How Home Loans Segregated America

The American dream, it's the idea that in the United States, upward mobility is available to everyone.

We're told from an early age that if you work hard and sacrifice, one day you too, will have a beautiful family, money in the bank and of course your very own house with a white picket fence.

- Today, we don't really appreciate how radical this idea is.

For most of human history, real estate was where money and power were wholly concentrated and only the most connected and wealthy families could be landowners.

- Since the 19th century, millions of people in our country really did climb the socioeconomic ladder this way.

The creation of a burgeoning middle-class was a remarkable achievement and a revolutionary step towards a society in which wealth is shared more evenly amongst its citizens.

But the ugly truth is that for decades, the federal government intentionally created programs that ensured the dream only became a reality for one type of person.

And to this day, we are dealing with its consequences.

(gentle music) - Back in the 1930s, our country was reeling from years of economic depression and housing was in crisis.

Many banks had failed, causing them to call their loans early, contributing to a wave of foreclosures.

Home ownership across the nation hovered around 45%.

And the housing inventory that did remain, was tight.

Especially for those in the middle and lower classes.

- In response, Congress passed the National Housing Act in 1934, which created the Federal Housing Administration.

The FHA's job was to make buying a house affordable to the everyday person, mainly by offering to insure certain home loans against borrower default.

This government sponsored safety net gave private banks and lenders the confidence to extend much more generous terms than had ever been available in the past.

Like 30 year mortgages, higher lending limits and low fixed rates.

The sort of things we take for granted today and it was a resounding success.

The FHA helped take the country's home ownership rate from 43.6% to just under 70% by 2005.

Heck, we even got an FHA loan when we bought our house back in 2010.

Thanks FHA.

- But there's a very big difference between the original FHA mortgages and the ones we have access to today.

Nowadays, approval for an FHA mortgage is based on your personal financial situation and credit worthiness.

But originally, FHA mortgages focused on some other factors.

Let's crack open the 1936 FHA Underwriting Manual.

Shall we?

It stated, if a neighborhood is to retain stability, it is necessary that properties be occupied but the same social and racial classes.

Schools should not be attended in large numbers by inharmonious racial groups.

If the children living in such an area are compelled to attend schools where the majority of the peoples represent a far lower level of society or an incompatible racial element, the neighborhood will prove far less stable and desirable.

- So, to quote the FHA, communities of color were branded as undesirable populations and their mere presence would have a detrimental influence on the housing prices surrounding them.

But this stance was not supported by any evidence.

In reality, when people of color managed to buy homes in mostly white neighborhoods, the property values would go up because they were willing to pay more due to the shrinking housing inventory available to them.

- Nevertheless, cities across the nation ended up being divided into specific zones by the FHA and local housing authorities.

The areas where whites were more concentrated got the green light for those sweet FHA backed loans.

But the areas with higher concentrations of communities of color and immigrants were sectioned off on maps with red lines to indicate they were not eligible for FHA loans regardless of individual financial credentials.

This practice, now referred to as red lining, also occurred for new affordable developments popping up in suburbs.

Many of those builders even added language to deeds, known as restrictive covenants, with phrasing like no property shall be sold, conveyed, rented or leased to any person not of the white or Caucasian race.

Yep, it was that explicit.

- The combination of federal policy and private sector reinforcement was devastatingly effective.

Between 1934 and 1968, black families specifically, received only 2% of all federally insured, home loans.

And housing segregation tightened its grip on the American landscape.

It wasn't until 1968 that title eight of the Fair Housing Act finally outlawed housing discrimination.

Think about that.

For 34 years, an entire generation of people denied access to one of the biggest tools of wealth building of the entire 20th century.

It's depressingly easy to find evidence of its impact all these years later.

- According to the federal reserve, the typical white family today, has eight times the wealth of a typical black family.

And five times the wealth of the typical Hispanic family.

This is in large part, due to home equity being bequeathed from one generation to the next.

Nearly 30% of white families report receiving an inheritance or monetary gift from family compared to 10% of black families and 7% of Hispanic families.

- And even though it's been 52 years since those FHA policies were ruled unconstitutional, the gap between white home ownership and black home ownership is the worst it's ever been.

And even if a black family does own a home, the typical value of it is only 65% of the average white families.

We even see this sort of divide play out in the most elite circles.

Of the 616 billionaires that call America home, only seven are black and none of them the product of inheritance.

- And honestly, the deeper you go on this subject, the more it feels like you're peeling back layers upon layers of rotted, termite infested wood.

Housing policy directly impacts education because we fund our public schools via property taxes.

Lower property values means less money for schools resulting in lower graduation rates, lower college attendance, et cetera.

Then there's the impact on policing, incarceration rates, mental health, even our diet.

Areas with higher concentrations of black, Latino and indigenous Americans are far more likely to lack easy access to fresh and affordable food, creating what are known as food deserts.

This leaves the residents of these areas more susceptible to chronic health issues.

- We here at Two Cents, deeply believe that taking ownership of your finances can completely change the game.

But we collectively have to acknowledge that the cards are not fairly dealt.

We are perfect examples of this.

We take our financial responsibilities very seriously through budgeting, saving, and living within our means, but we are fourth generation homeowners.

And when we bought our FHA insured house a decade ago, we were graciously gifted some of our down-payment.

Our net worth, like everyone else's, is due to a combination of choice and circumstance.

- We also hope this show helps strip away the taboo from money talk.

How can we find solutions to issues that we aren't educated on and don't converse openly about?

This subject is no different.

As the writer, At-Nehisi Coates puts it, All of our solutions to the great problems of healthcare, education, housing and economic inequality are troubled by what must go unspoken.

- Hopefully, if enough of us honestly talk about this rigged game, we just might be able to see more people actually win.