By the Bay
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By the Bay

Financing Suburbia

How government mortgage policy determined where you live

  1. Insurance,
  2. National mortgage markets, and
  3. New standards for debt structuring

A New Deal to restore the housing industry

  1. Revive the housing market, and
  2. Make homeownership attainable for more Americans

“The most ambitious suburbanization plan in US history”

By making an offer lenders couldn’t refuse, the FHA exercised tremendous power over residential design.

  • Large, new homes were given a higher score, because they increased demand for labor and materials. Older homes with small spaces didn’t create demand for new furniture. Features like long hallways and steep staircases lowered the rating, because they prevented easy moving of furniture.
  • Homogeneity of neighboring housing stock was believed to indicate stable housing prices. To get the max score on the FHA evaluation, the manual preferred that a house be a part of “a sparsely developed new neighborhood … completed over the span of very few years.”
Restrictions and guidelines in the 1936 FHA Underwriting Manual
  • The ideal house had “sunshine, ventilation, scenic outlook, privacy, and safety”, and “effective landscaping and gardening” added to its worth. The guide recommended that houses should be set back at least 15 feet from the road, and well-tended lawns that matched the neighbors’ yards helped the rating.
  • The manual had strict definitions for how streets should be built.
  • It prescribed minimum street widths and other specific measurements.
  • It recommended a hierarchical network, with a major arterial roads interlaced with smaller streets. The idea was to separate through traffic and enable efficient circulation.
  • It saw cul-de-sacs as the most desirable home locations, because they were most isolated from foot and auto traffic coming from outside of the neighborhood.
The FHA thought this was a great investment.
  • The guidelines favored auto- rather than transit-oriented development. The idea was that this would increase demand for cars, which were a growing part of American manufacturing.
The FHA did not think that Greenwich Village was a good investment.
  • The manual emphasized that suburbs must be arranged to promote strict separation of land uses
  • Multi-use districts with “commercial, industrial, or manufacturing enterprise” were seen to threaten residential value. So, the FHA simply did not provide insurance for units where the first floor was a shop with residences above for most of the agency’s lifetime.
  • Development like what you see in Greenwich Village and other traditional neighborhoods in east coast cities could not get an FHA loan. (These rules only changed in 2015.)
  • “There would be no corner groceries; if there were any stores at all, they would be grouped into a single shopping center,” wrote Tom Hanchett in The Other “Subsidized Housing”.

New frontiers for suburbia

This subsidized sparsely populated parts of the country, while disadvantaging older metropolitan areas.

New markets for suburbia

  • Federally-backed loans required terms of at least 10 years, replacing the balloon mortgages of the 1920s. This paved the way for the standard 30-year mortgage that we have today.
  • Borrowers focus on the size of these monthly payments rather than the total, so this made mortgages more affordable without actually decreasing their cost.
  • Before, the buyer had to pay upwards of 50% of the purchase price in cash, but with the FHA guarantees, banks were willing to accept down payments of just 10%.
  • To reward G.I.s returning from WWII, the Veterans Administration (VA) offered mortgage aid as well. The VA insurance program was even more generous than the FHA, so by midcentury banks offered as low as 0% down to newly returned veterans. These set the standard for conventional mortgages within a few years.
An aerial view of Phoenix suburbs

Invisible subsidies

Notes, resources, and further reading

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