In making judgments about a home’s potential to appreciate, HOLC mapmakers, like individual appraisers before them, used the race of residents as a proxy for desirability. Green neighborhoods were homogeneous and white. At the other end of the scale, the red neighborhoods were predominantly black. In fact, race was a greater factor in a neighborhood’s predicted decline than other structural characteristics such as the age of homes, proximity to city centers, creditworthiness of residents, transportation opportunities, public parks, or any other features.16 Obviously, these designations became a self-fulfilling prophesy. This process of “redlining” eventually created a dual credit market based on race. W. E. B. Du Bois was vindicated in his 1903 prophecy that “the problem of the Twentieth Century is the problem of the color line,” but perhaps in a way that even the wary Du Bois could not have imagined.17
The HOLC appraisers did not create the ghetto, and they were no more racist than the broader American public. Nor were they wrong when they labeled black neighborhoods undesirable—whites simply did not want to live near blacks. But they did institutionalize racial segregation in housing and made it a formal feature of the mortgage credit markets. This not only meant that blacks could not buy homes and build capital in the “undesirable” inner city; it also meant that they were trapped in neighborhoods in rapid decline, having been defined as such by the self-reinforcing judgments of government bureaucrats. The reason these maps lingered for so long was that private banks used them as models when creating their own “residential security maps" and deciding where to lend. Even this discriminatory practice might have abated with time had the Federal Housing Administration and the Veterans Administration (VA) not used them for their more consequential mortgage program.
The FHA did more to shape American life than any other government agency created during the New Deal. It is also unparalleled in the injustice its policies wrought on the black population. The FHA was created by the National Housing Act of 1934 and was supplemented and expanded through the 1944 Servicemen’s Readjustment Act (the GI Bill), administered by the VA. Between 1934 and 1968, the FHA and VA programs operated to open a spigot of mortgage lending that flowed through the banking system.18 The FHA did not lend money itself, but it created a large insurance fund backed by the U.S. Treasury that would guarantee all approved mortgage loans, which shifted the bulk of the risk of loan default from banks to the government.19 By creating a buffer to absorb default risks, this new government infrastructure opened the floodgates for an unprecedented amount of private capital to flood mortgage markets. Virtually overnight, mortgage loans became easy, risk free, and abundant.
This transformation was aided by the 1938 creation of the Federal National Mortgage Association (FNMA or Fannie Mae), which created a network in which buyers and sellers could exchange mortgage loans. Private and institutional investors in one part of the country could invest in mortgages in another, ensuring that capital would always find yield. Because capital was so richly rewarded, it increased, as did bank profits.20 What the government was doing was creating a network and a platform that drew in capital from all corners and multiplied it. The FHA, together with Fannie Mae, were blowing on the embers of the lending market until it became a full flame. The fuel was provided by private capital and the profits would go to those private investors. (However, as became clear decades later, catastrophic losses in this credit market would not be borne by the private sector alone.)
Banks increasingly relied on the protocol and standards provided by the government agencies that were insuring the mortgages and managing their resale. Interest rates and terms converged, as did the types of borrowers. Banks were much less likely to take risks on borrowers who did not fit the gold standard, which was white, middle class, and male. Yet to call those who qualified for these loans “the middle class" is an evasive and circular description. Many were blue-collar wage workers, but it was precisely through these mortgages that they became the much-heralded American middle class. These borrowers would not have been able to buy homes before these reforms; over half of mortgage borrowers earned less than $2,500 per year, or the equivalent of $40,000 in 2017.21 After these programs, mortgage loans became far more accessible than they had ever been, as banks significantly reduced down payment requirements, lengthened loan terms, and slashed interest rates.22 In the transformed mortgage market, borrowers could pay less in mortgage payments than they had been paying in rent. A borrower who moved from renting a small apartment in the city to owning a large home in the suburbs was actually saving money. Typical was the former New York City resident who said of his new home in suburban New Jersey, “We had been paying $50 per month rent, and here we come up and live for $29.00 a month." If you could save a few thousand dollars, you could buy a house, build wealth, and become middle class.23
Millions of mortgage loans on mass-produced homes created ready-made communities across the country, fundamentally changing American culture. Pop-up suburbs came prepackaged with parks, restaurants, bowling alleys, and movie theaters to provide the setting that would define middle-class life. The Norman Rockwell vision of America, of community, family, and hard work, was born during this era and mythologized thereafter. Many traditionalists wistfully remember this golden era of American life when things were “simple" and “wholesome" and there was optimism, prosperity, and growth as far as the eye could see. Yet this was a manufactured prosperity that left blacks out. It was achieved at their expense.
The prosperity fueled by the abundant flow of mortgage credit stopped firmly at the red lines around the black ghettos. The protocols and standards of the FHA pushed whites up and out of the slums into the suburbs, but they held blacks in. The discriminatory policies of the FHA were even more explicit than the HOLC mapmaking. The bureaucracy was now actually enforcing segregation. The FHA’s 1939 Underwriting Manual explicitly prohibited lending in neighborhoods that were changing in racial composition.24 In a 1941 memo, the FHA unapologetically explained that “the rapidly rising Negro population has produced a probl em in the maintenance of real estate values.”25 A good neighborhood, according to the FHA, was one that prevented “inharmonious racial groups,” which meant that the only groups that did not threaten property values were white families.
Once the FHA made its preferences clear, the natural operations of the credit market created racially pure white suburbs. Enforcing racial purity, or a “harmonious racial mix,” became a vested interest for homeowners, realtors, and banks—all of whom held a financial stake in the mortgages. “If a neighborhood is to retain stability,” said the FHA manual, “it is necessary that properties shall continue to be occupied by the same social and racial classes.” The FHA even offered suggestions for the best way of achieving this result, which they said was through “[race-based] subdivision regulations and suitable restrictive covenants.”26 So neighborhood groups vigilantly enforced racial covenants. Racial covenants were promises made by homeowners that they would never sell, rent, or lease their homes to nonwhites, guaranteeing that a neighborhood association could sue any white homeowner who stepped out of line by selling to blacks. The FHA only stopped recommending racial covenants in February 1950, two years after the Supreme Court found such covenants unenforceable in the landmark 1948 case Shelly v. Kramer.21
The FHA policies resulted in some outrageous acts of segregation. Kenneth Jackson describes how, when a white neighborhood in Detroit came too close to the borders of the black neighborhood, the homes were denied mortgage approvals. The solution? A white developer built a concrete wall between the two neighborhoods. It worked, and the white mortgages were approved.28 Such strong enforcement of the color line unsurprisingly led to an uptick of violence against black homeowners.29 But in the end, the policies achieved their desired outcome. Between 1934 and 1968, 98 percent of FHA loans went to white Americans.30 In some cases, whole cities were ineligible for FHA funds.31 Levittown, New York, the emblematic suburb, was typical of the racial divide. As late as 1960, “not a singl
e one of the Long Island Levittown’s 82,000 residents was black.”32 Even if whites preferred to buy homes in racially mixed neighborhoods, the FHA prevented them from doing so. The federal government was now enforcing credit discrimination with the full force of its monetary powers.
The FHA was not creating these preferences, but reflecting the reality that white Americans preferred to live in segregated communities. If “the market" punished home prices in mixed-race neighborhoods, the FHA manual was simply reflecting that market reality and protecting the agency’s investments. But the only “market" that mattered to the FHA was the white majority, and the FHA was unwilling to use the strength of the government and its leverage in the credit market to challenge this racism. In his 1955 book Forbidden Neighbors, urban planner Charles Abrams said that the “FHA adopted a racial policy that could well have been culled from the Nuremberg laws. From its inception FHA set itself up as the protector of all white neighborhoods."33 What resulted was a Jim Crow credit market.
The problem with suburbs full of homeowners and urban ghettos comprised of tenants was not just that it caused generational wealth inequality; it also affected the avenues of opportunity available to residents of these disparate communities. The disparity in community resources had to do, in part, with the operation of the American tax system, which gives local municipalities control of the bulk of their own tax dollars instead of distributing taxes nationwide or statewide. The creation of the white suburb meant that white communities had more tax revenues with which to build better schools, parks, and infrastructure, and the ghettos did not. Government credit led to a housing boom, a homeowning American middle class, and communities where future generation could be nurtured through well-funded public and private accommodations. Meanwhile, the cycle worked the other way in the ghetto—poverty led to institutional breakdown, which led to even more poverty.
As black neighborhoods became overpopulated, blight and crime rose. The largest wave of the Great Migration, spanning from 1940 to 1970, involved an exodus of several million blacks out of the South, which further concentrated the population of the ghetto.34 Harlem, which had been in full bloom in the 1920s, had by the 1950s become dilapidated and rat-infested—so bad was the rat problem that specific coalitions were formed to address the problem, and it was a repeated topic of conversation in Congress.35 Asthma, disease, drug addiction, and tuberculous were rampant. By 1952, nearly fifteen times as many African Americans in Harlem were dying of tuberculosis than among the all-white residents of Flushing, Queens.36
Such a stark disparity between the races led some observers to conclude that the black community was suffering as a result of some cultural failing such as family breakdown or lack of education.37 It seemed incomprehensible to some Americans living amid postwar prosperity to believe that there were any economic or systemic barriers that might have been responsible for the divergent fates of the communities. A black businessman in Chicago lamented that the banks refused to lend to qualified black borrowers on the one hand, and then turned around and blamed the black community’s credit problems on poor education or inferior culture.38 The government credit programs had so fundamentally tilted the scale against poor blacks and toward the white middle class that using “culture" to explain away the difference was absurd and insulting. Yet these theories would only gain momentum over time.
As harmful as the government-produced segregation was, it is only half the story. Into the void created by the FHA’s red lines came high-cost lenders and contract sellers. Deprivation is often linked with exploitation. Because blacks were deprived of the mortgage bounty created by government guarantees, they were ripe for exploitation by the sharks. Contract sellers took what little equity remained in the ghetto through an abusive innovation that looked a lot like a home mortgage. By the 1950s, 85 percent of the homes sold to blacks in Chicago were sold on contract with exploitative terms.39 Speculators bought properties for a few thousand dollars with private capital and then “sold" the home to a black buyer through contract for three to four times the price they had paid.40 But the sale was a ruse.41 These were contractual arrangements and not mortgages, which made a world of difference. Practically speaking, the “buyer" was just a tenant with an option to own the home at some point in the future. Blacks were paying much more than anyone else in the country on a mortgage, and they were not even getting an actual mortgage.42 As soon as they missed a payment, they lost everything—house, down payment, and all the work they had put into the property.
The same bankers who refused to lend to black buyers directly were profiting circuitously from such sham sales. Banks gave loans to the speculators who purchased the homes and then used them as “bait" to lure in black buyers.43 The bankers and brokers defended their actions as a natural consequence of market pricing. “In a free economy a house is worth what anyone will pay for it," said one contract seller.44
Of course, mortgage lending at the time was not exactly a free market because interest rates and prices were being artificially lowered due to unprecedented government interventions in credit markets. It was exactly the lack of government mortgage guarantees in the ghetto that made black mortgages so costly. Zooming in solely on the ghetto, the laws of supply-and-demand market pricing seemed to justify these high prices. There was simply too much risk, and investors had to be adequately compensated for taking on the risk of default. But zooming back out to consider the entire nation, it became clear that the government was absorbing all mortgage market risk except for mortgages in the ghetto. So capitalism and the natural rules of the market were indeed responsible for the high price of the properties of the ghetto—it’s just that those rules only applied to the ghetto. Everywhere else, there was an artificial buoy undergirding the natural markets. As Du Bois had said, “to be a poor man is hard, but to be a poor race in a land of dollars is the very bottom of hardships."45 The ghetto housing market was poor in the land of credit.
Even blacks who managed to leave the ghetto were caught in the Jim Crow credit market. In a few racially mixed or black suburbs in Atlanta, Memphis, New Orleans, Long Island, and Philadelphia, the black middle class was able to buy homes and find a “good living," according to the Chicago Defender. Though these families could obtain mortgages, they were paying much more for them than their white neighbors even when they were buying the same amount of home. In fact, the data on these loans is clear: being black was directly correlated with paying high interest, more clearly than any other factor.46 The FHA cared more about the race of the borrowers than their creditworthiness, so the black middle class was left to find mortgage loans in the private market. There were few institutional investors willing to provide capital for black mortgages, and black institutions did not have enough capital to provide for all such loans.47
After the original exclusion from the low-cost FHA loans, the debt cycle became self-reinforcing. While the small black middle class may have been earning incomes similar to the white middle class, their upward mobility carried much higher interest. Over 70 percent of suburban black families had to borrow just so they could purchase cars, appliances, furniture, and other life necessities. Because the black middle class had more debt, they were charged higher interest on each new loan. More debt begets higher interest and vice versa. The added debt burden and high interest was a direct result of the lack of wealth, and, looping around once again, the debt made it even harder to accumulate more wealth. The debt-wealth cycle fed on itself. Black middle-class families making the same income as the white middle class had much less wealth—a disparity that both created their need for debt and was caused by their costly debt. White families had twenty times more wealth than black families.48 Even the lowest-income whites had average wealth greater than the highest-earning black families.49
This amount of spending on debt drew the ire of anticapitalists and black intellectuals like E. Franklin Frazier, who assailed the black middle class, or the “black bourgeois,” for living on debt just to maintain their social sta
tus.50 Others like Edwin Berry of the Young Urban League also chastised the group’s indebtedness as irresponsible and showy.51 Research reveals, however, that black families were not buying more than whites, they were just paying much more for the same amount of household goods.52 Whites too were financing middle-class life through mortgage and consumer debt, but the black middle class was paying more for the same life.
It was not just mortgage credit that diverged along racial lines; the New Deal also transformed the consumer credit market. Consumer lending before the Great Depression was usually in the form of installment loans, a loan that is paid off in small amounts over a short period of time. The loan was provided by the same store that sold the merchandise—an arrangement that was risky for the lender and expensive for the borrower. The interest rates on these loans were usually high, and retailers often charged even more than what was allowed by law by simply marking up the price of the goods. Black families in the ghetto, with low wages and wealth, relied almost exclusively on installment loans to buy appliances and furniture.53
The FHA transformed the consumer credit market by lowering its risks and enabling banks, finance companies, and credit card companies to make profits on consumer loans for the first time. Once the
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