(Parts of earlier versions of this piece appeared on Forbes.com here and here.)

You may have seen stories in April about the Fair Housing Act being signed 51 years ago on April 11, 1968. The Act outlawed housing discrimination based on race, color, religion, and national origin.

As a real estate numbers geek, I was shocked a couple of years ago when I stumbled upon some U.S. Census data that showed that the percentage of U.S. blacks who own their own houses today is essentially the same as when housing discrimination was outlawed in 1968. The 1970 census found 42% of black households owned their own houses. In 2017, the number was 41%.

I was even more shocked when I saw that from 1950 to 1970 American blacks were able to increase their homeownership rate from 35% in 1950 to 42% in 1970.

Black Homeownership Paradox

That means, despite widespread, legal housing discrimination in the 1950s and at least part of the 1960s, the number of black families that owned their own houses increased 20% from 1950 to 1970 but, somehow, 50 years after housing discrimination was outlawed, the black homeownership rate is essentially the same today as it was the day the 1968 Fair Housing Act became law.

That seems impossible!

If discrimination prevented some blacks from buying houses in the 1950s and 1960s, why didn’t outlawing that discrimination in 1968 lead to more blacks owning houses today?

What the hell happened!

So I researched this stunning anomaly and here’s one man’s conclusion of what happened.

Part 1: From Redlining to 1968 Fair Housing Act

Before we dive in, let’s set the stage by looking at what mortgages were like before government mortgage programs.

Mortgages in 1930

#1 – Savings and Loans (including building and loan associations, and mutual savings banks)

• 45% of all outstanding mortgages in 1930
• 40% average down payment (average, so often lower)
• 11 years average length (max 15 years)
• 95% partially or fully amortized (no balloon payment at end)

S&L interest rates were a bit higher and you had to have a long track record of saving with them before they would lend you money to buy a house.

#2 – Individuals (family, friends, individual investors and, especially, house sellers)

• 37% of all outstanding mortgages in 1930
• Average terms unknown

It was common for house sellers to be the “bank” for their house buyers. The buyer would pay a down payment and for the rest of the money the buyer and seller would negotiate a seller “carryback” mortgage.

Or, the buyer might use two mortgages. For example, the buyer might pay the seller 20% in a cash down payment, get a first mortgage for 50% from a regular lender, and borrow the last 30% directly from the seller in a second mortgage. Back then, second mortgages were widespread.

#3 – Banks

• 10% of all outstanding mortgages in 1930
• 47% average down payment
• 4 years average length
• 10% of bank mortgages were fully amortized (you owed nothing at the end)
• 39% of bank mortgages were partially amortized (you owed less at the end of the mortgage than at the beginning)
• 51% of bank mortgages (or 5% of all outstanding mortgages) were “straight” mortgages where you only paid interest until the end when you paid back the original amount you borrowed. Today, we would call these short-term, interest-only, balloon mortgages.

Refinancing was usually assumed to be certain and consecutive renewal of short-term mortgages was quite common, at least until the Great Depression hit.

1933 – Redlining Begins

Federal redlining started in 1933. We were into the fourth year of the Great Depression. Hundreds of thousands had lost their houses to foreclosure and a lot more were headed to foreclosure. Franklin Roosevelt had just become president and the government created a new program (Home Owners Loan Corporation) to buy soon-to-be-foreclosed mortgages and offer the homeowners new government mortgages so they could keep their houses.

The lenders were happy to sell their delinquent mortgages to the government because the government was paying full price as if the mortgages weren’t in default. The homeowners were happy because they switched from owing huge balloon payments on their old mortgages to making monthly payments on their new 15-year government mortgages with no future balloon payments. Every month they paid the interest — plus a little principal — so at the end of the 15 years, they owned their places free and clear.

This government program in three years bought 18% of all outstanding mortgages in the United States (by value) and refinanced the houses with these new 15-year government mortgages.

This program was a success and became the model for future government mortgage programs — including its use of redlining. The program wouldn’t do mortgages in areas they said were economically hazardous. They had maps made of over 200 cities with the “riskiest” areas for lending marked in red. The red areas, it turned out, were mostly center city, black neighborhoods. The federal program wouldn’t do mortgages in those areas.

1934 – FHA Redlining Begins

Based on that program, the next year, 1934, the government created the Federal Housing Administration (FHA) which came out with a great way to get private mortgage lenders to make more mortgages — mortgage default insurance. FHA would insure mortgages that met their criteria, then FHA would pay the private lender if the lender had to foreclosure on an FHA-insured mortgage. The downside risk to the mortgage lender was phenomenally reduced and the lender just made the homebuyer/homeowner pay for the mortgage insurance.

Oh, and FHA would insure mortgages up to 20 years long with as little as 20% down.

This was an improvement over pre-1930 mortgages. You could lock-in one long-term mortgage instead of having to get a series of short-term mortgages. In the Great Depression, we found out that in a crisis, lenders might not renew your short-term mortgage. At the end, instead of rolling it over into a new, short-term mortgage, lenders might demand you pay the balloon payment and then foreclose on you when you couldn’t pay.

These new FHA mortgages were also a big improvement for those who could only put 20% down. Now, you could get a single, simpler, low-interest mortgage with 20% down instead of having to take out both a first mortgage and an expensive second mortgage to get down to 20% down.

These new FHA mortgages, however, also used redlining like the earlier program. FHA usually wouldn’t do mortgages in central city, black neighborhoods, it didn’t matter how strong the buyer was financially.

Many banks and S&Ls, and later the VA, copied these federal redlining lending standards. I wonder if some lenders who had previously lent in redlined areas, followed the federal government’s leadership and stopped lending there.

A few years later, to help new home builders increase the supply of houses, FHA started to insure construction loans for house builders. But now — dropping any pretense that redlining was because the neighborhoods were declining economically — FHA made the builders promise they wouldn’t sell any of the new houses to blacks.

So, blacks couldn’t buy houses out in the new suburbs and due to redlining, central city blacks couldn’t get federally-insured mortgages to buy houses in their central city neighborhoods either.

Next came the 1950s urban renewal projects that leveled some central city black neighborhoods in the name of helping central city black neighborhoods. Many say urban renewal was really about politicians helping their rich, white, campaign-contributing, real estate developer friends.

Mid-1950s – Homeownership Leveling Off Fast

By the mid-1950s, and for the U.S. as a whole, the skyrocketing U.S. homeownership rate of the 1940s and 1950s was leveling off fast. So, in 1956, the housing industry got the government to reduce the minimum FHA down payment from 20% to 10%. It was down to 3% by the end of the decade.

It seems the attitude was, “If 20-year/20%-down mortgages caused homeownership to skyrocket, then, naturally, going to 30-year/3%-down mortgages would do even better.” It didn’t happen. They apparently forgot that the homeownership boom was caused by a lot of different things, not just lower down payments and longer mortgages. Canada, for example, also had a huge homeownership boom but the Canadian government didn’t insure 20-year or 30-year long mortgages.

In the U.S., the FHA foreclosure rate increased rapidly and by the mid-1960s was eight times the 1950s average. At the same time, the U.S. homeownership rate stopped increasing.

What Happened?

Why did the black homeownership rate increase 20% from 1950 to 1970 despite widespread, legal and sometimes violent housing discrimination over most of that time? I don’t know for sure but I assume the top reasons were, 1) the real median black family income doubled from 1950 to 1970, and 2) some blacks, if they didn’t buy in the suburbs or redlined areas, were able to get mortgages to buy their houses.

One study argues that in some Northeast and Midwest cities, when central city whites moved to the new suburbs, house prices fell which enabled black homeownership to increase in the central city.

I think the following is an important clue to what happened — the states with the largest percentage point increases in black homeownership from 1950 to 1970 were West Virginia, Mississippi, South Carolina and Alabama. (See the interactive visualization near the top of this piece.)

Now let’s talk about the second part of the paradox, why the U.S. black homeownership rate isn’t any higher today than when the 1968 Fair Housing Act became law.

Part 2: Black Homeownership 1968 to Today

The 1968 Fair Housing Act was the last major civil rights legislation of the 1960s and probably the most contentious. It outlawed housing discrimination based on race, color, religion, and national origin. Before it passed, it was legal and common in many states for private individuals to refuse to sell or rent houses to blacks.

For a significant number of northern whites who supported other civil rights legislation, the Fair Housing Act hit too close to home. President Johnson’s top domestic aide, Joseph Califano, said, “We got the worst, nastiest mail we got on any piece of legislation on the Fair Housing Act.” A long time Democratic congressman from Chicago who championed civil rights legislation was defeated in the Democratic primary in 1968 after he championed fair housing. The Republican leader in the Senate, Everett Dirksen, also from Illinois, wouldn’t support the Fair Housing Act if it had strong enforcement provisions.

Therefore, in a political compromise to get it passed, the Fair Housing Act did not have strong enforcement powers.

Immediately after the Fair Housing Act was signed, however, political efforts shifted to creating brand new federal mortgage programs targeting lower-income, urban blacks. Just four months after the Fair Housing Act was signed into law, the Housing and Urban Development Act of 1968 was signed into law. It included the soon to be infamous Section 235 program from FHA that let lower-income people who couldn’t qualify for other mortgages get these new mortgages with down payments as low as $200 and subsidized, below-market interest rates as low as 1%.

High Hopes

Subsidized mortgages sounded like a great way to increase homeownership. President Johnson thought so. He said when signing the 1968 HUD Act into law, “this legislation can be the Magna Carta to liberate our cities” and he specifically mentioned the $200 down payment mortgage program. (Although, in the same speech he also called large-scale urban renewal a milestone of our progress.)

After the Fair Housing Act became law, instead of aggressively enforcing it and making sure blacks had equal access to the same mortgages that helped the white homeownership rate get so high, they created the new Section 235 mortgage program.

A later HUD secretary, George Romney, said of the program, “FHA personnel were encouraged to begin to do what they had not been doing; namely, to put families into homeownership situations in the central city in areas that had previously been redlined.”

The Nightmare

The new subsidized mortgage program was filled with fraud and abuse from real estate investors, real estate agents, appraisers and FHA employees. Neighborhoods in several cities ended up with blocks of foreclosed, vacant, boarded-up, FHA-owned houses.

In one related program in Detroit, by 1972, FHA had foreclosed on 35% of the mortgages they had made in 1968!

Despite President Johnson’s high hopes, the Section 235 program became a huge national scandal in the late 1960s and early 1970s. The program ended up being disgraced but many black neighborhoods in several large cities were left far worse off.

In a way, the program was unintentional, reverse redlining. Instead of excluding urban black neighborhoods from FHA’s normal mortgages like in the redlining of the 1930s, 1940s and 1950s, the 1968 FHA Section 235 program targeted lower-income, urban black neighborhoods for these new, and what turned out to be, extremely high-foreclosure FHA mortgages.

FHA mortgage lending standards which had been falling from the mid-1950s bottomed out with the Section 235 mortgages in 1968. In the 1970s, the disgraced mortgage programs were cut back but FHA lending standards never got anywhere close to returning to their 1940s and 1950s homeownership boom, low-foreclosure mortgages.

Since then, from 1975 to 2013, according to Ed Pinto of the American Enterprise Institute, one in eight FHA house buyers was foreclosed on, and “The FHA program has a national default rate 3 to 4 times the conventional market, and in many urban neighborhoods it routinely exceeds 10 times.”

FHA Foreclosure Rate of 12.5%

http://www.nightmareatfha.com/fha-reform-past-present-and-future/

Perhaps the 20% down payment requirement from 1934 to 1956 gave those FHA mortgages an unnecessarily large margin of safety but the margin of safety on these 1975 to 2013 FHA mortgages was obviously too small so they had incredibly high foreclosure rates.

Homeownership isn’t a wealth building tool when you get foreclosed on and lose all the money and work you put into the house.

BTW, if a private mortgage company had a 12% foreclosure rate, would you call that predatory lending?

What Happened?

Why isn’t the black homeownership rate any higher today than 50 years ago? Here are some likely factors.

Incredibly Inelastic Supply. The supply of houses in the U.S. increases more slowly than the supply of gold in the world, and unlike gold, you can’t ship houses around the world to wherever the demand is greatest.

Houses aren’t like anything else you’ll buy. The supply of houses doesn’t increase much in a year regardless of how much house prices increase that year. That means, when you subsidize buying houses and more people buy houses, house prices can increase a surprisingly large amount and that ends up making houses less affordable, even if that’s the exact opposite of what you intended.

Over-Stretched Homeowners. FHA let’s people with a given income get larger mortgages than traditional, non-government supported mortgages. That is, FHA lets people become more house-poor so they’re less able to keep up their houses when they’re hit by unexpected, expensive repairs. Neighborhoods with a lot of financially over-stretched homeowners, naturally, aren’t kept up as well, and that might discourage some other homeowners in the neighborhood who aren’t over-stretched from investing more money into their houses.

Percent of Mortgages With Debt-to-Income Ratios Above 43%

High-Foreclosure Neighborhoods. High-foreclosure mortgages don’t have much impact on your neighborhood if your neighborhood only has a few of them but if your neighborhood has a lot of them — whether from FHA or other lenders — high-foreclosure mortgages can be devastating.

Not only are foreclosures devastating for the families, if a neighborhood ends up with a lot of foreclosures, they hurt every homeowner in the neighborhood whether they have a high-foreclosure mortgage or not, and even if they own their houses free and clear.

A high concentration of high-foreclosure mortgages in a neighborhood means more vacant, abandoned, neglected and eventually foreclosed houses, and during real estate downturns, it means a lot more foreclosures.

Super Slo-Mo Feedback Loop. Be aware of another confusing thing about the relationship between house prices and mortgage lending standards. When house prices rise for any reason, foreclosures will fall for all mortgages, even for high-foreclosure mortgages.

When mortgage lending standards are lowered, it can, in and of itself, raise house prices which can lower foreclosures, which can make lenders think they can safely lower lending standards even more, which can increase house prices even more, which can make lenders think they can safely lower lending standards even more, and so on. While the lending standards are slowly ratcheting down over the years, the size of the next real estate bust is slowly ratcheting up.

Sometimes things happen so fast they’re hard to see. With real estate, sometimes things happen so slow they’re hard to see.

The Future

Although the FHA foreclosure rate wasn’t as high as on their 1968 Section 235 mortgages, I think high-foreclosure mortgages from FHA — and later from other lenders like Fannie Mae, Freddie Mac and private mortgage companies — help explain the Black Homeownership Paradox.

They help explain why the black homeownership rate isn’t any higher today, 50 years after the 1968 Fair Housing Act became law, despite the fact the black homeownership rate increased 20% from 1950 to 1970 when housing discrimination was legal and widespread.

It looks to me like unintentional reverse redlining since 1968 may have done something that intentional redlining and legal housing discrimination in the 1940s, 1950s and 1960s couldn’t do, it stopped American blacks from increasing their homeownership rate.

Whatever the causes, I think the black homeownership rate should be phenomenally higher today. To get there, we first have to admit that what we’ve been doing the last 50 years isn’t working.

If you asked President Johnson on April 11, 1968, what he thought the U.S. black homeownership rate would be in half a century, I don’t think he would have said, “The same.”


Notes. Special thanks to Edward Pinto of AEI for comments on an earlier version regarding the structure of pre-New Deal mortgages.

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