The Federal Housing Administration and the Color of Underwriting

<p>The Federal Housing Administration was created by the National Housing Act of 1934 to insure mortgages on terms that private lenders would not offer on their own balance sheets. The agency underwrote roughly a third of all new single-family home purchases between 1934 and 1962, transforming the structure of American homeownership. It also wrote into its lending standards the principle that racial segregation was a condition for insurability.</p><p>The FHA Underwriting Manual, issued in successive editions, instructed appraisers to consider 'inharmonious racial or nationality groups' a risk to property values. Section 233 of the 1938 edition spelled it out: 'If a neighborhood is to retain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes.' Section 980 recommended that 'subdivision regulations and suitable restrictive covenants' be used to maintain neighborhood composition. The Manual specifically endorsed racial restrictive covenants as a desirable feature of insurable subdivisions until the 1947 edition.</p><p>The practical effect was systematic. Neighborhoods with Black residents were marked as ineligible for FHA insurance. Subdivisions built with FHA-insured construction loans were required, as a condition of insurance, to include restrictive covenants barring sale to non-white buyers. The mortgage market for white suburbanizing families was effectively subsidized by federal insurance; the equivalent market for Black families was not. Between 1934 and 1962, the FHA insured approximately 120 billion dollars in mortgages, of which less than two percent went to non-white borrowers.</p><p>The Supreme Court ruling in Shelley v. Kraemer (1948) made restrictive covenants judicially unenforceable but did not bar private use of them. The FHA quietly dropped explicit endorsement of covenants but did not change its underwriting practice for another two decades. The agency continued to discount property values in neighborhoods with Black residents and to recommend against insuring loans in those areas. The consequence was the racial wealth gap that defines twenty-first century America: the asset-building decade of the postwar suburb was a publicly subsidized program from which Black families were largely excluded.</p>