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C h a p t e r 7 The Better Homes Movement and the Origins of Mortgage Redlining in the United States James L. Greer In the second year of the New Deal, the federal government continued to grapple with the daunting economic problems of the Great Depression, especially with the ongoing problems of the nation’s financial system and the continuing plague of extensive unemployment. One of the most important pieces of legislation of the “First New Deal” formulated in the second session of the 73rd Congress and explicitly designed to deal with the overwhelming problems of unemployment and the nation’s housing market was the National Housing Act of 1934. The intent of the Act was to address the ongoing stagnant state of the nation’s housing market and in so doing to spur employment in the critical housing construction sector.1 The Act, drafted by a small group of high-level bureaucratic officials in the Treasury Department, the Reconstruction Finance Corporation, the Federal Reserve Board, and the Federal Home Loan Bank, had several important objectives, not the least of which was to foster lending by banks, savings and loan associations (SLAs), thrifts, and insurance companies in order to stimulate the housing sector.2 This mundane objective nonetheless led to a stark revolution in the way in which home mortgage financing occurred in the United States. The Act was passed against the strident objections of the national trade organization of the SLAs, which at that time dominated home mortgage financing. It created a new standard mortgage, a mortgage insurance program to entice all financial institutions to participate in this new mortgage financing system, and last, a new institution, 204 James L. Greer the Federal Housing Administration (FHA) to administer this mortgage loan guarantee program. Congress created the FHA as an independent public corporation requiring the agency to finance its operations (and the reserves of the mortgage insurance fund) from fees charged to mortagees.3 Thus removed from congressional appropriation, the FHA held considerable autonomy as well as a mandate to implement the sweeping provisions of the Housing Act. The agency transformed mortgage financing, upgraded and regularized building standards for housing construction, and restructured the geography of mortgage financing across American metropolitan areas. Writing in 1984, historian Kenneth Jackson argued that “No agency of the United States government has had a more pervasive and powerful impact on the American people over the past half century than the Federal Housing Administration.”4 The FHA played such an important role because, in implementing mortgage insurance, the agency both refused to offer mortgage insurance (redlined ) on a very high proportion of the extant housing and, at the same time, created a powerful set of incentives for the construction of new housing on the edges of already built-up cities. The FHA adopted a set of underwriting standards that implemented in elaborate detail an extensive array of requirements concerning the physical plant of the home, and the public and private amenities of the neighborhood including transportation access and public facilities. These standards also required assurance about the likely economic future of the metropolitan area, and appropriate neighborhood characteristics, including the social class, ethnicity , and race of the community’s residents. The FHA used many reasons to deny mortgage insurance, often premised on the construction, structure, amenities, and infrastructural features of the home. Additionally, of course, the FHA adopted the belief, which was nearly universally held by real estate appraisal experts, lenders, and the realty industry at the time, that the entry of nonwhite residents into a previously all-white neighborhood inevitably initiated a process whereby property values would necessarily decline, probably precipitously.5 As such, the FHA refused to offer mortgage insurance, even on newly constructed housing, if African Americans, Latinos, and occasionally people of other ethnicities were potential purchasers.6 Also, the agency, from the earliest incarnations of its Underwriting Manual, sanctioned the adoption of racially restrictive covenants, already widespread throughout American cities at that time,7 as a condition of mortgage insurance.8 Redlining affected large swaths of American cities and probably two-thirds or more 47.53] Project MUSE (2024-04-26 09:24 GMT) The Better Homes Movement and Redlining 205 of the nation’s standing housing stock. Both white and nonwhite neighborhoods were denied mortgage insurance, that is, redlined.9 That the FHA from its very origins was thoroughly imbued with racist (and nativist as well as antisemitic) sentiments and implemented its programs in concert with these beliefs...

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