Secret #19 – Worse Than Redlining

To Be Pre-Approved for FHA Mortgages, FHA Required New Home Builders to Ban ALL Sales to Blacks

House builders wanted to get pre-approval of their new home developments from FHA because it made it far easier for developers to borrow the money they needed to develop their new home subdivisions out in the suburbs. Potential investors wanted to know that, when completed, the houses in the proposed new subdivision would qualify for FHA mortgages.

FHA, however, would NOT pre-approve new subdivisions unless builders banned ALL house sales to Blacks and other minorities in the new subdivisions. (Atlanta Fed, 2019.)

It didn’t matter if a buyer used an FHA mortgage or a different mortgage. It didn’t even matter if a buyer paid all cash! The subdivision had to ban all sales to Blacks to get pre-approval from FHA.

FHA policy caused developers to ban all sales to Blacks and other minorities when the houses were new, and they even banned resales of the houses to Blacks in the future! Builders did this with deed restrictions that banned the sale, resale, or rental of the houses to Blacks.

To get a feel for the underlying attitudes at the FHA, in 1947 the Supreme Court ruled that courts could not enforce racial deed restrictions but, nevertheless, the FHA kept recommending racial deed restrictions until 1950 (Tillotson, 2016.)

Government policy was a big reason why the new suburbs after World War 2 were so White even outside of the South.

• Blacks couldn’t get FHA mortgages to buy houses in central city neighborhoods because of FHA redlining, and

• Blacks couldn’t buy, or even rent, houses in many or most new suburbs because of the FHA.

The problem was the federal government rewarded builders who banned all sales to minorities in new subdivisions.

The problem wasn’t that single-family zoning in the new suburbs indirectly discriminated against Blacks. The problem was the federal government directly discriminated against Blacks and other minorities in the new suburbs.

Exploiting Black History. Why have you heard of redlining so often but you've never heard of this super racist U.S. government policy toward new subdivisions that was going on at the exact same time as redlining? 

My theory is that it’s because the history of redlining has often been used to sell “affordable” (higher-foreclosure) mortgage policies.

We didn't lend mortgages to inner-city Blacks due to redlining – the sales pitch goes – so we should sell them “affordable” (higher-foreclosure) mortgages now.

You may have first heard of redlining as part of a sales script from the mortgage and real estate industry to sell the idea of “affordable” (higher-foreclosure) mortgages.

Talking about the history of the U.S. government rewarding new home builders if they banned all Blacks from their new subdivisions doesn't help sell more “affordable” (higher-foreclosure) mortgage policies today so the industry never mentions it. 

The industry hasn't figured out a way to make money by bringing up that part of American history so they don’t and you’ve probably never heard about it before today.