Dream of Owning a Home Became a Nightmare

When tens of thousands of African-Americans held the keys to their first homes in the early 1970s as part of a new federal program that encouraged black homeownership, they thought they were about to fulfill the American dream. Instead they got an American nightmare.

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{snip} The Housing and Urban Development Act of 1968 created policies that let low-income black renters, long excluded from conventional mortgages and other standard ways of financing homes, become homeowners.

At the core of the law were three components: A down payment cost only $200; a buyer’s mortgage was linked to her income, not her house’s value; and the interest rate on the loan, subsidized by the federal government, was capped at 1 percent.

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The Federal Housing Administration backed mortgages arranged through this program and bankers didn’t have to worry about foreclosures or defaults because if buyers fell behind on their payment, Washington would simply pay off the loan. An unprecedented number of black renters in Philadelphia, Detroit, Chicago and other urban centers became homeowners.

But the program was troubled from the start. The conditions that allowed for homeownership also set the groundwork for fraud. Racist exclusion gave way to predatory inclusion.

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Meanwhile, bankers signed off on bloated appraisals because Washington absorbed the risk. These bankers made money on both the fees to make the loan and the closing costs to sell the house, so they cared only about issuing a huge number of mortgages, which they’d package and resell. {snip}

In turn, black buyers were paying more for homes that were older and shoddier than the ones their white peers were buying in the suburbs. As a result, the nation’s first programs to encourage black homeownership ended in the 1980s with tens of thousands of foreclosures. The push to uplift black homeownership had turned into a gold mine for real estate agents and mortgage lenders. {snip}

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{snip} Generous government subsidies had helped the real estate and banking industries overcome their reluctance to sell and lend to African-Americans. But of course they never stopped believing blacks presented a threat to property values, perpetuating the real estate industry’s segregationist practices.

While the policies created by the Housing and Urban Development Act did not immediately change the practices or the beliefs within the real estate industry — or among agents working for the Federal Housing Administration — it did allow for the participation of broader networks of real estate operatives and lenders that circulated billions of new dollars throughout the urban housing market.

This public-private partnership in the production of low-income housing tethered the public agencies of HUD and the F.H.A. to real estate brokers, mortgage bankers and homebuilders. These close relationships made it unlikely that anti-discrimination laws would be aggressively enforced. This allowed banks and real estate agents to continue to illegally steer black buyers away from neighborhoods with better housing at better prices.

One reason for the reluctance to push industry to obey federal laws was that federal workers eventually wanted jobs in the more lucrative private real estate industry. Another was that too much regulation could prompt the private partners to take their business far from the red tape of government.

The recruiting of thousands of poor black women as homeowners was strategic for an industry in search of new customers — and underlined the dubiousness of the program.

Real estate brokers and mortgage bankers valued black women like Janice Johnson precisely because they were poor, desperate and likely to fall behind on their payments. The HUD-F.H.A. guarantee to pay lenders in full for the mortgage of any home in foreclosure transformed risk from a reason for exclusion into an incentive for inclusion. Banks could profit from being repaid for inflated mortgages, and profit again when the foreclosed property was resold to another poor family that qualified for a government-guaranteed mortgage.

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Racial discrimination persisted in the new market because it was good business, not simply because the industry was stuck in its old ways. Our failure to fully recognize this history has meant that housing policy continues to uncritically revolve around market-based solutions even as black homeownership rates fall to historic lows.

It’s hard to uproot these predatory practices because race has been so important to the real estate industry’s bottom line. At the very least, Washington must renew its commitment to aggressively enforce its own civil rights laws and ruthlessly punish offenders. This could finally undo the ways that racial inequality has continued to find value in our housing market.