Ghettos and the Federal Housing Administration: Then and Now



In an attempt to help home buyers purchase homes Congress enacted the Federal Housing Administration (FHA) in 1934.  The FHA “insured private mortgages, causing a drop in the interest rates and a decline in the size of the down payment to buy a home.”  The FHA was a boon to those intending to buy.

 But not everyone was included in the act.  In my blog, Ghetto Scam and You, I introduced Clyde Ross who had purchased his home in the North Lawndale section of Chicago.  He had purchased a home “on contract.”  (Please see  Clyde Ross was unable to qualify for a FHA insured mortgage.

Why?  In order to distribute the FHA money wisely, they mapped cities and established a rating system.  If a community had an A rating, insurance might be easy to get.  A Chicago appraiser said that an A map had “neighborhoods that lacked a single foreigner or Negro.”  Those folks who lived in a D neighborhood, where most black people lived, were ineligible for FHA.  “Redlining went beyond FHA-backed loans and spread to the entire mortgage industry.”

“The government offering such bounty to builders and lenders could have required compliance with a nondiscrimination policy,” Charles Abrams, the urban-studies expert who helped create the New York City Housing Authority, wrote in 1965.  ‘Instead the FHS adopted a racial policy that could well have been culled from the Nuremberg laws.’”

“The devastating effects [of the government FHS racial policy] are cogently outlined by Melvin L. Oliver and Thomas M. Shapiro in their 1995 book, Black Wealth/White Wealth.

‘Locked out of the greatest mass-based opportunity for wealth accumulation in American history, African Americans who desired and were able to afford home ownership found themselves consigned to central-cities communities where their investments were affected by the “self-fulfilling prophecies” of the FHA appraisers: cut off from sources of new investment [,] their homes and communities deteriorated and lost value in comparison to those homes and communities that FHA appraisers deemed desirable.’”

What does the FHA require for people to get an approved loan today?

  • “A credit score of 500 or less generally means you won’t be eligible. The FHA will make allowances under certain circumstances for applicants who have what it calls “nontraditional credit history or insufficient credit” if they meet requirements. Ask your FHA lender or an FHA loan specialist if you qualify.”
  • “The FHA requires adown payment of just 3.5 percent of the purchase price of the home.”
  • “The FHA allows home sellers, builders and lenders to pay some of the borrower’s closing costs, such as an appraisal, credit report or title expenses. For example, a builder might offer to pay closing costs as an inducement for the borrower to buy a new home. Lenders typically charge a higher interest rate on the loan if they agree to pay closing costs.  Borrowers can use the good faith estimate of closing costs to compare interest rates and closing costs on different loans and figure out which option makes the most sense.”
  • “Because the FHA is not a lender, but rather an insurance fund, borrowers need to get their loan through an FHA-approved lender (as opposed to directly from the FHA). Not all FHA-approved lenders offer the same interest rate and costs — even on the same FHA loan.”
  • “Two mortgage insurance premiums are required on all FHA loans: The upfront premium is 1.75 percent of the loan amount and is paid when the borrower gets the loan but can be financed as part of the loan amount. The second is the annual premium, which varies based on the length of the loan, the amount borrowed and the initial loan-to-value ratio (LTV).”
  • “The FHA has a special loan product for borrowers who need extra cash to make repairs to their homes. The chief advantage of this type of loan, called a203(k), is that the loan amount is based not on the current appraised value of the home but on the projected value after the repairs are completed. A so-called ‘streamlined’ 203(k) allows the borrower to finance up to $35,000 in nonstructural repairs, such as painting and replacing cabinets or fixtures.”

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Check out my next blog for ways in which cities and contract sellers worked to create ghettos.

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