Dreams shattered in Black America

THE FORECLOSURE rate in Black and Latino communities is running at an astonishing rate.

In Chicago, foreclosures increased by 18 percent in 2009, including 8,000 homes lost by Latinos and another 10,000 homes lost by African Americans. According to the Center for Responsible Lending, between 2009 and 2012, 1.3 million Latinos and 1.1 million African Americans are expected to lose their homes.

The nonprofit Woodstock Institute attributes the disproportionate number of lost homes in Black and Latino communities to their overrepresentation among those who were steered towards sub-prime loans during the 2000s. Studies have shown that African Americans, despite being qualified for convention loans, were often steered toward sub-prime loans, with their hidden fees and ballooning interest rates.

For years, African Americans in urban areas were cut off from private mortgage funds. But legal changes in the 1970s in lending rules and deregulation in the 1980s and 1990s led to a sharp increase of credit in African American communities.

African American communities were more susceptible to predatory lending because of the dearth of banks in Black communities and the generally lower credit scores among African Americans. According to the Chicago Reporter, when calculated on a 100-point scale, the average credit score for African Americans is about half of the average for whites.

Generally, low credit scores were the pretext for both steering Blacks toward sub-prime mortgages during the housing boom--and now, the renewed exclusion of African Americans from credit sources. According to one report, in 2008, 48 percent of African American applications to purchase or refinance a home were rejected. In Dallas, more than 60 percent of Blacks' loan applications for home refinancing were rejected.

Still, the focus on low credit scores as the reason for African Americans being offered predatory mortgages or now being rejected outright has become a way of denying that racism underlies the foreclosure and credit crisis in Black communities.

A lot of the evidence leads to a different conclusion.

For example, a 2005 study found that 70 percent of African Americans with incomes between $92,000 and $152,000 who bought homes were given sub-prime loans, versus 16 percent of whites in the same income range. Moreover, the NAACP claims in a lawsuit against several mortgage lenders that even when Blacks and whites were both offered sub-prime loans, African Americans were charged on average 30 percent more for the same services.

But even when it was the case that Blacks had lower credit scores and therefore didn't qualify for prime credit based on "legitimate" criteria, can this process by considered free of racism? Who and what determines what constitutes "good credit" anyway? What are the factors involved?

According to the response of JPMorgan Chase to the NAACP lawsuit charging discrimination, a good credit score is based on multiple factors like credit history, debt, work history, assets, and previous or current property ownership, among others. How could it be claimed that such criteria aren't shaped by racism?

In reality, "good" or "bad" credit are socially created products, born of the entanglement of race, place, the real estate industry and American housing policy.

IN THE earliest parts of the 20th century, African Americans, along with millions of rural whites and European immigrants, flocked to American cities to escape rural life and look for jobs.

As early as 1908, when the National Association of Real Estate Boards (NAREB) formed, the code of ethics for realtors required that "a Realtor should never be instrumental in introducing into a neighborhood...members of any race or nationality or any individual whose presence will clearly be detrimental to property values in the neighborhood." As late as 1950, this was still the written requirement of NAREB members.

But the motivation was never just racial. Rather, there was significant money to be made in restricting African Americans to specific portions of cities. This led to worsening overcrowding, and as neighborhoods went into decline, the realtors' tales of the harmful effects of Blacks on property values came true--which, in turn, was used to justify continued segregation.

Many of the realtors responsible for the racial division of cities in this early period went on to be central participants in the creation of American housing policy in the 1930s. One of the most influential was a man named Homer Hoyt, who began his career as a real estate agent in Chicago before joining the University of Chicago's influential Sociology Department, which famously studied settlement patterns of Blacks migrating to Chicago.

From 1934 through 1940, Hoyt was instrumental in developing Federal Housing Administration (FHA) guidelines that linked neighborhood racial composition to property values. On the critical issue of maintaining property value, Hoyt wrote, "It is in the twilight zone, where members of different races live together, that racial mixtures tend to have a depressing effect upon land values."

In his highly influential book, One Hundred Years of Land Values in Chicago, Hoyt descended into racist myth to come up with a "ranking of races and nationalities with respect to their beneficial effect upon land values, [which] may be scientifically wrong from the standpoint of inherent racial characteristics, [but which] registers an opinion or prejudice that is reflected in land values."

Hoyt used a ranking system developed by a real estate broker on the West Side of Chicago that listed, in descending order, the groups that had the most desirable effect on property values:

1) English, Germans, Scotch, Irish, Scandinavians
2) North Italians
3) Bohemians or Czechs
4) Poles
5) Lithuanians
6) Greeks
7) Russians, Jews (lower class)
8) South Italians
9) Negroes
10) Mexicans

Hoyt took his twisted ideas about race and property values with him to his post in the FHA.

By the mid-1930s, almost one out of every two homes was in foreclosure. Created by the federal government in 1934, the FHA was designed to do two things: spur the construction of houses, thereby putting people back to work during the Great Depression; and insure mortgages to prod banks to lend money at reasonable rates.

From its inception, the FHA was heavily influenced by the private real estate industry, which had always linked African Americans to neighborhood decline. Thus, FHA policy on loan insurance reflected this. The 1938 FHA Underwriter's Manual, which established government policy regarding mortgage insurance, wrote:

Areas surrounding a location are investigated to determine whether incompatible racial and social groups are present, for the purpose of making a prediction regarding the probability of the location being invaded by such groups. If a neighborhood is to retain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes. A change in social or racial occupancy generally contributes to instability and a decline in values.

While the creation of the FHA was responsible for expanding home ownership to millions of people who otherwise never would have been able to afford it, it also created policies that denied African Americans access to the same benefits. By 1959, 10 years after the passage of the American Housing Act of 1949, only 2 percent of new homes insured by the FHA were for nonwhites.

When the GI Bill was passed in 1944, it followed the lead of the FHA in excluding Black veterans from a policy of guaranteed mortgages. Though 8 percent of veterans from both the Korean War and Second World War were nonwhite, by 1956, the Department of Veterans Affairs had only guaranteed home loans for 3 percent of nonwhite veterans.

There were two primary criteria for receiving loans: racial homogeneity and the age and condition of the property. By the 1960s, American inner cities were overwhelmingly Black, meeting the criteria of racial homogeneity, but most of the structures in these areas were old and dilapidated, rendering them risky sites for investment in the eyes of government bureaucrats.

Agents in the FHA drew red lines––hence the term "redlining"––around inner-city areas where most African Americans lived, and denied their eligibility for government-insured mortgages.

The segregation of African Americans in inner cities didn't just affect their access to housing. It sharply impacted their access to good jobs--especially by the 1950s and 1960s, when good jobs began leaving cities for the suburbs to capitalize on lower overhead costs.

Moreover, because of the peculiar U.S. emphasis on "neighborhood schools" funded through property taxes, segregated Black schools lagged behind financially suburban white schools. Thus, housing discrimination and redlining were lynchpins in a whole edifice of racist policies. Savings and loans, banks and insurers all took their lead from the federal government and excluded Blacks.

THE LACK of available credit in inner cities had two effects in particular. One, it drove up prices on everything. The extra amount that Blacks came to pay for housing, food, medicine, cars and more became popularly known as "the race tax." Second, where lending opportunities were available, it was at predatory rates.

In Chicago, for example, the vast majority of Blacks couldn't secure mortgages because of FHA policy. So if African Americans wanted to buy a house, they had to do so on a land installment contract.

Houses bought on contract required larger down payments and higher interest rates than conventional loans. Moreover, contract owners weren't given the title to the house until it was completely paid off, even though they were expected to assume all the financial responsibilities of home ownership, including paying property taxes, home insurance and maintenance costs.

Yet if a single contract payment was missed or late, the contract buyer was treated like a renting tenant, taken to eviction court, and evicted from "their" house, losing everything they had already invested.

The use of contracts in home purchases for African Americans was worse in Chicago because of the ease with which contract buyers could be evicted within days--other cities used the longer foreclosure process. Nevertheless, the practice was the norm in others cities, like Detroit, Baltimore, Cincinnati, Philadelphia, Houston, Rochester, Washington, D.C., and elsewhere.

In 1968, the Fair Housing Act, the final piece of civil rights legislation of the 1960s, banned discrimination in all housing transactions, whether public or private. And in the 1970s, as a result of community struggles against redlining, several changes affecting lending practices were undertaken. Banks were required to publicize who they were lending to, and they could no longer take deposits from neighborhoods, while refusing to lend in the same places.

Nevertheless, decades of economic stigma, redlining, segregation and exclusion continue to shape lending institutions' relationship to the cities and neighborhoods where African Americans live.

The cumulative impact of government-sanctioned housing discrimination has shaped African American work histories, the accumulation of assets, ability to purchase property, and all other criteria that today go into defining who gets a "good" credit score.

Regardless of whether or not race is explicitly used as criteria in who gets access to mortgage lending--or equitable rates on everything from home insurance to car insurance to health insurance--the context is one of a long history of racialized public policy and private practice.