Tuesday, January 15, 2013

Emergence of Exploitative Contract Selling, Part 3: The Federal Housing Administration

The FHA was created in 1934 with the main objective of stabilizing the home mortgage industry after the Great Depression.  Subsequently, homeownership in America was encouraged by the availability of homes with low down payments and low interest rates through federally insured mortgages.  However, the framework for the “American Dream”, set forth by the newly created FHA, did not work in favor of all potential homeowners.  Part of the FHA’s evaluation process when considering the insurance of mortgages was based on “residential security maps” created by the federal entity the Home Owner’s Loan Corporation (HOLC) (though there were other private institutions that created their own maps).  These maps of specific metropolitan areas, produced at the request of the FHA, were coded to define the level of risk for insuring mortgages in certain areas of a city.

HOLC Map of Chicago 1939  (Source)
View of North Lawndale (Source)
Areas on the map would be coded as "A - First Grade" defined by green, "B - Second Grade" defined by blue, "C - Third Grade" defined by yellow, and "D - Fourth Grade" defined by red.  These “D - Fourth Grade” neighborhoods were most often inner city neighborhoods going through racial transition from white to black, and as such, an entire area or community could be "redlined" with the arrival of an African American family.  There were instances in which FHA would insure mortgages for African Americans moving into all-black communities.  In contrast, even if a bank or private lender was open to providing a mortgage to an African American family in a transitioning neighborhood, FHA would not insure that mortgage.1 

A particular idiosyncrasy of the effects of redlining, and one that conspired to unnerve white’s acceptance of the arrival of blacks into their neighborhoods, was that white homeowners also experienced great difficulty in obtaining credit in neighborhoods that had been redlined.  Whether whites were seeking a mortgage for purchasing a home or financing costly home repairs in a redlined neighborhood, if FHA would not insure mortgages in that geographical area banks would likely not provide them. 2

The situation was certainly not monolithic though.  When white real estate speculators started their dealings in transitioning neighborhoods, they had easier access to various sources of financing that eluded blacks.  That access to financing provided speculators with the cash flow to go in and buy from white homeowners before turning and re-selling those same properties on contract to blacks at a greatly increased price.3

Emergence of Exploitative Contract Selling, Part 1: An Introduction

Emergence of Exploitative Contract Selling, Part 2:  Restrictive Covenants and Real Estate Boards

Emergence of Exploitative Contract Selling, Part 4: The Fair Housing Act of 1968 and the Community Reinvestment Act of 1977

McPherson, “‘In My Father’s House There Are Many Mansions—and I’m Going to Get Me Some of Them Too’: The Story of the Contract Buyers League.” The Atlantic Monthly Apr. 1972: 54.
2   Satter, “Family Properties” 45.
3   McKnight. (Nov 7, 2012). personal interview.


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