing Authority (FHA) was established by Title I of the Federal Housing Act of 1934. Title II of the Federal Housing Act of 1934 tasked the FHA with providing mortgage insurance to mostly single-family homeowners but also for multifamily developments and hospitals. It is now the largest mortgage insurer in the world. It was created to help Americans realize their dreams of home ownership, and it has done so; however, in the process it also reinforced and created patterns of segregation that contributed to the decay of inner cities and the simultaneously to the rise of a largely racially homogenous suburbia. In 1944, a very similar program was enacted which guarantees mortgage loans under the Veteran's Administration (VA).

The color lines in American neighborhoods were left largely intact despite intense change in the civil rights front due to government action, commonly shared attitudes among most whites and the institutionalization of racial discrimination in the real estate industry. Together, the urbanization of African Americans, and the movement of nearly 5 million blacks out of the South between 1940 and 1970 (link to great migration) still left patterns of segregation nearly untouched.

Explicitly racist loan requirements were used to block minorities'; access to homes in certain neighborhoods, particularly suburban neighborhoods that were created following World War II. The FHA's mortgage insurance program largely denied its benefits to blacks, but also to Jews, Asians and Latinos at various times. Early on, the FHA encouraged municipalities to enact racially restrictive covenants and zoning ordinances. However, this practice was outlawed with the Supreme Court decision in Shelly v. Kramer. One of the most pervasive and longer lasting discriminatory practices used by the FHA was redlining. The term redlining refers to placing a red line on a map to denote neighborhoods based on race and ethnicity in which loans would not be granted. Redlining involves ideas about creditworthiness that have little or nothing to do with the mortgage applicant and everything to do with the location of their property.

Redlining can be, and was at times processed based and outcome based. Process based redlining occurs when a specific act can be identified in the mortgage-seeking process. Outcome based redlining occurs when neighborhoods with a high percentage of racial minorities has less access to mortgages. Neighborhoods were assigned colors based on their desirability for lending, rather than considering the creditworthiness of the individuals. (Insert redlining map) The FHA recommended that banks not lend to "inharmonious racial groups" Additionally, the FHA pressured local governments to pass discriminatory land use regulations before deciding whether to back mortgages in a particular neighborhood. Local laws and planning procedures to guarantee stability, protection from adverse influences and adequacy of transportation, made a community more insurable. The FHA's 1938 Circular No. 5: SUBDIVISION STANDARDS for the Insurance of Mortgages on Properties Located in Undeveloped Subdivisions, for example, specifically included zoning and subdivision regulations among its "Minimum Requirements." Technically the FHA could not require passage of such ordinances, but the agency emphasized that its loan evaluators would insist upon the observance of rational principles of development in those areas in which insured mortgages are desired.

As the federal government contributed to the growth of all white suburbs it also contributed to the early decay of inner city neighborhoods by restricting availability to mortgages and making it difficult for these neighborhoods to attract and retain families able to purchase homes. FHA insurance often was isolated to new residential developments on the edges of metropolitan areas that were considered safer investments, and not to inner city neighborhoods. This practice stripped the inner city of many of its middle class inhabitants, thus advancing the decay of inner city neighborhoods. Loans for the repair of existing structures were small and for short duration, which meant that families could more easily purchase a new home than modernize an old one, leading to the abandonment of many older inner city properties.

Realtors also exploited the racial fears of whites and minorities' demand for housing. They employed practices of racial steering and block busting. These practices consisted of convincing whites that racial change was inevitable and property values would decline as a result. Realtors were then able to purchase homes from whites at bargain prices and sell to blacks at greatly inflated prices. Since FHA and other conventional loans were not available to many black buyers, these homes were usually sold on land installment contracts. Although there was no mortgage involved, the contract worked similarly to a mortgage. In effect, the seller was lending the buyer the money to purchase the home with contract installment payments repaying the loan, both principal and interest. Often, these contracts were set up so that no equity accrued over time. If the buyer defaulted on the loan, the property went back to the owner who was free to resell it.

The FHA was very sympathetic to the interests of local real estate agents and builders. Large-scale developers known as "community builders" were given government contracts to build large numbers of homes quickly for defense workers during World War II. Builders such as William Levitt and Sons (Link) became major developers with FHA help as they acquired large tracts of land, made comprehensive plans and supervised the entire development process. Private developers became the major planners in the country from the 1940s onward.

Now, two laws prevent process based discrimination in mortgage lending; the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA). The Community Reinvestment Act (CRA) of 1977, which mandates that depository financial institutions make credit available to all areas from which they accept deposits, makes this form of discrimination illegal.

-- JamilaMcCoy - 05 Feb 2010