Federal Housing Administration Research Articles

Historical Redlining Is Associated with Disparities in Environmental Quality across California.

Historical policies have been shown to underpin environmental quality. In the 1930s, the federal Home Owners' Loan Corporation (HOLC) developed the most comprehensive archive of neighborhoods that would have been redlined by local lenders and the Federal Housing Administration, often applying racist criteria. Our study explored how redlining is associated with environmental quality across eight California cities. We integrated HOLC's graded maps [grades A (i.e., "best" and "greenlined"), B, C, and D (i.e., "hazardous" and "redlined")] with 10 environmental hazards using data from 2018 to 2021 to quantify the spatial overlap among redlined neighborhoods and environmental hazards. We found that formerly redlined neighborhoods have poorer environmental quality relative to those of other HOLC grades via higher pollution, more noise, less vegetation, and elevated temperatures. Additionally, we found that intraurban disparities were consistently worse for formerly redlined neighborhoods across environmental hazards, with redlined neighborhoods having higher pollution burdens (77% of redlined neighborhoods vs 18% of greenlined neighborhoods), more noise (72% vs 18%), less vegetation (86% vs 12%), and elevated temperature (72% vs 20%), than their respective city's average. Our findings highlight that redlining, a policy abolished in 1968, remains an environmental justice concern by shaping the environmental quality of Californian urban neighborhoods.

The HOLC Maps: How Race and Poverty Influenced Real Estate Professionals’ Evaluation of Lending Risk in the 1930s

During the late 1930s, the Home Owners’ Loan Corporation (HOLC) developed a series of area descriptions with color-coded maps of cities that summarized mortgage lending risk. We analyze the maps to explain the oft-noted fact that black neighborhoods overwhelmingly received the lowest rating. Our results suggest that racial bias in the construction of the HOLC maps can explain at most 4 to 20 percent of the observed concentration of black households in the lowest-rated zones. We also provide evidence that the Federal Housing Administration had its own mapping strategies when evaluating mortgages and relied relatively little on the HOLC maps.

Peer-to-Peer Lending as a Determinant of Federal Housing Administration-Insured Mortgages to Meet Sustainable Development Goals

In this paper, we investigate the influential factors of Federal Housing Administration (FHA) mortgage loans, focusing our research interest on peer-to-peer (P2P) lending, the most successful FinTech lending model. We consider P2P lending an alternative source of financing that marginal borrowers use to pay the increased mortgage down payment, making them eligible to receive a mortgage from conventional banks. In other words, we examine whether and to what extent P2P lending has a positive impact on the FHA loans volume by providing the ability to circumvent the loan-to-value (LTV) cap policy. As a result, P2P lending can be seen as a means for ”rationed” borrowers to have access to the market by reducing inequalities and promoting financial inclusion, thus achieving Sustainable Development Goals (SDGs). We employ hand-collected data from FHA mortgages, P2P loans, and other economic factors from all 50 U.S. states during 2007–2017 and use panel data techniques for this purpose. Research shows that P2P lending, GDP per capita, population growth, broad money growth rate, interest rate, unemployment rate, new housing units, and consumer confidence Index produce effects on FHA loans. We show that P2P lending, a nonconventional determinant, is causally associated with a significant increase in the count and volume of FHA loans, implying that P2P lending has a positive impact on them. The ability of P2P to bypass mortgage supply constraints (tightened LTV caps) by providing small loans to borrowers to meet the increased down payment requirements is very important to policy-makers, as it shows that constraining the volume of mortgage loans may be not achieved. Macroprudential tools designed to control credit growth may prove ineffective, as the use of alternative forms of lending helps circumvent them and ultimately leads to excessive household leverage with all the risks that it poses to the financial system.

Investigation of Current Industry Strategies to Reduce the Cost of Financing a Manufactured Home

The cost and process when financing manufactured homes (MHs) are the greatest barriers to owning them. MHs are considered personal properties and do not qualify for conventional real estate loans with lower interest rates than personal (chattel) loans. The resulting higher financing costs present a major obstacle to the lower-income demographic, who are the predominant purchasers of MHs. Recently, strategies have been implemented to permit MHs to be considered real property; therefore, making them eligible for a conventional mortgage. However, most MHs do not qualify for conventional loans and must apply for higher-interest chattel loans. To the best of the authors’ knowledge, this area has not been investigated by academia or industry. Therefore, there is a gap in the literature on financing an MH. This study reviewed various methods for financing MHs and their corresponding loan terms, interest rates, down payments, and advantages or disadvantages. This study included Federal Housing Administration (FHA), chattel, and conventional loans. The aim was to identify the best approaches to reduce the cost of financing an MH that was based on specific conditions, such as the land ownership of the property and the type of foundation. Strategies, such as providing land lease communities for MHs to qualify them as real properties, were discussed. Recommendations were made to reduce ownership costs for manufactured houses to benefit the homeowners, MH industry, and mortgage companies.

Racialized Hazardous Space: A Critical Race Urban-Environmental Sociology of Residential Security in the Depression Era

This article advances a novel “critical race urban-environmental sociology” (CRUES) approach that synthesizes Marxist and critical race theory to focus on the “production of racialized hazardous space” and “residential security” during the Great Depression in the U.S. It applies the CRUES lens to the work of Frederick M. Babcock, the economist who disseminated authoritative and racially discriminatory statements on residential security and neighborhood appraisals before and during his tenure at the Federal Housing Administration. The article shows how Babcock paralleled and intersected with strands of classic urban ecology to conflate racially segregated and environmentally hazardous neighborhoods and naturalize their devalued status. Using the CRUES lens, the article also frames the Home Owners’ Loan Corporation’s (HOLC) worst neighborhood rating in its 1930s Residential Security Surveys as racialized hazardous space, and advances a conceptual model for future research on how environmental hazards, racialized social “threats,” and other sociospatial factors conditioned HOLC hazardous grade assignments.

Where Did Redlining Matter? Regional Heterogeneity and the Uneven Distribution of Advantage

This article analyzes the regional variation in outcomes of a seemingly standardized federal neighborhood valuation principle used in home mortgage insurance grading. The objective is to highlight the contingent discriminatory and economic conditions that mediated heterogeneous housing outcomes across different parts of the United States. How did city and regional economic and demographic growth patterns vary before and during the mortgage insurance program implemented through the Federal Housing Administration (FHA)? How might this have shaped loan guarantee patterns? How does preexisting racial housing discrimination relate to outcomes? Adopting an orientation that centers on Whiteness and the benefits of mortgage finance for certain groups and neighborhoods, this analysis uses a Bayesian hierarchical framework to investigate the degree of the FHA’s influence between 1940 and 1970, here proxied by the Home Owners’ Loan Corporation maps, on A or B (“AB”) graded neighborhoods versus C graded neighborhoods in different cities. This article studies how home values and homeownership change over time and whether there are regional variations in the influence of these grades. It also studies what longitudinal socioeconomic patterns might explain the persistence or decline of the AB effect over time. Findings show cities in the West Coast, Southwest, and northern central United States that saw the most housing construction also had the highest proportions of FHA loans to overall dwelling units. There is also a distinctive consistency and persistence of benefit on home value and homeownership to AB graded neighborhoods in these cities, possibly owing to regional shifts in the industrial landscape.

Review: Tainted Tap: Flint’s Journey from Crisis to Recovery, by Katrinell M. Davis

Review: <i>Tainted Tap: Flint’s Journey from Crisis to Recovery</i>, by Katrinell M. Davis

Past structural racism and present home prices

ABSTRACT The widely acknowledged rating system of the Federal Homeowners’ Loan Corporation (HOLC) was a relative measure of pre-1940 racist practices in residential real estate activities in large United States central cities. It was not an assessment that guided HOLC or later Federal Housing Administration (FHA) mortgage lending practices. The research question examined here is whether a similar home in different HOLC-rated neighborhoods in the City of Sacramento (California) sold for a different price eight decades after receiving its HOLC grade. A hedonic regression result shows that homes in the two forms of lower-rated neighborhoods sold for about 13% less than those in the two forms of higher-rated neighborhoods. A Blinder-Oaxaca decomposition breaks down the average selling price difference of $195,000 between a home sold in HOLC green/blue compared to yellow/red rated neighborhoods. A third of this difference in home prices, which is not due to home characteristics, represents a starting measure of the legacy of discriminatory housing practices. The remaining two-thirds of the difference could be due to variations in current home characteristics also influenced by Pre-1940s discriminatory housing practices. These findings are relevant to understanding the contribution of past structural racism in the housing market to present inequalities.

The Relationship of Historical Redlining with Present-Day Neighborhood Environmental and Health Outcomes: A Scoping Review and Conceptual Model.

Following the Great Depression and related home foreclosures, the federal government established new agencies to facilitate access to affordable home mortgages, including the Home Owners’ Loan Corporation (HOLC) and Federal Housing Administration (FHA). HOLC and FHA directed widespread neighborhood appraisals to determine investment risk, referred to as “redlining,” which took into account residents’ race. Redlining thereby contributed to segregation, disinvestment, and racial inequities in opportunities for homeownership and wealth accumulation. Recent research examines associations between historical redlining and subsequent environmental determinants of health and health-related outcomes. In this scoping review, we assess the extent of the current body of evidence, the range of outcomes studied, and key study characteristics, examining the direction and strength of the relationship between redlining, neighborhood environments, and health as well as different methodological approaches. Overall, studies nearly universally report evidence of an association between redlining and health-relevant outcomes, although heterogeneity in study design precludes direct comparison of results. We critically consider evidence regarding HOLC’s causality and offer a conceptual framework for the relationship between redlining and present-day health. Finally, we point to key directions for future research to improve and broaden understanding of redlining’s enduring impact and translate findings into public health and planning practice.

New Evidence on Redlining by Federal Housing Programs in the 1930s

We show that the Federal Housing Administration (FHA), from its inception in the 1930s, did not insure mortgages in low income urban neighborhoods where the vast majority of urban Black Americans lived. This pattern emerged before the Home Owners’ Loan Corporation (HOLC) drafted its infamous maps. In contrast, the HOLC itself broadly loaned to core urban neighborhoods and to Black homeowners. We conclude that the mechanisms through which the HOLC's maps could have affected the geographic scope of mortgage lending were likely quite limited. The FHA instead evaluated neighborhoods using block-level information developed in the 1930s and other data, rather than on the basis of the HOLC maps.

On the Impact of Federal Housing Policies on Racial Inequality

Using data on the value of Federal Housing Administration (FHA) mortgage insurance between 1935 and 1939, I estimate the effect of the agency's program on racial disparities in home ownership and home values. The distance between an FHA office and counties within its jurisdiction is used as an instrument. I find that insurance activity had a negligible effect on the racial gap in home ownership and a sizable effect on the gap in home values. Results suggest that while African American households continued to acquire homes, they may have chosen lower-priced properties, as they lacked the same access to credit as White buyers.

The Cumulative Costs of Racism and the Bill for Black Reparations

Two major procedures for establishing the monetary value of a plan for reparations for Black American descendants of US slavery are considered in this paper: 1) Enumeration of atrocities and assignment of a dollar value to each as a prelude to adding up the total, and 2) Identification of a summary measure that captures the dollar amount of the cumulative, intergenerational effects of anti-Black atrocities. Under the first approach, the itemization strategy, we assess wage costs to the enslaved of bondage; financial gains to the perpetrators of slavery; damages to Black victims of post-Civil War white massacres and lynchings; losses from discrimination in the provision of the home buying supports from the Federal Housing Administration and the G.I. Bill; and income penalties due to racial discrimination in employment. Under the second approach, the global indicator strategy, we calculate the present value of providing 40 acres of land to freed slaves in 1865 and the current wealth gap between Black and White Americans. We conclude that the latter standard, the racial wealth gap, provides the best gauge for the size of the bill for Black reparations.

Race for Profit: How Banks and the Real Estate Industry Undermined Black Homeownership

Race for Profit is a landmark study of how structural racism transforms and reproduces disadvantages. Keeanga-Yamahtta Taylor tells a convincing story of race and capitalism in late twentieth-century urban American housing markets in transition. The book develops the theme of “predatory inclusion” of African-descended Americans in home ownership sponsored by the Federal Housing Administration (FHA) and financed by private lenders after the urban riots of the mid-1960s (p. 5, passim). One was Wilhelmina Gause of Philadelphia. A twenty-seven-year-old Black mother of three, she could not afford a house, yet a real estate agent said there were none for rent in the neighborhood. She saved the $500 down payment, signed the mortgage, and moved in to discover that a broken pipe leaked sewage into her basement, a wall leaked rain into her house, and a backyard drain was stopped up, flooding the yard. And Gause now owned the property. Her family's experience typifies the transition from redlining to predatory inclusion. Taylor wonders, “How could a house that appeared to be falling apart also be appraised by the FHA as having any value and then approved for a mortgage subsidy?” (p. 142).Race for Profit intervenes in a historiography of race, capitalism, and urban housing that includes Mehrsa Baradaran, The Color of Money: Black Banks and the Racial Wealth Gap (2017), Richard Rothstein, The Color of Law: A Forgotten History of How Our Government Segregated America (2017), Thomas Sugrue, The Origins of the Urban Crisis: Race and Inequality in Postwar Detroit (1996), and Rhonda Y. Williams, The Politics of Public Housing: Black Women's Struggles against Urban Inequality (2004), among many others. Before civil rights legislation including the Housing and Urban Development Act of 1968, legal discrimination excluded Black borrowers from loans, segregating urban spaces and trapping low-income homeowners, particularly Black and Latino residents, in enclaves of impoverished schools and services.Instead of exclusion, the HUD Act subsidized lenders, which encouraged them to lend to those who were traditionally excluded, particularly Black women who were heads of households. But in the shift from legal discrimination to predatory inclusion, brokers and lenders worked to sell substandard and unsafe housing to homebuyers who found themselves saddled with debt in a home they owned but could not safely live in. Black borrowers set up to fail lost their property at a moment in the 1960s and 1970s when urban areas became targets of renewal projects and other investment.Race for Profit explores how the change from exclusion to homeownership occurred. Taylor's narrative seamlessly weaves stories like that of the Gause family with Black women's organizing, policy-making, and an eagle-eyed view of the financial and regulatory landscape of the post-1968 housing market in urban cores. “The end of FHA redlining and the introduction of home finance into American cities created a new market for urban housing almost out of thin air,” Taylor argues, and yet like so many aspects of American capitalism, African Americans paid more for less and were blamed for systemic failures (p. 140).And the predation was the point, at least so far as the real estate industry was concerned. The system of federal subsidies benefited real estate brokers and lenders rather than homeowners, and policy makers tended to blame buyers rather than an interlocking system of predatory lending and deceptive real estate practices. The African American McCrudden family of Philadelphia bought their house soon after the HUD Act subsidized the $9,000 purchase. After they moved in, they realized it had major defects, including holes in the floors, which the broker who sold them the property said would be fixed but were not. In 1972 Carmel McCrudden testified that she was “tired of living in a half-built, torn apart house,” which was now her problem as the buyer (p. 205). Such deceptive practices sapped the incomes and time of predominantly Black borrowers while enriching brokers and lenders. Yes, the McCruddens were homeowners, but their living standards were not necessarily better than public housing. And now they had a mortgage and owned a property that could not easily be sold or rented out. In response, Carmel McCrudden helped organize the Concerned City-Wide Homeowners, a grassroots organization that brought the predatory practices to light and demanded policy responses, and failing that, launched class-action lawsuits.Race for Profit defies an optimistic narrative of civil rights and economics. Markets are not self-correcting and incorporate the values and assumptions of those who govern them. Taylor warns against market-based solutions to systemic racism since the real estate and lending industries that thrived on racist practices before 1968 adjusted to thrive on racist practices after 1968.

Review: Detached America: Building Houses in Postwar Suburbia

Review: <i>Detached America: Building Houses in Postwar Suburbia</i>

How the City Survey’s Redlining Maps Were Made: A Closer Look at HOLC’s Mortgagee Rehabilitation Division

The infamous “security maps” made in the 1930s by the Home Owners’ Loan Corporation (HOLC), rating supposed mortgage lending risk in urban neighborhoods across the United States, have long been considered the quintessential expression of racist redlining policy. However, a number of misunderstandings and unwarranted speculations about how these maps were made and used have proliferated. Using previously unexamined correspondence, this article establishes that HOLC could not have used the maps for loan denials, did share them with the Federal Housing Administration but not with private industry, and highly improvised their production with numerous methodological inconsistencies, including with regard to race.

Potential Changes to the FHA COVID-19 Modification Options to Keep More Borrowers in Their Homes

Millions of homeowners are having difficulty affording their monthly mortgage payments because of the COVID-19 pandemic. The most vulnerable group of borrowers is concentrated within the Federal Housing Administration (FHA) program, with over 900,000 borrowers who are more than 90 days delinquent. Research provides clear evidence that immediate and substantial payment reduction is the most effective mortgage default prevention tool available. This paper suggests several changes to the FHA COVID-19 Home Retention Options that FHA should consider to provide more borrowers with deeper payment reductions, many at no cost to the Mutual Mortgage Insurance Fund, that would provide borrowers in need of financial assistance with greater eligibility as well as more substantial payment reductions that help them retain their home and avoid foreclosure. We estimate the incremental payment relief and resulting reduction in foreclosures that would be created by each of our proposed changes, and demonstrate how our suggestions would increase the availability of mortgage modifications for borrowers with lower incomes and higher debt-to-income ratios, particularly Black and Hispanic borrowers.

Prepayment risk in reverse mortgages: An intensity-governed surrender model

Reverse mortgages have been an important financial tool for cash poor seniors to release home equity. In the United States, most reverse mortgages are insured by the Federal Housing Administration (FHA) through the Home Equity Conversion Mortgage (HECM) program. Previous literature on reverse mortgage insurance often considers mortality as the main loan termination risk, and less attention has been paid to terminations due to loan prepayment, such as refinancing, repayment, and move-out. However, prepayment of reverse mortgages presents a significant risk to lenders and the HECM program. The Report to Congressional Requesters (United States Government Accountability Office, 2019) shows that about 28.5% of the total known reverse mortgage terminations in Fiscal Years 2014–2018 were attributed to loan refinancing, repayment, or move-out due to non-health reasons, whereas 48.6% of known terminations were attributed to mortality. In this paper, we employ an exogenous intensity-governed surrender model to study prepayment risk in reverse mortgages. The proposed model captures both macro-economic and non-economic drivers in surrender decisions. This paper complements existing studies of surrender behavior in reverse mortgages and provides a novel approach to incorporate prepayment risk into reverse mortgage pricing.

Legacies of Institutionalized Redlining: A Comparison Between Speculative and Implemented Mortgage Risk Maps in Chicago, Illinois

ABSTRACT How did institutionalized discriminatory lending policies implemented under the guidance of the Federal Housing Administration (FHA)’s mortgage risk maps impact neighborhood trajectories? Have these spatially restrictive credit designations influenced home value, homeownership, and racial segregation? Using the FHA mortgage risk map of Chicago, Illinois, for new loan guarantees as a case study, I measure outcomes between credit zones and compare these risk regions with the Home Owners’ Loan Corporation (HOLC) Residential Security Maps, which represent post hoc measures of mortgage risk and were likely not directly used in loan activities. For areas excluded from FHA loan guarantees, the results suggest a negative impact on home values and homeownership rates and weakly decreased segregation between 1940 and 1980. They also suggest an overcorrection of home values, an undercorrection of homeownership, and an increase in racial segregation in excluded neighborhoods between 1980 and 2010 when these areas may have experienced capital reinvestment. In comparison with the HOLC map, the effects on tracts in Chicago rated worst by the FHA are clearer and suggest a more significant impact during the period of discriminatory mortgage lending.

The Lowdown on Low-Down-Payment Mortgages: Is It Safe?

Low down payment mortgages were prevalent before the financial crisis, slowed down during the financial crisis, but have reemerged since the financial crisis. The Federal Housing Administration has a history of insuring 3% down payment mortgages to help lower- and middle-income households purchase a home, but Fannie Mae and Freddie Mac recently have introduced 3% (and lower) down payment programs. In addition, mortgage innovation in the form of the “wealth building mortgage” now adds the possibility of a 100% loan-to-value (LTV) ratio. In this paper, we examine the performance of low down payment (or high LTV) lending. We find that low initial down payment mortgages are significantly more likely to become seriously delinquent (90 days or more) than mortgages with traditional down payments of 20% or more. TOPICS:Fixed income and structured finance, MBS and residential mortgage loans, risk management, credit risk management, legal/regulatory/public policy, financial crises and financial market history Key Findings ▪ This study finds meaningfully accurate estimates of the likelihood of more severe delinquency payment status changes by using individual mortgage loan, borrower, and county-level risk factors as explanatory variables. ▪ Low initial down payment mortgages are significantly more likely to become seriously delinquent (90 days or more) than mortgages with traditional downpayments of 20% or more. ▪ Initial borrower and mortgage characteristics, such as LTV, borrower documentation, or FICO score, are dominant factors in the likelihood of delinquency and default.

Better Housing: FHA Property Improvement Loans

The National Housing Act of 1934 is most well-known for creating the Federal Housing Administration (FHA) to insure home mortgages; however, the first section of the Act also covers insurance of financial institutions against losses on loans and advances of credit “for the purpose of financing alterations, repairs, and improvements upon real property.” Title I was at the heart of a New Deal initiative to modernize housing as both a means to improve the welfare of American households as well as employ surplus labor in home construction and repair. It also introduced commercial banks to consumer instalment lending, which revolutionized household finance. FHA endorsed more property improvement loans per year than home mortgages for its first 35 years. And the cumulative number of loans insured under Title I was greater than the more famous Section 203B program until the financial crisis of 2008. Yet the importance of Title I is often overlooked. “Historical scholars have argued that FHA programs were self-validating: by encouraging the neglect of older homes and neighborhoods, they made filtering inevitable, and with it the decline of older neighborhoods in central cities. There is some truth to this assessment of federal policy. However, and although the fact has been widely ignored, from the beginning the FHA also sought to improve existing homes and neighborhoods” (Harris 2009, p. 392). In part, this may be because the Title I program has not kept pace with changes in the financial industry, causing disbursements to tumble and the program to drift into obscurity. This paper briefly describes FHA’s Title I property improvement program, including its history and underwriting requirements. Using administrative data, the paper examines variation in interest rates across loan and borrower characteristics. In particular, I estimate the rate premium associated with unsecured lending during the Great Recession. I further estimate the likelihood of default and insurance claim amount given default. The results could be used to automate credit underwriting and facilitate modernization of property improvement financing.