Connect
Community Reinvestment
Transfer Day Assumed Credit Unions Are Virtuous
Dec 01, 2011 — American Banker
By Preeti Vissa
It's hard to pin down preci... [ More ]
Little Help for Homeowners, Big Bonuses at Fannie and Freddie
Nov 22, 2011 — Huffington Post
By Preeti Vissa
Why are top executives at government-backed mortgage giants Fann... [ More ]
Deficit Committee Deadlock May Be Best Option
Nov 15, 2011 — Contact: Bruce Mirken, Greenlining Institute Media Relations Coordinator, ... [ More ]
Historic Discrimination
The Federal government encourages suburbanization
Although the practice of building country homes and company towns outside of core cities has been around since the beginning of California's settlement[1], suburbanization as we know it began officially with the National Housing Act of 1934, which established the Federal Housing Administration (FHA). The FHA's main goal was to "stabilize and then to expand homeownership"[2] in the wake of the Great Depression. By that year, the stock market crash had sent half the nation's mortgages into default, and money available for lending had all but dried up.
Working in partnership with the nation's financial institutions, the FHA provided insurance for very low-cost mortgages to qualified borrowers, encouraging financial institutions to begin making mortgages again. The very favorable loan terms seduced city dwellers with the opportunity to have vastly more living space for a monthly price that was close to, or sometimes less than that of their relatively smaller spaces in the inner city. The funds available to the FHA were further expanded in 1938 with the creation of the secondary mortgage market through the Federal National Mortgage Association (FNMA, or "Fannie Mae"). FNMA packaged mortgage-backed securities for trading on the stock market, greatly increasing its assets, and therefore the funds available for potential new homeowners to borrow.
It is therefore little wonder that so many in the Boomer generation, armed with innovative home financing and expanded automobile and highway access, abandoned the old urban cores and moved into the wide open spaces of the surrounding countryside, solidly setting the benchmark for the middle-class life that would come to be cast in future generations' vision of the American Dream.
[1] Ebner, Michael H. "Re-Reading Suburban America: Urban Population Deconcentration, 1810-1980."
American Quarterly, 37:3 (1985) 368-381.
[2] Rusk, 82-100 and generally.
Minorities, however, were left behind
All of this government sponsorship of homeownership was not for everyone, however. The FHA insurance underwriting manuals of 1938 and 1947 explicitly outlined covenants that barred a homeowner from selling his home to a person of another race[1], and that characterized a good neighborhood with stable property values as one where, "properties...continue to be occupied by the same social and racial classes.[2]" As such, before the 1948 Shelley v. Kramer case eliminated de jure racial covenants from FHA underwriting practices, the National Association of Real Estate Boards' (NAREB) code of ethics prohibited realtors from introducing into a neighborhood "members of any race...whose presence would clearly be detrimental to property values."[3] This left racial and ethnic minorities with rather limited choice of neighborhoods where they would be allowed to live, which were usually located in central cities. This practice was known as redlining.
The restrictions on the availability of FHA loans also extended to home improvement loans, such that homeowners living in lower-rated neighborhoods (those with higher proportions of minority residents) had little or no access to these funds. Minorities who could not move into higher-rated neighborhoods were therefore left behind in older neighborhoods with steadily deteriorating housing stock and infrastructure. Poor housing conditions then facilitated the spread of disease and social disorder, which continues to be characteristic of many poor neighborhoods today.
In 1978 Congress passed the Community Reinvestment Act in order to prevent and reduce credit discrimination in lower-income neighborhoods. The Act required financial institutions to make investments in lower-income neighborhoods consistent with "safe and sound lending practices."