The Hypocrisy of U.S. Housing Policies

Systematic racism takes many forms.  It has always been the case that Blacks and other minorities lag Whites with respect to education, health, income, and wealth.  It is a well-documented and recognized fact of our society.  Obviously, there are many root causes of these social disparities.

However, I want to focus on what I consider to be one of the historically critical elements of systematic racism: U.S. government housing policies.  This will include historical policies that many people are unfamiliar with.  I will also focus on how current policies foster a continuance of this pattern of discrimination through less obvious mechanisms known as tax expenditures, procuring small mortgage loans, and discriminatory lending.

The Historical Precedents: The Post-World War II Period and Housing Finance

This period clearly goes down as a major transformative time in American history.  It also dramatically reinforced segregation practices in housing whose effects continue to plague Blacks to this day and will into the foreseeable future.

My parents were high school graduates, and during WW II my father served in what was then called the Army Air Corps.  Early in their childhoods, both families were quite well off, but they lost everything prior to and during the Depression.  After my father was discharged, and my brother was born, my parents were living with his parents on Long Island, NY.  There was a severe post-war housing shortage, and such living arrangements were more the rule than the exception.

Enter William Levitt, who had the idea to build low-cost expandable houses using very basic and consistent construction plans that allowed homes to be built quickly and inexpensively.  That was the plan, but then how could post-Depression young adults with minimal if any net worth finance the home purchase?  Enter the Veterans Administration (VA) and the Federal Housing Administration (FHA).  These two federal agencies provided low cost financing to young households with minimal down-payments, low interest rates, and a 30-year period to pay off the loan.  In other words, lower middle- and middle-income people could buy the homes and have low monthly mortgage payments because the loans could be paid off over 30 years.

Levitt’s primary development was Levittown New York.  Prior to construction commencing, the VA and FHA committed to provide the financing for qualifying households.  A purchase required only a $500 down-payment for an $8000 house.  My father had to borrow the $500 from an uncle, and he qualified even though he had just been laid off at a defense plant.  It was a very successful program.

But only if you were White

Blacks were effectively excluded from the VA/FHA mortgage programs.  Their military service did not count.  Their financial resources, even if sufficient to meet the lending guidelines, did not count.  On top of that, my parents were required to sign a covenant stating that they would never sell their home to a Black family.  Levittown NY grew to 70,000 people, all of whom were white.  The same thing was going on Philadelphia, Detroit, Chicago, and other major cities.  Needless to say, the South was no different.

During this period, a house was the primary source of wealth for middle class families.  The joke was that you bought your house with a 30-year mortgage, worked for the same company for 30+ years and retired with a pension. You then sold your house in the “cold climes” and moved to Florida and Arizona.  The reality was that it was no joke.  This was the middle-class life. Twenty-five years later, my parent’s home remained their primary source of wealth, even though they lived check to check throughout this time.

This systematic racism in housing policies was compounded by “red-lining”.  This “unofficial” form of discrimination steered Black families away from White neighborhoods.  But this is generally known in the public, even if some people refuse to believe it.  It has been illegal since the civil rights legislation of the 1960’s, but it is rarely enforced.  It is hard to prove, so it is easier just to have a settlement where the lender pays some fine and walks away without even admitting guilt.

Historical Precedents: The Post World War II Period—Transportation and Infrastructure Policies

This systematic racism in housing had other dimensions that were and continue to be incredibly averse to Black households.  Because they were forced to remain in central city neighborhoods, Blacks were particularly vulnerable to transportation and public works policies.  The problem was this.  The White suburbanites had to get into the central city where their jobs were located.  They wanted to drive in, and regional planners were happy to accommodate them.  Enter freeways and the interstate highway system which cut through Black urban neighborhoods, in effect dislocating and destroying them.  For those who are doubters, I suggest reading any book on Robert Moses or just check him out on Google.

Cars and the resulting traffic congestion polluted the air.  At the time there were no anti-pollution devices on cars.  Gasoline actually had lead in it.  The health effects from air pollution and leaded gasoline are well known.  Central city Blacks were the “beneficiaries”, and their health was accordingly impaired.

The suburbs needed infrastructure such as water, sewage treatment, and above all schools.  While central city neighborhoods had deteriorating water/sewer systems and schools, everything in the suburbs was normally built from scratch.  In other words it was all newly constructed using the latest materials.  In comparison, it is now widely recognized that many urban water systems’ pipes leached lead into the water.

Some of these negative impacts could have been mitigated if central cities had been able to annex the growing suburbs and their tax base.  However, in many regions state and local legislatures ensured that was not going to happen and specifically implemented laws to prevent it.

None of what I am writing about is new, but few people put the pieces together or even think about it.  Post WW II housing policies wreaked havoc on Blacks and other minorities.  It substantively reduced their housing options, their neighborhoods were further diminished by freeways and other automobile “amenities”, the health of urban families was significantly harmed due to “suburban” pollution and deteriorating infrastructure.

Perhaps most important, it prevented Black households from accumulating wealth.

Can you think of any jurisdiction in the U.S. where the schools, roads, and water/sewage treatment systems are better for predominately Black/minority neighborhoods than for White neighborhoods?  I cannot.

The Current Bias of U.S. Housing Policies and Practices

Red-lining remains a problem.  Discriminatory lending practices remain a problem. In many documented cases, Black/minority households are often forced to accept higher mortgage rates and pay more fees than comparable White borrowers. Those
lenders that are “caught” just pay a fine—a slap on the wrist in effect. Furthermore, this was taken to the limit in the 2004-7 period when low income households with inadequate understanding of the financial terms of their mortgages were grievously taken advantage of by sub-prime mortgage lenders.  Whatever equity they had built up was generally destroyed due to unemployment and the collapse of home prices.  The defaults cost them their homes, but it also impaired their credit for years.

Instead of civil statutes, why not make Red-lining and discriminatory practices criminal offenses.  The threat of jail may be more powerful than simply imposing fines if at all.

There are two lesser known discriminatory practices: small dollar mortgage loans and tax expenditures.  Recently, there have been a number of papers showing that lenders are averse to making mortgage loans for small balances.  There are two reasons for this.  The first is that mortgage lending still requires much documentation and labor-intensive reviews.  These costs are basically fixed regardless of the size of the mortgage and are paid as a percentage of the mortgage balance, often 1%.  For a $50,000 mortgage, the lender gets $500.  On a $200,000 mortgage, the lender gets a fee of $2000.  Which mortgage would you focus on?  Since many Black/minority borrowers live in neighborhoods where housing prices are low, this pattern of “ignoring” small loans is a form of discrimination.

A related problem is mortgage servicing.  When you make a payment on your mortgage, it does not go to the lender.  It goes to the servicer of your loan.  The servicer takes your payment and allocates interest and principal to the owner of the mortgage loan.  The servicer also handles delinquencies and defaults.  The servicer makes its money two ways.  The first is late fees on delinquencies and related issues.  The second is that the servicer receives a fee on each loan every month that is equal to the servicing fee in percentage terms times the outstanding balance on the loan.

For a simple example, assume that the annual servicing fee is 0.50% (normally is more like 0.25-0.375%).  The cost of servicing is about the same for a small loan and a large loan.  Going to the example above, the small loan would provide an unprofitable servicing fee of $250/year, while the $200,000 generates $1000.  It is often the case that the servicers are subsidiaries of the lenders.  Therefore, the lenders basically have no incentive to make small mortgage loans, and this primarily affects Black/minority households.

The second problem is the perception and reality of public housing assistance.  Let me provide an example.

Talk to your suburban White middle- and upper-income neighbors about housing.  Suggest that the government should provide down-payment subsidies, payments to lenders to provide small balance mortgage loans, and pay for financial counseling to Black households.  The cost would likely be quite modest, certainly less than $25 billion.  I suspect that the reaction would be strongly negative, that sufficient housing programs already exist through the government or non-profits.  Unfortunately, they do not, but that is likely to be the consensus view.

They would not support direct expenditures to assist potential Black borrowers/homeowners.

Now ask those same neighbors who own their homes whether they take the mortgage interest deduction on their primary residence and their vacation properties if they have one.  The answer would very likely be in the affirmative. 

Now ask them if it is hypocritical to take the tax deduction, a “tax expenditure”, but not a “direct” expenditure to support to low income Black households.  I am confident that they would argue that there is a “difference” between the two. 

But there is not.  Fiscally, direct and tax expenditures are both costs.  One is a line item in the budget, and one is not.  By the way, the mortgage interest deduction costs the U.S Treasury about $70 billion in revenue.  This is a pure subsidy to the middle- and upper- income households.

Eliminating the Hypocrisy

President George W. Bush promoted the ownership society.  Its intent was good, but it permitted predatory lending and resulted in an actual decline of Black home ownership.  Supporting home ownership will require direct expenditures for small loans and similar programs, but that is not sufficient.  There must be a concurrent infrastructure plan.

Systematic racism in housing and related policies have historically and continue to plague Black households in wealth creation, health, education, and job opportunities.  What is required is not complicated.  Make discriminatory practices potentially criminal offenses.  To provide down-payment subsidies and small mortgage loans, for it could be funded at least in part by removing the mortgage interest deduction on vacation homes/properties.  That would be a good place to start.  Why should taxpayers be subsidizing someone’s beach house while significant housing needs are unmet?

Infrastructure can be addressed through a general infrastructure program focused on transportation, schools, and environmental protection that should be done in any context. 

I am well off.  If my parents had been Black and unable to purchase a home following WW II, would I be well off? 


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