A primer on how housing policy has been super racist for the last 100 years
The US government has been pushing homebuying since the 1920s. The 1940s economic boom saw an opportunity for families to invest their newfound savings into non-liquid wealth; encouraging people to buy homes — stable investments that had a practical application, increased in value over-time, and lasted forever — seemed a great way to achieve this goal. But despite its seeming beneficence, the homebuying policy project of the 20th century has two sinister legacies: race-based residential segregation and a chasmic Black-white wealth gap.
The Federal Housing Administration (FHA), created in 1934, was the original guarantor of these racist outcomes. The FHA was responsible for insuring mortgages — that is, ensuring that, if a person failed to pay off the loan given to them for the purposes of buying a house (AKA a mortgage), lenders would recoup their money. Such a policy was necessary because it freed up mortgage lenders to lend without the risk of default, creating a robust homebuying market.
The problem? The FHA did not insure all mortgages. To decide which ones they would insure, they drew color-coded maps in metropolitan areas throughout the country. Green areas were deemed financially healthy and stable, places where mortgages would be guaranteed. Red areas were the opposite: areas where property values couldn’t be trusted to rise, or where homebuyers couldn’t be trusted to pay off their mortgages. Mortgages in these areas would not be insured.
This was, at least, the FHA’s stated logic. In reality, the main criteria for determining whether an area deserved insurance or not was the racial makeup of that neighborhood. Majority Black areas were deemed automatically unworthy of insurance and subsequently “redlined.” White neighborhoods were given the benefit of the doubt. The result was that Black folks could not receive mortgages because they would not be federally insured. To compound this effect, even if a Black person received a mortgage, newly created suburbs — these massive pools of accessible housing wealth — entirely excluded Black folks. The mechanisms of this exclusion were numerous. The main strategies were for suburban developers to claim Black residents would make property values fall, for developers to create contracts with clauses that prevented resale to Black people, or for white folks to directly intimidate and threaten violence towards Black families looking to move in to their neighborhoods. The result was two-fold. First, the exhaustive residential segregation of Black and white folks in virtually all metropolitan areas in the United States. And second, the prohibition of home-based wealth building for Black Americans. Both realities manifest in the present.
But that’s not all! In the late 1960s, the federal government once again wanted to spur the lending of mortgages. To do so, it created entities that buy mortgages from private lenders. These entities — today known as Fannie Mae, Freddie Mac, and Ginnie Mae — re-package and sell these mortgages after buying them, producing a secondary market for mortgage trading. This is the “mortgage-backed securities” market. One of the main functions of Fannie, Freddie, and Ginnie is to guarantee the health of the mortgages they buy, ensuring the proper functioning of both the homebuying market and the secondary mortgage market.
In the early 1990s, the US Department for Housing and Urban Development (HUD), in an alleged attempt to expand the housing market to lower income people, began to encourage Fannie Mae and Freddie Mac to buy up mortgages directed at lower income folks. Doing so was supposed to decrease the risk of inherently risky mortgages. This seemed to be working for a while, but by the early 2000s, private lenders began selling more and more of these “subprime” mortgages to private investment banks, instead of Fannie and Freddie. These banks did not have the same regulatory standards as Fannie and Freddie and so lenders could get away with creating and selling much riskier — and much more predatory — mortgages.
As the private subprime mortgage market boomed, investment banks became extremely “creative” in packaging these mortgages into financial instruments. The idea was to combine mortgages with other securities creating new, monstrous, unrecognizable securities, easy to sell to the unwitting buyer for a quick buck. In other words, banks wouldn’t hold their subprime mortgages — and the risks associated with them — for long. The market was a game of hot potato; as long as you didn’t hold the subprime securities when everything came crashing down, you’d be fine. In 2007, this incredibly speculative bubble burst as homebuyers inevitably began to default on their terrible mortgages, making all those mortgage-backed securities valueless. The broad effect of this well-known: the collapse of the US financial sector, followed by the global financial sector, followed by the world economy. The effect on populations who were targeted by subprime mortgages is, however, often ignored.
These individuals, often Black and Latinx, were looking for a chance to secure the sort of wealth America had explicitly guaranteed for white folks and white folks alone throughout the 20th century. Perhaps HUD was making a good faith attempt to make this happen in the 1990s. But that good-faith counts for nothing considering the results. Instead of flexible mortgages that were underwritten and guaranteed by governmental or quasi-governmental institutions, working class Black and Latinx folks got predatory mortgages from private loan sharks, who disguised them as cheap opportunities to attain housing wealth. These loan sharks were allowed to thrive was because of investment banks that gobbled up the garbage mortgages they issued, encouraging more and more predatory behavior. When these markets crashed, the loan sharks got off scot-free because they had sold all their mortgages to investment banks. The investment banks — save one or two — also escaped calamity because they had Big Brother (the federal government) hand them a cool $700 billion dollars to bail them out.
In contrast, from 2007 to 2010, Black families lost 31% of their wealth; in the same period, white folks lost just 11% of theirs.