The FHA and Government Sponsored Racial Discrimination

Before the creation of the Federal Housing Authority (FHA) in 1934, relatively few Americans owned their homes. The FHA made home ownership possible for many Americans by introducing low down-payment, long-term fixed-interest, self-amortizing loans. In 1938, the creation of the Federal National Mortgage Association (“Fannie Mae”) provided a market for Federal Housing Authority (FHA) loans, increasing liquidity and further decreasing lender risk.

Black Americans were almost completely excluded from benefiting from these loans because the FHA assigned “risk” rating to neighborhoods, based on various demographic factors, specifically race.

This very explicit and widespread discrimination sponsored by the Federal government had severe impacts still felt to the very present.

Let’s read from the Federal Housing Administration, Underwriting Manual: Underwriting and Valuation Procedure Under Title II of the National Housing Act, (Revised Feb. 1938, Washington, D.C.)

935. Natural Physical Protection:
Usually the protection from adverse influences afforded by these means includes prevention of the infiltration of business and industrial uses, lower class occupancy, and inharmonious racial groups.

937. Quality of Neighboring Development:
The presence of overimprovement or underimprovement in the neighborhood constitutes a condition which may adversely affect location ratings. Areas surrounding a location are investigated to determine whether incompatible racial and social groups are present, for the purpose of making a prediction regarding the probability of the location being invaded by such groups. If a neighborhood is to retain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes. A change in social or racial occupancy generally contributes to instability and a decline in values.

951. Quality and Accessibility of Schools:
Thus, physical surroundings of a neighborhood area may be favorable and conducive to enjoyable, pleasant living in its location. However, if the children of people living in such an area are compelled to attend school where the majority or a considerable number of the pupils represent a far lower level of society or an incompatible racial element, the neighborhood under consideration will prove far less stable and desirable than if this condition did not exist.

973. Social Attractiveness:
Satisfaction, contentment, and comfort result from association with persons of similar social attributes. Families enjoy social relationships with other families whose education, abilities, mode of living, and racial characteristics are similar to their own.

982 (1). Adequacy of Civic, Social, and Commercial Centers:
Schools should be appropriate to the needs of the new community and they should not be attended in large numbers by inharmonious racial groups. Employment centers, preferably diversified in nature, should be at a convenient distance.

1360. Low ratings of the features in the Location category will not necessarily indicate that the estimate of remaining economic life should also be relatively low. The economic life estimate may be relatively high if the Rating of Property is high, although the Rating of Location may simultaneously be low. This is true because of the opposite effects produced on the economic life estimate and on the Location rating by threatening or probable encroachments of incongruous land uses and by threatening or probable infiltration of inharmonious racial groups.

…The infiltration of inharmonious racial groups will produce the same effects as those which follow the introduction of incongruous land uses, when the latter tend to lower the level of land values and lessen the desirability of residential areas.

1412 (3)(d). The degree of social and racial compatibility of the inhabitants of the neighborhood. The presence of socially or racially inharmonious groups in a neighborhood tends to lessen or destroy owner-occupancy appeal.

So that’s the manual. Here’s an example of the guidance in practice:

In June of 1937, surveyors from the Federal government-sponsored Home Owner’s Loan Corporation (HOLC) visited Philadelphia neighborhoods to warn banks away from lending in areas with large number of African Americans. These surveyors assessed the favorable and detrimental influences.