to the Great Depression, homeowners typically put a minimum
of 60% down on a home, with payment terms of 3-5 years of
interest only. After the term, the homeowner would refinance
the loan. If the bank chose not to refinance, the homeowner
would loose their down payment and property. HOLC had favorable
rates as well as 216-300 months to repay the loan in full.
It is alleged that some homeowners stopped paying their mortgage
intentionally for the more favorable terms offered by HOLC.
started with a $200 million purchase of stock by the US Treasury
Dept. The agency was authorized to issue up to $2 billion
in bonds and Congress increased their limit to $3.5 billion.
They could refinance homes with a market value no greater
than $17,500 (the maximum loan amount was $14,000 and the
average loan was less than $5,000). Most of the borrowers
were on the lower end of the middle class in the $50-150 per
month salary range. To reach clients in remote areas the agency
was located in regional centers. Agency employees were not
limited by bureaucratic constraints. They were given the latitude
to treat each case differently, depending on the dynamics.
They could make personal visits to prevent defaults, assist
borrowers with finding employment, find tenants for rental
space, file claims for public assistance, in other words they
were proactive and committed to the success of the agency
and as a result the default rate was approximately 20%. Not
exactly perfect for servicing but on the other hand a commendable
job when one considers the assets were non-performing when
HOLC refinanced them.
story on HOLC begins like this: less than 1% of that $3.5
billion went to Black folk. HOLC’s policy was to favor single
family residences outside the central cities which favored
suburbia and inclined toward racial segregation based upon
the premise that racially homogeneous neighborhoods were more
stable and presented the lowest risk. HOLC records indicate
during the years 1933 through 1936 when it was authorized
by Congress to issue loans, 44% of its assistance went to
“native white”, 42% went to “native white and foreign” and
1% to Negro.
policy was made by the Federal Home Bank Board System (FHLBB).
John H. Fahey, Chairman of FHLBB , in a speech before the
annual convention of the US Building and Loan League, Cincinnati,
OH, November, 1935, stated, “[f]or the first time a comprehensive
method of studying the risk involved in a particular mortgage
transaction had been developed by the Administration after
studying methods used in analyzing mortgage risk. These methods
have been set forth in a manual for underwriters, and some
650 staff underwriters and 1,800 fee consultants have been
trained in using them. Insurance companies and other lending
institutions have generally accepted this method as a major
contribution to the technique of mortgage lending”. The risk
rating system Mr. Fahey refers to was developed by none other
than Frederick Babcock, Asst. FHA Commissioner and FHA Chief
Economist Ernest Fisher.
rating system’s overarching principle was to protect the long-term
warranted value of the property. An impediment to this goal
was the introduction of “undesirables” into a stable neighborhood.
It became paramount to keep all neighborhoods segregated;
otherwise, lenders’ investments were in peril. This perception
was common and pervasive as Arthur May, former dean of American
Institute of Real Estate Appraisers, stated, “homogeneity
of the neighborhood and stability of property values go hand
in hand and that the mere threat of Negro entry had caused
a drop of 25 per cent in an all-white neighborhood in some
cities”. The American Institute of Real Estate Appraisers
was a consulting organization for HOLC and membership in the
institute qualified an appraiser to provide services to the
a tacit agreement among all groups - lending institutions,
fire insurance companies, and FHA - to block off certain areas
of cities within “red lines,” and not to loan or insure within
them. (U.S. National Commission on Urban Problems 1969, 101)
is the practice of not lending or insuring in certain neighborhoods
based upon the racial composition. This practice was encoded
in our system of finance, real estate and insurance by the
Home Owners Loan Corporation, an agency within the Federal
Home Loan Bank Board system created by Congress. The HOLC
had a method of property evaluation to determine the suitability
of neighborhoods for investment that became the standard used
by lending institutions and other real estate professionals.
HOLC surveyed 239 cities using 4 color codes to indicate the
level of risk a particular area would present. Based upon
information gathered from bankers, appraisers, real estate
agents and governmental officials, HOLC developed Residential
Security Maps with four classifications: First (A), Second
(B), Third (C) and Fourth (D) that corresponded to color grades:
A-Green, B-Blue, C-Yellow and D-Red.
spots” were First (A) grade areas, coded green. These areas
were in high demand during good times or bad, homogeneous,
and still had room for new residential growth. Second grade
of B, coded Blue had been completely developed, still good
but at its peak in the life cycle of neighborhoods. Third-grade
of C, colored yellow, were older neighborhoods, becoming obsolete
and had expiring deed restrictions or missing restrictions
(meaning Blacks could move in) and had an infiltration of
a lower grade population. These areas had poorly maintained
homes and often lacked homogeneity. Fourth-grade or D areas,
colored red, represented those neighborhoods with lower homeownership
rates, poor housing conditions, detrimental influences in
a pronounced degree and undesirable population. Essentially,
those areas in green represented an excellent investment,
blue was a good investment, yellow was a risk and red was
an extremely high risk where it was extremely difficult to
find an institution to lend, hence the term redlining.
the redlining theory argue that the Federal Home Loan Bank
Board (FHLLB) and the Federal Housing Administration (FHA)
were two separate and distinct entities and the FHA did not
use the residential security maps created by the FHLLB’s HOLC.
Notwithstanding the quote from above, the two agencies’ policies
were shaped by colleagues and students of the Institute
for Research in Land Economics and Public Utilities. The institute,
the lending and real estate industries fervently subscribed
to the theory of the neighborhood lifecycle and the mortgage
risk rating system. Furthermore, the results from both agencies
are the same - a hyper-segregated society and an inequitable
distribution of the resources in the middle and lower strata
along the lines of race. To be continued.
BlackCommentator.com Columnist, Lloyd Wynn was a consultant in the secondary market. Lloyd is the author of Residential Real Estate Finance: From
Application Through Settlement. Click
here to contact Lloyd Wynn.